-----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, FiY+6zQneyBIB7fdLDyChPnvGSaIUVKAjf2NX9L2ekUNi4tv4O2opMzL2S6+D3/G RGsZD+Vu1c7iZTK4jYro0A== 0000002491-96-000032.txt : 19961118 0000002491-96-000032.hdr.sgml : 19961118 ACCESSION NUMBER: 0000002491-96-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96664706 BUSINESS ADDRESS: STREET 1: 6601 S. BERMUDA RD. CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 702-270-6700 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 September 30, 1996 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 November 7, 1996 according to the records of the registrant's registrar and transfer agent was 31,832,539. I N D E X PART I. FINANCIAL INFORMATION Page Item 1. Unaudited Financial Statements Unaudited Condensed Consolidated Balance Sheets as of June 30, 1996 and September 30, 1996 3 Unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 1995 and 1996 4 Unaudited Condensed Consolidated Statements of Stockholder's Equity for the three months ended September 30, 1996 5 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 1995 and 1996 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings 30 Item 6. Exhibits and reports on Form 8-K 30 SIGNATURES 31 PART 1 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In 000's, except share data) June 30, Sept. 30, 1996 1996 ASSETS Current assets: Cash and cash equivalents $ 48,057 $ 38,331 Accounts and notes receivable, net of allowance for doubtful accounts of $17,727 and $18,973 93,502 89,446 Inventories, net 41,656 44,426 Other current assets 8,354 8,162 Total current assets 191,569 180,365 Long-term notes receivable, net of allowance for doubtful accounts of $1,770 and $1,829 14,184 13,661 Property, plant and equipment, net of accumulated depreciation of $30,144 and $32,925 78,084 76,309 Excess of costs over net assets of acquired businesses, net of accumulated amortization of $422 and $405 60,292 60,995 Intangible assets, net of accumulated amortization of $5,216 and $6,672 20,247 19,093 Other assets, net 11,128 11,434 Total assets $375,504 $361,857 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,479 $ 19,887 Accrued liabilities 38,304 36,610 Current maturities of long-term debt 25,777 13,328 Total current liabilities 80,560 69,825 Senior secured notes, net of unamortized discount of $3,071 and $3,001 150,929 150,999 Other long-term debt, less current maturities 14,638 12,860 Other liabilities 6,831 6,869 Total liabilities 252,958 240,553 Minority interest 1,148 1,107 Series B Special Stock, $.10 par value, $100 liquidation value; 684,551 shares and 691,707 issued and outstanding, net of discount 51,552 52,656 Commitments and contingencies Stockholders' equity: Common Stock, $.10 par value; 175,000,000 shares authorized; 31,763,000 shares and 31,835,000 issued and outstanding 3,176 3,183 Series E Special Stock, $100 liquidation value; 113,160 shares issued and outstanding 11,316 11,316 Additional paid-in capital 139,031 138,902 Cumulative translation adjustment (287) (441) Accumulated deficit (83,390) (85,419) Total stockholders' equity 69,846 67,541 Total liabilities and stockholders' equity $375,504 $361,857 See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except share data) Three Months Ended September 30, 1995 1996 Revenues: Gaming machine operations $26,296 $ 28,889 Casino operations 12,242 12,713 Gaming equipment and systems sales 3 34,883 Wall machine and amusement game sales --- 26,427 38,541 102,912 Costs and expenses: Cost of gaming machine operations 20,212 21,894 Cost of casino operations 5,915 5,366 Cost of gaming equipment and systems sales --- 21,808 Cost of wall machine and amusement game sales --- 15,104 Selling, general and administrative 6,694 22,289 Provision for doubtful receivables 21 1,575 Depreciation and amortization 2,487 5,220 Unusual items --- 700 Direct merger costs 4,677 --- 40,006 93,956 Operating income (loss) (1,465) 8,956 Other income (expense): Interest income 426 563 Interest expense (2,208) (6,250) Royalty fees (980) (1,151) Minority interest in income (144) (141) Other, net 482 (1) Income (loss) before income taxes (3,889) 1,976 Income tax provision (benefit) (471) 1,341 Net income (loss) (3,418) 635 Special Stock dividends --- (2,896) Net loss applicable to common shares $(3,418) $(2,261) Net loss per common share $ (.29) $ (.07) Weighted average common shares outstanding 11,654 31,772 See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three Months Ended September 30, 1996 (In 000's)
Retained Total Series E Additional Earnings Cumulative Stock- Common Stock Special Stock Paid-in (Accum. Translation holders' Shares Dollars Shares Dollars Capital Deficit) Adjustment Equity Balances at June 30, 1996 31,763 $3,176 113 $11,316 $139,031 $(83,390) $(287) $69,846 Net income - - - - - 635 - 635 Shares issued upon exercise of options 75 7 - - 115 - - 122 Adjustments to merger consideration (3) - - - (12) - - (12) Special Stock dividends - - - - - (2,664) - (2,664) Special Stock repurchase premium - - - - (232) - - (232) Foreign currency translation adjustment - - - - - - (154) (154) Balances at September 30,1996 31,835 $3,183 113 $11,316 $138,902 $(85,419) $(441) $67,541
See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In 000's) Three Months Ended September 30, 1995 1996 Cash flows from operating activities: Net income (loss) $ (3,418) $ 635 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,487 5,220 Amortization of debt discounts 59 512 Write down of other assets 125 102 Loss on sale of assets 151 53 Provision for losses on receivables 21 1,575 Other --- (24) Net change in operating assets and liabilities: Accounts and notes receivable (453) 2,933 Inventories 9 (2,456) Other current assets 1,013 43 Accounts payable (271) 3,408 Accrued liabilities 279 (750) Net cash provided by operating activities 2 11,251 Cash flows from investing activities: Additions to property, plant and equipment (2,226) (2,772) Proceeds from disposal of property and equipment 296 41 Net sales of securities available for sale 3,548 --- Other (1,110) (1,058) Net cash provided by (used in) investing activities 508 (3,789) Cash flows from financing activities: Proceeds from long-term debt, net of expenses 168 41 Reduction of long-term debt (1,024) (3,683) Net change in lines of credit --- (12,010) Repurchase of Series B Special Stock --- (1,653) Issuance of common stock upon exercise of stock options --- 122 Net cash used in financing activities (856) (17,183) Effect of exchange rate changes on cash --- (5) Cash and cash equivalents: Decrease for period (346) (9,726) Balance, beginning of period 13,734 48,057 Balance, end of period $ 13,388 $ 38,331 See notes to unaudited condensed consolidated financial statements. 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 for the year ended June 30, 1996. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet at June 30, 1996 was derived from audited consolidated financial statements, but does not include all disclosures required under generally accepted accounting principles. Certain reclassifications have been made to prior period financial statements to conform with current period presentation. On June 18, 1996, the Company completed the acquisition of all the outstanding shares of Bally Gaming International, Inc. ("BGII") (the "Merger"). The consideration paid consisted of approximately $77,243,000 in cash, $2,957,000 in the Company's common stock and $36,571,000 in the Company's Series B Special Stock, totaling $11.84 per share for the 9,855,500 shares of BGII outstanding (excluding the 1,000,000 shares beneficially owned by the Company prior to the Merger). The acquisition has been accounted for as a purchase and the results of operations of BGII have been included in the consolidated financial statements beginning on June 18, 1996. The purchase price was allocated based on estimated fair values at the date of the acquisition. During the one year period following the Merger, the Company will make adjustments to the estimated fair values assigned to the assets acquired from BGII based on appraisals and other information received, which will result in changes to the excess of purchase price over the fair value of BGII assets acquired. The excess of purchase price over the BGII assets acquired is being amortized on a straight-line basis over 40 years and has been adjusted during the quarter ended September 30, 1996 for changes in values assigned to certain buildings, deferred tax liabilities and the actual BGII shares acquired. 