-----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, IBX4+VJplevj8wf9RK2mkIkNfgGB28tFiIvq7ahHvshvwMgtFh6azd2mqdVHbGyv po4AhxP/5J3OewbT+DKymg== 0000002491-99-000003.txt : 19990215 0000002491-99-000003.hdr.sgml : 19990215 ACCESSION NUMBER: 0000002491-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE GAMING CORP CENTRAL INDEX KEY: 0000002491 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880104066 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04281 FILM NUMBER: 99535582 BUSINESS ADDRESS: STREET 1: 6601 S. BERMUDA RD. CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7028967700 MAIL ADDRESS: STREET 1: 4380 BOULDER HIGHWAY CITY: LAS VEGAS STATE: NV ZIP: 89121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED GAMING INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GAMING & TECHNOLOGY INC DATE OF NAME CHANGE: 19890206 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED PATENT TECHNOLOGY INC DATE OF NAME CHANGE: 19830519 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1998 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-4281 ALLIANCE GAMING CORPORATION (Exact name of registrant as specified in its charter) NEVADA 88-0104066 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6601 S. Bermuda Rd. Las Vegas, Nevada 89119 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (702) 270-7600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares of Common Stock, $0.10 par value, outstanding as of February 1, 1999 according to the records of the registrant's registrar and transfer agent was 9,790,597. ALLIANCE GAMING CORPORATION FORM 10-Q For the Quarter Ended December 31, 1998 I N D E X PART I. FINANCIAL INFORMATION Page Item 1. Unaudited Financial Statements Unaudited Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1998 3 Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 1997 and 1998 4 Unaudited Condensed Consolidated Statements of Operations for the six months ended December 31, 1997 and 1998 5 Unaudited Condensed Consolidated Statements of Stockholders' Deficiency for the six months ended December 31, 1998 6 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 1997 and 1998 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 33 Item 6. Exhibits and Reports on Form 8-K 33 SIGNATURES 34 PART I ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In 000's, except share data) June 30, Dec. 31, 1998 1998 ASSETS Current assets: Cash and cash equivalents $ 23,487 $20,518 Accounts and notes receivable, net of allowance for doubtful accounts of $11,932 and $11,756 93,459 83,232 Inventories, net of reserves of $6,797 and $5,997 42,418 47,262 Other current assets 11,711 7,733 -------- -------- Total current assets 171,075 158,745 ------- ------- Long-term notes receivable, net of allowance for doubtful accounts of $1,109 and $996 7,931 7,528 Leased equipment, net of accumulated depreciation of $4,020 and $3,758 7,325 7,813 Property, plant and equipment, net of accumulated depreciation of $46,090 and $52,815 77,905 78,979 Excess of costs over net assets of acquired businesses, net of accumulated amortization of $3,199 and $4,223 59,952 60,619 Intangible assets, net of accumulated amortization of $13,358 and $15,611 26,732 27,158 Other assets, net 15,917 14,515 ------- ------- Total assets $366,837 $355,357 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 10,477 $ 13,295 Accrued liabilities 39,122 34,927 Current maturities of long-term debt 1,996 1,989 ------ ------ Total current liabilities 51,595 50,211 ------- ------- Term loan facilities 137,800 134,600 Senior Subordinated Notes due 2007, net 149,245 149,272 Other long-term debt, less current maturities 36,912 31,499 Other liabilities 12,718 12,590 ------ ------ Total liabilities 388,270 378,172 Minority interest 2,315 1,978 Commitments and contingencies Stockholders' deficiency: Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 137,317 shares and 145,326 shares issued and outstanding 13,732 14,532 Common Stock, $.10 par value; 50,000,000 shares authorized; 9,178,000 shares and 9,790,000 shares issued and outstanding 3,212 3,426 Additional paid-in capital 122,980 127,544 Accumulated other comprehensive loss (13,946) (7,712) Accumulated deficit (149,726) (162,583) -------- ------- Total stockholders' deficiency (23,748) (24,793) ------- ------- Total liabilities and stockholders' deficiency $366,837 $355,357 ======== ======== See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except per share data) Three Months Ended December 31, 1997 1998 Revenues: Gaming equipment and systems $ 27,455 $ 22,499 Wall machines and amusement games 27,731 23,769 Route operations 37,040 42,750 Casino operations 14,488 14,892 ------- ------- 106,714 103,910 Costs and expenses: Cost of gaming equipment and systems 15,333 13,394 Cost of wall machines and amusement games 15,165 14,674 Cost of route operations 28,635 33,516 Cost of casino operations 6,271 6,504 Selling, general and administrative 23,158 27,866 Research and development 3,446 3,976 Depreciation and amortization 5,809 5,757 Unusual items (2,545) - ------ ------- 95,272 105,687 Operating income (loss) 11,442 (1,777) Other income (expense): Interest income 210 141 Interest expense (7,497) (7,502) Minority interest (446) (509) Other, net 64 (355) ----- ------- Income (loss) before income taxes 3,773 (10,002) Income tax (provision) benefit (427) 245 ------ ------ Net income (loss) 3,346 (9,757) Special Stock dividends (373) (418) ------ ------- Net income (loss) applicable to common shares $2,973 $(10,175) ====== ========= Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ 0.33 $(1.04) ====== ======= Diluted earnings (loss) per share $ 0.31 $(1.04) ====== ======= Weighted average common shares outstanding 9,135 9,789 Weighted average common and common share equivalents outstanding 9,731 9,789 See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except share data) Six Months Ended December 31, 1997 1998 Revenues: Gaming equipment and systems $ 54,622 $44,441 Wall machines and amusement games 48,792 44,380 Route operations 72,695 82,754 Casino operations 28,576 31,106 ------- ------- 204,685 202,681 Costs and expenses: Cost of gaming equipment and systems 31,569 25,234 Cost of wall machines and amusement games 26,733 26,742 Cost of route operations 55,823 64,645 Cost of casino operations 12,531 13,320 Selling, general and administrative 44,562 48,903 Research and development 6,314 8,145 Depreciation and amortization 10,812 11,159 Unusual items (2,545) - ------- ------- 185,799 198,148 Operating income 18,886 4,533 Other income (expense): Interest income 441 373 Interest expense (13,566) (15,405) Rainbow royalty (587) - Rainbow royalty buyout (19,000) - Minority interest (836) (1,048) Other, net 52 (547) ------- ------- Loss before income taxes (14,610) (12,094) Income tax (provision) benefit (920) 61 ------ ------- Loss before extraordinary item (15,530) (12,033) Extraordinary loss, without tax benefit (note 2) (42,033) - -------- ------- Net loss (57,563) (12,033) Special Stock dividends (note 2) (2,773) (824) Premium on repurchase/redemption of Series B Special Stock (16,553) - Net loss applicable to common shares $(76,889) $(12,857) Basic and diluted loss per share: Loss before extraordinary item $(3.82) $(1.34) Extraordinary loss (4.61) - ----- ----- Net loss $(8.43) $(1.34) ======= ======= Weighted average common shares outstanding 9,118 9,607 Weighted average common and common share equivalents outstanding 9,118 9,607 See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY Six Months Ended December 31, 1998 (In 000's)
Accumulated Total Series E Additional Other Stock- Special Stock Common Stock Paid-in Comprehensive Accum. holders' Shares Dollars Shares Dollars Capital Income (Loss) Deficit Deficiency Balances at June 30, 1998 137 $ 13,732 9,178 $ 3,212 $122,980 $(13,946) $(149,726) $(23,748) Net loss -- -- -- -- -- -- (12,033) (12,033) Shares issued upon exercise of options and warrants -- -- 612 214 4,564 -- -- 4,778 Special Stock dividends 8 800 -- -- -- -- (824) (24) Foreign currency translation adjustment -- -- -- -- -- 6,234 -- 6,234 --- ------ ----- ----- ------- ------ -------- ------- Balances at December 31, 1998 145 $ 14,532 9,790 $ 3,426 $127,544 $ (7,712) $(162,583) $(24,793) === ======== ===== ======= ======== ========= ========== =========
See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In 000's) Six Months Ended December 31, 1997 1998 Cash flows from operating activities: Net loss $(57,563) $(12,033) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 10,812 11,159 Amortization of debt discounts 19 26 Extraordinary item 42,033 - Write down of other assets 2,776 523 Gain on sale of assets (45) (25) Provision for losses on (recovery of) doubtful receivables (6,886) 922 Other 572 1,293 Net change in operating assets and liabilities: Accounts and notes receivable 8,026 13,949 Inventories (754) (6,551) Other current assets (347) 3,394 Accounts payable (6,994) 2,603 Accrued liabilities (3,803) (4,422) ------ ------ Net cash provided by (used in) operating activities (12,154) 10,838 Cash flows from investing activities: Additions to property, plant and equipment (6,574) (5,476) Proceeds from disposal of property and equipment 224 83 Additions to other long term assets (1,974) (3,216) ------ ------ Net cash used in investing activities (8,324) (8,609) Cash flows from financing activities: Refinancing fees and expenses (32,752) - Capitalized debt issuance costs (11,456) - Proceeds from issuance of long-term debt 303,734 - Repayments of long-term debt (178,355) (4,099) Net change in lines of credit 14,674 (6,200) Repurchase/redemption of Series B Special Stock (77,568) - Proceeds from exercise of stock options and warrants 473 4,778 ------- ------ Net cash provided by (used in) financing activities 18,750 (5,521) Effect of exchange rate changes on cash (149) 323 ----- ----- Cash and cash equivalents: Decrease for period (1,877) (2,969) Balance, beginning of period 28,924 23,487 ------ ------ Balance, end of period $27,047 $20,518 ======= ======= See notes to unaudited condensed consolidated financial statements. ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended December 31, 1997 and 1998 1. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations and cash flows of Alliance Gaming Corporation ("Alliance" or the "Company") for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results which may be expected for any other interim period or for the year as a whole. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's annual report on Form 10-K as amended for the year ended June 30, 1998. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements at June 30, 1998 were derived from the audited consolidated financial statements, but do not include all disclosures required under generally accepted accounting principles. Certain reclassifications have been made to prior period financial statements to conform with current period presentation. 2. DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION Long-term debt at June 30, 1998 and December 31, 1998 consists of the following: June 30, Dec. 31, 1998 1998 (in 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount of $755 and $728 $149,245 $149,272 Term loan facilities: Tranche B Term Loan 74,438 72,642 Tranche C Term Loan 39,700 38,899 Delayed Draw Term Facility 25,000