2. SUPPLEMENTAL CASH FLOW INFORMATION The following supplemental information is related to the condensed consolidated statements of cash flows. In the three months ended September 30, 1995 and 1996, the Company recorded the following significant non-cash items: During the three months ended September 30, 1996, the Company reclassified approximately $567,000 from other assets to equipment and reclassified approximately $1,286,000 to property, plant and equipment from excess costs over net assets of acquired business based on recent appraisals received for certain German properties. In addition, the Company recorded non-cash dividends for its Series E and Series B Special Stock in the amount of $2,664,000 and a premium on the repurchase of shares of Series B Special Stock of $232,000. During the three months ended September 30, 1995, the Company reclassified approximately $581,000 from other assets to equipment as gaming machines were manufactured and placed into service on the route. In addition, the Company recorded a non-cash unrealized gain on securities available for sale in the amount of $505,000 recorded in the stockholders equity section, net of tax. 3. LONG-TERM DEBT AND LINES OF CREDIT Long-term debt at June 30, 1996 and September 30, 1996 consists of the following (in 000's) : June 30, Sept. 30, 1996 1996 12 7/8% Senior Secured Notes due 2003, net of unamortized discount of $3,071,000 and $3,001,000 $150,929 $150,999 Bally Wulff revolving lines of credit 13,664 9,179 Hospitality Franchise Systems note payable, secured by the assets of the Rainbow Casino 7,864 7,549 Bally Gaming and Systems revolving line of credit 7,525 --- 7.5% Convertible subordinated debentures due 2003, unsecured 1,642 1,642 Subordinated note payable to stockholder, net of discount, secured by the assets of VSI 2,268 --- Other, secured by related equipment 7,452 7,818 191,344 177,187 Less current maturities 25,777 13,328 Long-term debt, less current maturities $165,567 $163,859 In June 1996, the Company completed a public offering of $154,000,000 aggregate principal amount of its 12 7/8% Senior Secured Notes due 2003 (the "Senior Secured Notes") as part of the financing of the BGII Merger. Interest on the Senior Secured Notes is payable semi-annually in arrears on June 30 and December 30 of each year, commencing December 30, 1996. The Senior Secured Notes will mature on June 30, 2003. The Senior Secured Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after June 30, 2000 at the redemption prices of 104.292% for the twelve months beginning June 30, 2000, 102.146% for the twelve months beginning June 30, 2001 and 100% thereafter plus accrued and unpaid interest, if any, to the date of redemption. Upon the occurrence of a change of control as defined in the indenture, the Company is required to make an offer to repurchase the Senior Secured Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The Senior Secured Notes are secured by an exclusive pledge of the equity interests directly or indirectly held by the Company in its subsidiaries, except for the equity interests in BGII and its subsidiaries, but including the equity interests in Alliance Holding Company ("Holding"), which was formed to hold the equity interests of BGII and its subsidiaries. The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several senior basis by each present and future subsidiary, as defined, of the Company, other than (i) the partially-owned entities through which the Company's Mississippi casino and Louisiana gaming machine operations are conducted and (ii) specified entities through which the Company's German operations are conducted. The indenture for the Company's Senior Secured Notes contains various limitations on incurrence of additional indebtedness, on restricted payments and on dividend and payment restrictions on subsidiaries. In June 1996, in response to a solicitation from the Company, holders of $83,358,000 aggregate principal amount of its 7.5% Convertible Subordinated Debentures ("Convertible Debentures") elected to exchange for new debentures that converted at the time of the Merger into shares of the Company's common stock ($72,042,000 principal amount) and shares of the Company's Series E Special Stock ($11,316,000 principal amount). At September 30, 1996, $1,642,000 of Convertible Debentures remained outstanding. During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to loan $7,750,000 to the Company's majority controlled subsidiary Rainbow Casino Vicksburg Partnership, LP ("RCVP") in connection with the construction of the Rainbow Casino. The loan amount was subsequently increased to $10,000,000. The note bears interest at 7.5% per annum and requires monthly payments of principal and interest over a 24-month period. In exchange for funding this loan, HFS is also entitled to receive in perpetuity a monthly royalty fee based on the casino's gaming revenues of 12% on the first $40.0 million, 11% on the next $10.0 million, and 10% thereafter. The accompanying unaudited consolidated statement of operations for the three months ended September 30, 1995 and 1996 include approximately $980,000 and $1,151,000 of such royalties, respectively. In March 1992, Alfred H. Wilms, director and principal stockholder (and then Chairman of the Board of Directors and Chief Executive Officer) of the Company, committed to provide or cause others to provide a $6,500,000 five year loan to Video Services, Inc. ("VSI"), the Company's controlled subsidiary, which loan was funded in full and was secured by a subordinated interest in all of VSI's present and future personal property. All scheduled principal and interest payments were made until September 1996 when the Company paid off the remaining principal and accrued interest balance totaling $2,826,000. During March 1993, the Bally Wulff entities obtained two bank lines of credit for the purpose of financing the acquisition of assets acquired from an independent distributor. The agreements provide for borrowings of DM16,000,000 (approximately $10,490,000, at September 30, 1996) and DM1,500,000 (approximately $983,000 at September 30, 1996), respectively. The DM1,500,000 line of credit was originally DM5,000,000 and has been, and will continue to be, reduced by DM250,000 principal amount per quarter, and expires on March 31, 1998. Borrowings under this line of credit bear interest at 6.95%. The working capital revolving credit line of DM16,000,000 bears interest at a rate tied to an international borrowing rate plus 1% (4.64% at September 30, 1996) and is due on demand. These lines are collateralized by a pledge of the assets acquired. Approximately $1,967,000 was outstanding under these lines at September 30, 1996. In May 1993, the Bally Wulff entities obtained a DM16,300,000 (approximately $10,686,000 at September 30, 1996) revolving line of credit for general working capital purposes. This agreement bears interest at a rate tied to an international borrowing rate plus 1% (4.67% at September 30, 1996) and is due on demand. This line is collateralized by the receivables of the Bally Wulff entities. Approximately $7,212,000 was outstanding under this line at September 30, 1996. In March 1993, BGII's domestic subsidiary, Bally Gaming, Inc., obtained a bank revolving line of credit which, as amended, provides for borrowings tied to a percentage of Bally Gaming, Inc.'s eligible (as defined in the credit agreement) inventory and accounts receivable with a maximum borrowing capacity of $15,000,000. Borrowings under this agreement, which expires March 31, 1997, bear interest at 1.5% above the bank's prime rate (9.75% at September 30, 1996). The Company must pay an annual facility fee of one-half of one percent of the maximum borrowing capacity and a monthly unused line fee of one-quarter of one percent of the difference between the maximum borrowing capacity and the average daily outstanding balance during any month. This line of credit is collateralized by property, plant and equipment and the eligible inventory and accounts receivable. The agreement and subsequent amendments also contain certain financial and other restrictive covenants, including the maintenance by Bally Gaming, Inc. of specified levels of minimum net working capital, working capital ratio, tangible net worth, net worth ratio, and minimum net income after taxes, all as defined in the credit agreement. Eligible borrowing capacity under this agreement at September 30, 1996 was $15,000,000. There was no balance outstanding at September 30, 1996. 4. SERIES B SPECIAL STOCK During the quarter ended September 30, 1996, the Company purchased on the open market 19,000 shares of its Series B Special Stock for $1,634,000 which represented a premium of $232,000 over the carrying value. The premium paid is reflected in the consolidated statement of stockholder's equity as a charge against additional paid in capital, and is also deducted in computing net income applicable to common shareholders. 5. INCOME TAXES The Company's effective tax rate for the three months ended September 30, 1996 differs from the statutory rate of 35% due to higher tax rates applicable to earnings of Bally Wulff, combined with the fact that earnings at the Company's domestic subsidiaries cannot be fully offset by the utilization of net operating loss carryforwards. The Company's effective tax rate for the three months ended September 30, 1995 differs from the statutory rate of 35% due to the book tax benefit related to the change in the unrealized gains and losses in the investments and securities available for sale, and the fact that net operating losses incurred during the period were fully reserved. 6. LEGAL PROCEEDINGS Litigation Relating to the Merger. On or about June 19, 1995, three purported class actions were filed in the Chancery Court of Delaware by BGII stockholders against BGII and its directors (the "Fiorella, Cignetti and Neuman Actions") in connection with the then-proposed merger of BGII with WMS ("WMS Merger"). Also on or about June 19, 1995, a purported class action was filed in the Delaware Court of Chancery by a BGII stockholder against BGII and its directors and the Company (the "Strougo Action") in connection with the tender offer and consent solicitation made by the Company (subsequently superseded by the execution of the Agreement and Plan of Merger in October 1995 between the Company and BGII). On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman and Strougo Actions (collectively, the "Stockholder Plaintiffs") filed with the Court a motion to consolidate the four actions. On or about July 27, 1995, certain of the Stockholder Plantiffs filed an amended complaint that adopted certain allegations concerning self-dealing by BGII directors in connection with the merger agreement entered into with WMS (the "WMS Agreement"); added a claim relating to BGII's alleged failure to hold an annual meeting as required; and added WMS as defendant. The amended complaint also alleged that BGII intended, in violation of Delaware law, to sell Bally Wulff without first seeking stockholder approval of the sale. The action sought an order enjoining defendants from proceeding with, consummating or closing the WMS merger or rescinding it if it closed; preventing the sale of Bally Wulff without prior stockholder approval; declaring invalid BGII's agreement to pay WMS a fee if the WMS Agreement is terminated by BGII in certain circumstances; compelling an auction of BGII and the provision of due diligence to the Company; scheduling an immediate meeting of BGII stockholders; and awarding compensatory damages. Management believes these claims to be without merit and intends to vigorously defend these actions. On October 23, 1995, WMS instituted a suit in New York State Court against BGII for BGII's failure to pay $4.8 million upon termination of the WMS Agreement. Management intends to vigorously defend this action. On November 22, 1995, BGII answered the complaint and brought counterclaims against WMS alleging that WMS repudiated and breached the WMS Agreement by, among other things, failing to act in good faith toward the consummation of the WMS Merger, advising BGII that it would not perform as agreed but would impose new conditions on the WMS Merger, acting in excess of its authority and undermining the ability of BGII to perform the WMS Agreement. On February 8, 1996 WMS moved for summary judgment. On April 2, 1996, BGII opposed WMS's motion and cross-moved for summary judgment. On September 14, 1995, a stockholders' class and derivative action was commenced by Richard Iannone, a stockholder of the Company, against the Company, the members of its current Board of Directors and certain of its former directors in Federal District Court in Nevada asserting, among other matters, that the Company has wasted corporate assets in its efforts to acquire BGII by, among other things, agreeing to onerous and burdensome financing arrangements that threaten the Company's ability to continue as a going concern and that the Company had made false and misleading statements and omissions in connection with that effort by failing to disclose the need to refinance an additional $53.0 million of existing BGII indebtedness, by failing to disclose how the Company would recapitalize the combined indebtedness of both companies and by failing to disclose the allegedly leading role played by Richard Rainwater in the Company's efforts to acquire control of BGII which, given assurances made by the Company to gaming regulators in Nevada that the unlicensed Mr. Rainwater would not play an active role in the management of the Company, could expose the Company to suspension or revocation of its Nevada gaming license. In addition, the stockholder action against the Company alleges that (i) the Company substantially inflated its results of operations by selling gaming machines at inflated prices in exchange for promissory notes (without any down payment) which the Company knew could not be paid in full but which the Company nevertheless recorded at full value, (ii) the Company doctored reports sent to its route customers and (iii) the directors of the Company had caused the Company to engage in self-dealing transactions with certain directors which resulted in the exchange of the Company assets for assets and services of vastly lesser value. On September 21, 1995, a United States magistrate denied the plaintiffs' request for expedited discovery, stating that Mr. Iannone was not an adequate representative and was not likely to succeed on the merits. On October 4, 1995, the defendants filed a motion to dismiss the action. On December 18, 1995, the plaintiff filed an amended shareholder derivative complaint. The plaintiff is no longer asserting any class claims. On March 5, 1996 the defendants filed a motion to dismiss the amended complaint. On May 16, 1996, the magistrate judge, on motion of defendants, stayed discovery in this case pending a ruling by the court on the defendants' motion to dismiss the amended complaint. Other Litigation In 1994, after an intensive Federal investigation of Bally Gaming's former Louisiana distributor, eighteen individuals were indicted on charges of racketeering and fraud against Bally Gaming, Inc. and the Louisiana regulatory system. Among those indicted were the former distributor's stockholders, directors, employees and others alleged to be associated with organized crime. Fifteen entered pleas of guilty before trial and the remaining three were convicted in October 1995. In addition, Alan Maiss, a former director and president of BGII, pled guilty to misprision of a felony in connection with such investigation. BGII, its subsidiaries and its current employees were not subject to such investigation. Prior to the conclusion of the Federal criminal case, BGII's activities with regard to its former VLT distributor in Louisiana were the subject of inquiries by gaming regulators and a report by the New Jersey Division of Gaming Enforcement dated August 24, 1995. The New Jersey Commission and Division of Gaming have indicated that in light of the Merger and consequent personnel changes that have occurred at BGII, there will be no need for a hearing and the inquiry can be resolved by stipulation. There has been no indication from the New Jersey Commission and Division of Gaming that the inquiry will have any effect on BGII's pending license application. The Gaming Authorities in Ontario, Canada, who have investigated the matter, issued a gaming registration to Bally Gaming, Inc. on February 8, 1996. On September 25, 1995, BGII was named as a defendant in a class action lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf of himself and all others similarly situated (the "plaintiffs"). The plaintiffs filed suit against BGII and approximately 45 other defendants (each a "defendant," and collectively the "defendants"). Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people into playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of one billion dollars, and are asking that any damage awards be trebled under applicable Federal law. Management believes the plaintiffs' lawsuit to be without merit. The Company intends to vigorously pursue all legal defenses available to it. While the ultimate outcome of the matters described above are not presently determinable, management does not expect that the outcome will have a material adverse effect on the Company's results of operations, financial position or cash flows. The Company and its subsidiaries are also involved from time to time in various claims and legal actions arising in the ordinary course of business. Management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial statements taken as a whole. 7. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS The following unaudited consolidating financial statements are presented to provide information regarding Alliance Gaming Corporation in columnar presentation as follows: the parent company and its wholly-owned "Guaranteeing Subsidiaries", its "Pledging Subsidiaries" consisting of VSI, Rainbow Casino Vicksburg L.P. and Alliance Holding Company (the entity that holds the Company's investment in BGII) and its non-pledging and non-guaranteeing subsidiary, Alliance Automaten GmbH & Co KG (the subsidiary that holds the Company's German interests). The "Pledging Subsidiaries" are shown separately because all of the Company's interest in these entities is pledged as collateral for the Senior Secured Notes. The note to consolidating financial statements should be read in conjunction with these consolidating financial statements. CONSOLIDATING BALANCE SHEETS June 30, 1996 (In 000's)
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries ASSETS Current assets: Cash and cash equivalents $ 37,249 $ 8,684 $ 2,124 $ $ 48,057 Accounts and notes receivable, net 47,915 35 46,850 (1,298) 93,502 Inventories, net 24,996 12 16,648 41,656 Other current assets 6,317 552 1,485 8,354 Total current assets 116,477 9,283 67,107 (1,298) 191,569 Long-term notes receivable, net 16,935 1,773 (4,524) 14,184 Property, plant and equipment, net 39,336 26,937 11,811 78,084 Excess of costs over net assets of acquired businesses, net 40,396 18,332 1,564 60,292 Intangible assets, net 19,827 420 20,247 Investment in subsidiaries 88,154 (88,154) Other assets, net 8,576 2,835 2,744 (3,027) 11,128 $329,701 $39,475 $101,767 $(95,439) $375,504 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $15,076 $213 $3,750 $(2,560) $16,479 Accrued liabilities 53,474 4,110 6,140 (25,420) 38,304 Current maturities of long-term debt 8,200 3,913 13,664 25,777 Total current liabilities 76,750 8,236 23,554 (27,980) 80,560 Senior Secured Notes due 2003, net 150,929 150,929 Other long-term debt, less current maturities 2,750 12,984 3,007 (4,103) 14,638 Other liabilities 7,343 (512) 6,831 Total liabilities 237,772 21,220 26,561 (32,595) 252,958 Minority interest 1,147 1 1,148 Series B Special Stock 51,552 51,552 Commitments and contingencies Stockholders' equity: Common Stock 3,547 2 (373) 3,176 Series E Special Stock 11,316 11,316 Additional paid-in capital 118,513 2,455 75,222 (57,159) 139,031 Cumulative translation adjustment 3 (290) (287) Retained earnings (Accumulated deficit) (93,002) 14,651 274 (5,313) (83,390) Total stockholders' equity 40,377 17,108 75,206 (62,845) 69,846 $329,701 $39,475 $101,767 $(95,439) $375,504
See accompanying unaudited note. CONSOLIDATING BALANCE SHEETS September 30, 1996 (In 000's)
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries ASSETS Current assets: Cash and cash equivalents $ 26,992 $ 8,047 $ 3,292 $ $ 38,331 Accounts and notes receivable, net 43,230 40 47,323 (1,147) 89,446 Inventories, net 28,250 14 16,162 44,426 Other current assets 5,827 517 1,818 8,162 Total current assets 104,299 8,618 68,595 (1,147) 180,365 Long-term notes receivable, net 15,856 2,113 (4,308) 13,661 Property, plant and equipment, net 39,273 26,723 10,313 76,309 Excess of costs over net assets of acquired businesses, net 39,953 19,478 1,564 60,995 Intangible assets, net 18,718 375 19,093 Investment in subsidiaries 88,154 (88,154) Other assets, net 9,371 2,518 (34) (421) 11,434 $315,624 $38,234 $100,465 $(92,466) $361,857 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,872 $ 455 $ 2,513 $ 47 $ 19,887 Accrued liabilities 49,565 3,965 8,349 (25,269) 36,610 Current maturities of long term-debt 641 2,525 10,162 13,328 Total current liabilities 67,078 6,945 21,024 (25,222) 69,825 Senior Secured Notes due 2003, net 150,999 150,999 Other long-term debt, less current maturities 2,595 11,218 2,955 (3,908) 12,860 Other liabilities 7,316 1 46 (494) 6,869 Total liabilities 227,988 18,164 24,025 (29,624) 240,553 Minority interest 1,106 1 1,107 Series B Special Stock 52,656 52,656 Commitments and contingencies Stockholders' equity: Common Stock 3,554 2 (373) 3,183 Series E Special Stock 11,316 11,316 Additional paid-in capital 118,382 2,455 75,222 (57,157) 138,902 Cumulative translation adjustment (5) (436) (441) Retained earnings (Accumulated deficit) (98,267) 16,507 1,654 (5,313) (85,419) Total stockholders' equity 34,980 18,964 76,440 (62,843) 67,541 $315,624 $38,234 $100,465 $(92,466) $361,857
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended September 30, 1995 (In 000's)
Alliance Gaming Parent and Corporation Guaranteeing Pledging Adjust- and Subsidiaries Subsidiaries ments Subsidiaries Revenues: Gaming machine operations $22,716 $ 3,784 $(204) $26,296 Casino and tavern operations 4,623 8,303 (684) 12,242 Gaming equipment sales 3 3 27,342 12,087 (888) 38,541 Costs and expenses: Cost of gaming machine operations 18,032 2,384 (204) 20,212 Cost of casino and tavern operations 2,950 3,075 (110) 5,915 Selling, general and administrative 4,767 2,426 (499) 6,694 Provision for doubtful receivables 10 11 21 Depreciation and amortization 1,959 528 2,487 Direct merger costs 4,677 4,677 32,395 8,424 (813) 40,006 Operating income (loss) (5,053) 3,663 (75) (1,465) Other income (expense): Interest income 479 60 (113) 426 Interest expense (1,759) (562) 113 (2,208) Royalty fees (980) (980) Minority interest in income (144) (144) Other, net 351 312 (181) 482 Income (loss) before income taxes (5,982) 2,349 (256) (3,889) Income tax provision (benefit) (536) 321 (256) (471) Net income (loss) $ (5,446) $ 2,028 $ --- $ (3,418)
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended September 30, 1996 (In 000's)
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries Revenues: Gaming machine operations $24,569 $ 4,320 $ $ $ 28,889 Casino operations 3,375 9,899 (561) 12,713 Gaming equipment and systems sales 34,883 34,883 Wall machine and amusement game sales 26,427 26,427 62,827 14,219 26,427 (561) 102,912 Costs and expenses: Cost of gaming machine operations 19,117 2,777 21,894 Cost of casino operations 1,866 3,500 5,366 Cost of gaming equipment and systems sales 21,808 21,808 Cost of wall machines and amusement game sales 15,104 15,104 Selling, general and administrative 12,905 3,104 6,858 (578) 22,289 Provision for doubtful receivables 1,180 395 1,575 Depreciation and amortization 3,258 556 1,406 5,220 Unusual items 700 700 60,834 9,937 23,763 (578) 93,956 Operating income 1,993 4,282 2,664 17 8,956 Other income (expense): Interest income 586 90 (113) 563 Interest expense (5,294) (866) (203) 113 (6,250) Royalty fees (1,151) (1,151) Minority interest in income (141) (141) Other, net (136) 152 (17) (1) Income (loss) before income taxes (2,851) 2,366 2,461 1,976 Income tax provision (benefit) (250) 510 1,081 1,341 Net income (loss) (2,601) 1,856 1,380 635 Special Stock dividends (2,896) (2,896) Net income (loss) applicable to common shares $ (5,497) $ 1,856 $ 1,380 $ --- $ (2,261)
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF CASH FLOWS Three Months Ended September 30, 1995 (In 000's)
Alliance Gaming Parent and Corporation Guaranteeing Pledging Adjust- and Subsidiaries Subsidiaries ments Subsidiaries Cash flows from operating activities: Net (loss) income $(5,446) $2,028 $ $ (3,418) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 1,959 528 2,487 Amortization of debt discounts 59 59 Write down of other assets 147 (22) 125 Loss on sale of assets 159 (8) 151 Provision for losses on receivables 10 11 21 Net change in operating assets and liabilities: Accounts and notes receivable (610) (3) 160 (453) Inventories 6 3 9 Other current assets 387 626 1,013 Accounts payable (169) (102) (271) Accrued liabilities (158) 601 (164) 279 Intercompany accounts 439 (439) Net cash provided by (used in) operating activities (3,276) 3,282 (4) 2 Cash flows from investing activities: Additions to property and equipment (1,278) (948) (2,226) Proceeds from disposal of property and equipment 288 8 296 Net sale of securities available for sale 3,548 3,548 Other (752) (358) (1,110) Net cash provided by (used in) investing activities 1,806 (1,298) 508 Cash flows from financing activities: Proceeds from long-term debt, net of expenses 329 (161) 168 Reduction of long-term debt (69) (1,120) 165 (1,024) Net cash used in financing activities (69) (791) 4 (856) Cash and cash equivalents: Increase (decrease) for period (1,539) 1,193 (346) Balance, beginning of period 8,235 5,499 13,734 Balance, end of period $6,696 $6,692 $--- $13,388
See accompanying unaudited note. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended September 30, 1996 (In 000's)
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries Cash flows from operating activities: Net income (loss) $(2,601) $1,856 $1,380 $ $ 635 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,258 556 1,406 5,220 Amortization of debt discounts 17 495 512 (Gain) loss on sale of property and equipment 49 (4) 8 53 Write down of other assets 95 7 102 Provision for losses on receivables 1,180 395 1,575 Other (24) (24) Change in operating assets and liabilities: Accounts and notes receivable 4,513 (5) (1,208) (367) 2,933 Inventories (2,940) (2) 486 (2,456) Other current assets 482 35 (474) 43 Intercompany accounts (518) 317 2,807 (2,606) Accounts payable 1,795 242 (1,237) 2,608 3,408 Accrued liabilities (3,925) (185) 3,192 168 (750) Net cash provided by (used in) operating activities 1,405 3,305 6,738 (197) 11,251 Cash flows from investing activities: Additions to property, plant and equipment (1,447) (297) (1,028) (2,772) Proceeds from disposal of property and equipment 37 4 41 Other (1,058) (1,058) Net cash provided by (used in) investing activities (2,468) (293) (1,028) (3,789) Cash flows from financing activities: Proceeds from long-term debt 41 41 Reduction of long-term debt (179) (3,649) (52) 197 (3,683) Net change in lines of credit (7,525) (4,485) (12,010) Repurchase of Series B Special Stock (1,653) (1,653) Issuance of common stock upon exercise of stock options 122 122 Net cash provided by (used in) financing activities (9,194) (3,649) (4,537) 197 (17,183) Effect of exchange rate changes on cash (5) (5) Cash and cash equivalents: Increase (decrease) for period (10,257) (637) 1,168 (9,726) Balance, beginning of period 37,249 8,684 2,124 48,057 Balance, end of period $26,992 $8,047 $3,292 $ --- $38,331
See accompanying unaudited note. Debt and Lines of Credit Long-term debt and lines of credit at September 30, 1996 consist of the following (in 000's):
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries 12 7/8% Senior Secured notes due 2003, net of unamortized discount $150,999 $ $ $ $150,999 Hospitality Franchise Systems note payable 7,549 7,549 Bally Wulff revolving line of credit 9,179 9,179 7.5% Convertible subordinated debentures due 2003 1,642 1,642 Other 1,594 6,194 3,938 (3,908) 7,818 154,235 13,743 13,117 (3,908) 177,187 Less current maturities 641 2,525 10,162 13,328 Long-term debt, less current maturities $153,594 $11,218 $ 2,955 $(3,908) $163,859
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources On June 18, 1996, the Company completed the acquisition of all the outstanding shares of BGII. The consideration paid consisted of $77,243,000 in cash, $2,957,000 in the Company's common stock and $36,571,000 in the Company's Series B Special Stock and totaled $11.84 per share for the 9,855,500 shares outstanding (excluding the 1,000,000 shares beneficially owned by the Company prior to the Merger). The Company incurred direct merger costs of approximately $4,677,000 and $0 during the three months ended September 30, 1995, and 1996, respectively. Such costs include legal, accounting, transaction financing fees, public and investor relations and printing costs and related costs. At September 30, 1996, the Company had $38,331,000 in cash and cash equivalents and $27,980,000 in availability on revolving lines of credit (representing a paydown in the lines of credit during the quarter of $12,010,000). In addition the Company had working capital of approximately $110,540,000, a decrease of approximately $469,000 from June 30, 1996. Consolidated cash and cash equivalents at September 30, 1996 includes approximately $8,000,000 of cash which is utilized in gaming operations which is held in vaults, cages or change banks. The following table presents an analysis of the consolidated working capital at June 30, 1996 and September 30, 1996 and the components of the changes from the prior period: June 30, Sept. 30, Total 1996 1996 Change (In $000's) Cash and Cash Equivalents $48,057 $38,331 $ (9,726) Accounts and Notes Receivable, net 93,502 89,446 (4,056) Inventories, net 41,656 44,426 2,770 Other Current Assets, net 8,354 8,162 (192) Total Current Assets 191,569 180,365 (11,204) Accounts Payable 16,479 19,887 (3,408) Accrued Liabilities 38,304 36,610 1,694 Current Maturities of Long Term Debt 25,777 13,328 12,449 Total Current Liabilities 80,560 69,825 10,735 Net Working Capital $111,009 $110,540 $ (469) The following are the significant changes in the components of the Company's working capital during the three months ended September 30, 1996: Cash and Cash Equivalents The net change in cash and cash equivalents resulted from cash used for principal reductions of the revolving lines of credit borrowings associated with Bally Gaming and Systems of $7,525,000 and Bally Wulff of $4,485,000 and to fully pay a loan associated with VSI in the amount of $2,826,000, payments made for accrued direct merger costs, accrued compensation, and the accrued distribution payable to the limited partner in the Rainbow Casino Vicksburg Partnership, L.P., and cash used to purchase shares of Series B Special Stock, partially offset by the cash received from the reduction in accounts and notes receivable. Accounts and Notes Receivable, Accounts Payable and Accrued Liabilities During the three months ended September 30, 1996, the Company received a net cash inflow from its accounts and notes receivable. Accounts payable and accrued liabilities decreased over the prior year due to the payments made for accrued direct merger costs, accrued compensation, and the accrued distribution payable to the limited partner in the Rainbow Casino Vicksburg Partnership, L.P. Current Maturities of Long Term Debt During the three months ended September 30, 1996, current maturities of long term debt were reduced primarily due to the principal reductions of revolving line of credit borrowings associated with Bally Gaming and Systems and Bally Wulff, and to a lesser extent, the payment of a subordinated loan associated with VSI, partially offset by the reclassification to current maturities of long-term debt of certain debt instruments which now have maturities less than one year. Cash Flow and Other Information Cash provided in operating activities for three months ended September 30, 1996 increased approximately $11,249,000 from amounts reported for the same period in 1995. Significant changes in operating assets and liabilities in the 1996 period from the 1995 period were (1) net income of $635,000 compared to a net loss of $3,418,000 in the prior year quarter, (2) a decrease in net current and long-term accounts and notes receivable of $2,933,000 as collections from prior period sales exceeded customer financing on current period sales, (3) an increase in inventories of $2,456,000 primarily related to increased production activity, (4) an increase of $3,408,000 in accounts payable primarily related to the increase in inventory and (5) a decrease in accrued liabilities and other payables primarily due to payments made during the quarter on accrued and unpaid direct merger costs, accrued compensation and the accrued distribution payable to the limited partner in RCVP. Significant non-cash items added to net income in the computation of cash flows from operating activities for three months ended September 30, 1996 include $5,220,000 of depreciation and amortization representing an increase of $2,733,000 over the prior year quarter and a provision for doubtful receivables of $1,575,000 representing an increase of $1.554,000 over the prior year quarter. Cash flows used in investing activities for three months ended September 30, 1996 decreased by $4,297,000 from the same period in 1995. The decrease is primarily the result of the net sale of securities available for sale during the prior period totaling $3,548,000 compared to $0 in the current period. Cash flows from financing activities for three months ended September 30, 1996 decreased $16,327,000 from the same period in 1995. The decrease was primarily the result of cash used for principal reductions of and revolving line of credit borrowings in the amount of $12,010,000, payment of the remaining principal and accrued interest balance of the loan associated with VSI totaling $2,826,000 and the repurchase for $1,653,000 of 19,000 shares of the Company's Series B Special Stock. In the prospectus for the Senior Secured Notes and Series B Special Stock issued to finance the Merger, the Company had presented adjusted operating cash flow for the combined companies which consists of the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA"), net of casino royalty and minority interest and adjusted to exclude direct merger costs and unusual items and, in periods prior to the Merger, as further adjusted to include BGII's results for the entire period and to assume cost savings synergies resulting from the Merger and to adjust business development expenses to assumed annual amount of $3,000,000. The Company experienced a significant increase in adjusted operating cash flow from $9,249,000 in the three months ended September 30, 1995 to $13,784,000 in the three months ended September 30, 1996. Each of the Company's four business units contributed to this improvement. The following is summary of EBITDA, as adjusted by business unit reconciled to adjusted operating cash flows: Three Months Ending September 30, 1995(a) 1996(a) (In $000's) EBITDA by Business Unit: Bally Gaming and Systems $ 2,410 $5,463 Bally Wulff 3,159 4,050 Gaming Machine Operations 3,983(b) 4,760(b) Casino Operations 2,776(b) 3,284(b) Corporate Administrative Expenses and Other (4,667) (3,973) Direct Merger Costs (4,951) --- Unusual Items (1,529) (700) EBITDA, as adjusted 1,181 12,884 Adjustments: Direct Merger Costs 4,951 --- Unusual Items or Non-recurring Charges 1,929 900 Development Expense (62)(c) --- Synergy Cost Savings 1,250(d) --- Adjusted Operating Cash Flows $9,249 $13,784 _________________ (a) Includes the consolidated results of the Company (including BGII) for the three months ended September 30, 1996 and the combined historical results of the Company andBGII for the three months ended September30, 1995. (b) Minority interest and, for Casino Operations, casino royalty have been offset against business unit EBITDA. (c) Adjusts business development expense for the quarter ended September 30, 1995 to an assumed annual amount of $3,000,000 or $750,000 for each quarter. Actual business development expenses for the quarter ended September 30, 1996 was $603,000 and is included in corporate administrative expenses. (d) Adjusts for estimated synergy cost savings including elimination of certain duplicative costs, such as facility, legal, accounting, and compensation. The Company believes that the above analysis of adjusted operating cash flows is a useful adjunct to net income, cash flow and other GAAP measurements. However, this information should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of the Company's performance or to GAAP-defined cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. During March 1993, Bally Wulff obtained two bank revolving lines of credit that currently provide for borrowings up to DM17,500,000 (approximately $11,473,000 at September 30, 1996) of which approximately $1,967,000 had been borrowed at September 30, 1996. In May 1993, Bally Wulff obtained a working capital line of credit that provides for borrowings up to DM16,300,000 (approximately $10,686,000 at September 30, 1996) of which approximately $7,212,000 had been borrowed at September 30, 1996. Bally Gaming, Inc., BGII's domestic subsidiary, obtained a bank revolving line of credit in March 1993 which, as amended, provides for borrowings tied to a percentage of Bally Gaming, Inc.'s eligible (as defined in the credit agreement) inventory and accounts receivable with a maximum borrowing capacity of $15,000,000 with the expiration date of March 31, 1997. At September 30, 1996 Bally Gaming, Inc.'s eligible borrowing capacity under this agreement was approximately $15,000,000 of which $0 was outstanding. Through bank credit agreements at Bally Wulff and Bally Gaming, Inc., the Company has unused lines of credit of approximately $27,980,000 at September 30, 1996. The Company is currently evaluating new financing alternatives, including a replacement of Bally Gaming, Inc.'s revolving line of credit facility, in order to free up certain non-working capital based collateral and to obtain a lower interest rate. The indenture for the Company's Senior Secured Notes limits the Company's worldwide maximum borrowings under working capital or revolving credit facilities to $40,000,000. The indenture for the Company's Senior Secured Notes contains various limitations on incurrence of additional indebtedness, on restricted payments and on dividend and payment restrictions on subsidiaries. The Company does not have any material capital expenditure commitments at September 30, 1996. The Company anticipates that cash flow from operations and borrowings available under existing lines of credit will be sufficient to fund its cash needs for at least the next twelve months. Management believes that customer financing terms have become an increasingly important competitive factor in certain emerging markets for the Bally Gaming and Systems business unit. Competitive conditions sometimes require Bally Gaming and Systems to grant extended payment terms on gaming machines and other gaming equipment. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of a default may be less than the amount financed. In conjunction with sales by Bally Gaming and Systems, with recourse to the Company, of certain trade receivables to third parties, the Company had guaranteed amounts due from various customers of approximately $14,000,000 at September 30, 1996. It is possible that one or more customers whose obligation has been guaranteed by Bally Gaming and Systems may be unable to make payments as such amounts become due. In such event, Bally Gaming and Systems may become responsible for repayment of at least a portion of such amounts over the term of the receivables. In general, under the terms of these contracts, the Company may be responsible for monthly payments of the outstanding obligations. Accordingly, the Company will have greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. In August 1996, the Company received demand notices from the holder of notes related to one customer's trade receivables for which payments were in arrears from December 1995. The demand notice is for $3,571,000 and although the Company is negotiating a restructuring with the holder of these notes and the customer, there can be no assurance that a successful restructuring will take place. In order to be competitive in meeting customer demand for financing of gaming equipment in emerging markets, the Company plans to continue to evaluate the need to involve third party finance companies or secure additional financing, although there is no assurance that such additional financing will be obtained. Bally Wulff provides customer financing for approximately 20% of its sales, and management expects this practice temporarily to increase during the latter half of calendar 1996. In March 1992, Alfred H. Wilms, director and principal stockholder (and then Chairman of the Board of Directors and Chief Executive Officer) of the Company, committed to provide or cause others to provide a $6,500,000 five year loan to VSI, the Company's controlled subsidiary, which loan was funded in full and was secured by a subordinated interest in all of VSI's present and future personal property. All scheduled principal and interest payments were made until September 1996 when the remaining principal and accrued interest thereon totaling $2,826,000 was paid. Results of Operations: Three Months Ended September 30, 1995 and 1996 General The company operates through four business units: (i) Bally Gaming and Systems, (ii) Bally Wulff (consisting of the manufacture and distribution of wall-mounted gaming machines and distribution of other recreational and amusement machines), (iii) gaming machine operations and (iv) casino operations. The results of operations of the BGII business units have been consolidated since June 18, 1996. However, to enhance the comparability to prior periods, the following discussion presents the results of the operations of BGII for the three months ended September 30, 1995 which was prior to the Merger and therefore such results are not included in the accompanying consolidated financial statements. The following tables set forth the combined revenues and operating income (loss) for the four business units for the three months ended September 30, 1995 and 1996: 1995 1996 (In 000's) Revenues: Bally Gaming and Systems $27,720 $34,883 Bally Wulff 23,754 26,427 Gaming Machine Operations 26,296 28,889 Casino Operations 12,242 12,713 Total Revenues $90,012 $102,912 1995 1996 (In 000's) Operating income (loss): Bally Gaming and Systems 1,875 4,772 Bally Wulff 1,588 2,644 Gaming Machine Operations 2,407(a) 3,049(a) Casino Operations 2,335(a) 2,814(a) Corporate and Other (5,569) (4,916) Subtotal 2,636 8,363 Direct merger costs (4,971) --- Unusual items (1,529) (700) Total operating income (loss): $(3,864) $7,663 (a) Net of minority interest and, for Casino Operations, net of casino royalty. Bally Gaming and Systems For the quarter ended September 30, 1996, Bally Gaming and Systems reported revenues of $34.9 million, an increase of 26%, compared to revenues of $27.7 million in the prior year quarter. Bally Gaming reported unit sales of approximately 4,900 new gaming machines, an increase of 40%, compared to unit sales of approximately 3,500 in the prior year quarter. The volume improvement resulted primarily from sales to Casino Niagara in Niagara Falls, Canada where Bally Gaming placed approximately 1,500 new gaming machines, representing 50% of the casino floor. By market segment, Bally Gaming's unit sales for the quarter consisted of approximately 1,700 units to the Nevada and Atlantic City markets, 2,500 units to international markets and 700 units to riverboats, Native American and other domestic markets. Bally Gaming reported revenues from the sale of new gaming machines of $24.3 million, an increase of 29%, compared to $18.8 million in the prior year quarter due to higher unit volume partially offset by lower average selling prices. Bally Systems reported revenues of $5.2 million, an increase of 160%, compared to revenues of $2.0 million in the prior year quarter. The revenue improvement resulted primarily from the Casino Rama installation in Ontario, Canada and recognition of approximately one-half of the hardware revenues during the quarter for Casino Niagara. For the quarter ended September 30, 1996, gross profit margins improved to 37.5% from 34.9% in the prior year quarter. The gross margin improvement resulted primarily from the favorable impact of greater production volume in the Company's manufacturing facility, partially offset by the effect of higher international sales which traditionally have lower profit margins. Bally Gaming and Systems reported operating income of $4.8 million, an increase of 154%, compared to operating income of $1.9 million in the prior year quarter. The operating income improvement resulted primarily from the aforementioned revenue and gross margin increases, as well as relatively flat selling, general and administrative expenses, partially offset by an increased provision for doubtful receivables. Bally Wulff For the quarter ended September 30, 1996, Bally Wulff reported revenues of $26.4 million, an increase of 11%, compared to revenues of $23.8 million in the prior year quarter. The revenue improvement resulted primarily from a 44% increase in new wall machine units sold, partially offset by a decrease in amusement game sales as operators weighted their mix of capital expenditures toward new wall machines. The currency translation impact of the fluctuation of the German mark versus the U.S. dollar reduced revenues by $1.9 million during the 1996 quarter. For the quarter ended September 30, 1996, gross profit margin improved to 42.8% from 40.3% in the prior year quarter. The gross margin improvement resulted primarily from the favorable impact of greater production volume in Bally Wulff's production facility. Bally Wulff reported operating income of $2.6 million, an increase of 66%, compared to $1.6 million in the prior year quarter. The operating income improvement resulted primarily from the aforementioned revenue and gross margin increases, partially offset by an increased provision for doubtful receivables as well as higher selling, general and administrative expenses due to costs of a trade show. Gaming Machine Operations For the quarter ended September 30, 1996, the gaming machine operations business unit reported revenues of $28.9 million, an increase of 10%, compared to revenues of $26.3 million in the prior year quarter. Louisiana revenues increased 14% as net win per gaming machine per day increased 21% to $72.10 from $59.78 in the prior year quarter, partially offset by a decline in the average number of gaming machines to 653 from 677 in the prior year quarter. Nevada revenues increased 9% as net win per gaming machine per day increased 6% to $49.36 from $46.67 in the prior year quarter, while the average number of gaming machines increased to 5,552 from 5,270 in the prior year quarter. The improvement in net win per gaming machine per day in Nevada resulted primarily from the continuing favorable impact of Gamblers Bonus, a cardless slot player's club and player tracking system launched in December 1995. The increase in the average number of gaming machines in Nevada reflects the addition of approximately 150 gaming machines in Northern Nevada operated by Bally Gaming prior to the Merger and the continued roll-out of the Gamblers Bonus machines. Gamblers Bonus is currently installed in 86 locations representing 1,091 machines in Southern Nevada. For the quarter ended September 30, 1996, cost of revenues increased 8% to $21.9 million compared to $20.2 million in the prior year quarter. As a percentage of revenues, cost of revenues improved to 75.8% from 76.8% in the prior year quarter. Louisiana cost of revenues, increased 16% and, as a percentage of revenues increased slightly to 64.3% from 63.0% in the prior year quarter primarily due to the new location which opened in October 1995. Nevada cost of revenues increased 7% but, as a percentage of revenues, improved to 77.8% from 79.2% in the prior year quarter primarily due to higher revenues while costs associated with new and renewed contracts which remained relatively flat. The gaming machine operations business unit reported operating income, net of minority interest, of $3.0 million, an increase of 27% compared to operating income of $2.4 million in the prior year quarter. The operating income improvement resulted primarily from the aforementioned increase in revenues and an improvement in operating costs as a percentage of revenues, partially offset by a slight increase in selling, general and administrative expenses. On November 5, 1996 voters in Louisiana approved a proposition to allow video poker to continue in six of the seven parishes in which the Company operates within off-track betting locations in the greater New Orleans area. In the one parish in which the Company operates where video poker was voted down, the Company will be allowed to continue to conduct business through June 30, 1999. The two off-track betting locations in this parish accounted for only 13% of the VSI revenues and less than $0.4 million of EBITDA for the year ended June 30, 1996. Casino Operations For the quarter ended September 30, 1996, the casino operations business unit reported revenues of $12.7 million, an increase of 16%, compared to revenues of $11.0 million in the prior year quarter. This increase is due to an 18% increase at the Rainbow Casino and a 9% increase at the Plantation Casino. The improvement at the Rainbow Casino was attributable to the continuing success of its direct marketing campaigns and a 23% higher average market share than in the prior year quarter. Revenues from the Plantation Casino improved as revenues in the prior year quarter had been negatively impacted by an internal remodeling project. For the quarter ended September 30, 1996, the cost of revenues for casino operations increased 7% to $5.4 million compared to $5.0 million in the prior year quarter but, as a percentage of revenues, improved to 42.2% from 45.5% in the prior year quarter due to higher revenues with relatively stable costs. For the quarter ended September 30, 1996, the casino operations business unit reported operating income, net of casino royalty and minority interest, of $2.8 million, an increase of 21%, compared to operating income of $2.3 million in the prior year quarter. The operating income improvement resulted from the aforementioned increase in revenues and an improvement in operating costs as a percentage of revenues, partially offset by an increase in selling, general and administrative due to higher advertising and promotional costs at the Rainbow Casino operations. Revenues and Expenses for Closed Casinos and Taverns During the year ended June 30, 1996, the Company disposed of or terminated operations at several small casinos and taverns as these operations were not deemed to be compatible with the Company's long-term growth strategy. The Company does not believe these businesses constitute a disposal of a segment of a business, as defined in APB Opinion 30, and therefore the results of operations from these businesses are included in the applicable revenue and expense captions in the consolidated statements of operations. No revenues or expenses were reported for these properties in the quarter ended September 30, 1996. For the quarter ended September 30, 1995, revenues for these properties are included in casino revenues and totaled $1.3 million. The related costs of revenues are included in casino cost of revenues and totaled $0.9 million. The related selling, general and administrative expenses are included in selling general and administrative expenses and totaled $0.4 million. Consolidated As previously discussed, the Company acquired BGII on June 18, 1996. Therefore the consolidated results of operations for the three months ended September 30, 1996 include the results of operations of BGII while the consolidated results for the three months ended September 30, 1995 do not include BGII's results. The discussion below does not include results for BGII in the 1995 quarter. Total revenues for the quarter ended September 30, 1996, were $102.9 million, an increase of 167% compared to revenues of $38.5 million in the prior year quarter. This increase is due to including $61.3 million of revenues from BGII in the 1996 quarter as well as the aforementioned increases in revenues at both the gaming machine operations and casino operations business units. Cost of revenues for the quarter ended September 30, 1996, were $64.2 million, an increase of 146% compared to $26.1 million in the prior year quarter due to the inclusion of $36.9 million of BGII cost of revenues in the 1996 quarter as well as the aforementioned increases in cost of revenues at both the gaming machine operations and casino operations business units. Cost of revenues as a percentage of total revenues improved to 62.4% from 67.8% in the prior year quarter due to the aforementioned improvements at both the gaming machine operations and casino operations business units as well as the impact of the inclusion of the BGII business units. Corporate administrative expenses for the quarter ended September 30, 1996, were $4.0 million, an increase of 82% compared to corporate administrative costs of $2.2 million in the prior year quarter. This increase is due to inclusion of BGII corporate administrative expenses in the 1996 quarter partially offset by synergy cost savings such as elimination of certain duplicative costs, for example facility, legal, accounting, and compensation costs. Corporate administrative expenses include salaries and wages, related taxes and benefits, rent, professional fees and other expenses associated with maintaining the corporate office and providing centralized corporate services for the Company. Exclusive of the corporate administrative expenses noted above, selling, general and administrative expenses for the quarter ended September 30, 1996, were $18.3 million an increase of 307% compared to selling, general and administrative costs of $4.5 million in the prior year quarter. This increase is due to the inclusion of $13.3 million of BGII selling, general and administrative expenses in the 1996 quarter and the aforementioned increase at both the gaming machine operations and casino operations business units partially offset by the decrease in expenses as the result of the aforementioned disposed or terminated operations at several small casinos and taverns. Provisions for bad debt for the quarter ended September 30, 1996, increased $1.6 million from the prior fiscal year quarter. The increase was due to the impact of including BGII's operations in the 1996 quarter. Depreciation and amortization for the quarter ended September 30, 1996 was $5.2 million, an increase of 110% compared to depreciation and amortization of $2.5 million in the prior year quarter. This increase is due to the inclusion of BGII depreciation and amortization in the 1996 quarter, higher depreciation and amortization in the gaming machine operations business unit and the impact of amortizing goodwill and other intangibles acquired in the BGII Merger. During the quarter ended September 30, 1996, the Company incurred unusual charges of $0.7 million related primarily to separation costs of Alliance personnel subsequent to the Merger. During the quarter ended September 30, 1995, the Company expensed direct merger costs related to the pursuit of BGII totaling $4.7 million. Such costs included legal, accounting, financial advisory, printer, SEC filing fees and other related expenses. Net Interest Expense and Income Taxes Net interest expense in the quarter ended September 30, 1996, increased $5.7 million, an increase of 219% compared to the net interest expense of $1.8 million in the prior year quarter. The increase is primarily due to interest on the Company's 12 7/8% Senior Secured Notes due 2003 which were issued in June 1996, partially offset by lower interest expense on the Company's 7 1/2% Convertible Debentures due 2003, substantially all of which were converted into equity as part of the financing of the Merger. The Company recorded an income tax provision of $1.3 million in the quarter ended September 30, 1996 compared to a benefit from income taxes of $0.5 million in the prior fiscal year quarter. The current quarter provision is primarily due to income taxes related to Bally Wulff. The information contained in this Form 10-Q may contain forward- looking statements that involve risks and uncertainties, including, but not limited to, the impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources, product development and commercialization risks, costs associated with the integration and administration of acquired operations, capacity and supply constraints or difficulties, the results of financing efforts and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. PART II Item 1. Legal Proceedings See "Notes to Unaudited Condensed Consolidated Financial Statements- 6. Legal Proceedings" for a description of certain legal proceedings. Item 6. Exhibits and Reports on Form 8-K a. Exhibits - None b. Reports on Form 8-K The registrant submitted items on Form 8-K as follows : (i) On July 3, 1996 to disclose the completion of the merger with BGII and the closing of the related financings. (ii) On September 10, 1996 to file a consent by KPMG Peat Marwick, LLP related to the Company's Registration Statement (No. 33-45811). 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 (Principal Executive Officer) By /s/ Scott D. Schweinfurth Sr. Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2
5 This schedule contains summary financial information excerpted from Form 10-Q for the quarter ended 09/30/96. 1,000 3-MOS JUN-30-1997 SEP-30-1996 38,331 0 108,419 18,973 44,426 180,365 108,234 32,925 361,857 69,825 150,999 3,183 52,656 0 64,358 361,857 63,310 102,912 36,912 64,172 29,784 0 6,250 (920) 635 (2,261) 0 0 0 (2,261) (0.07) 0
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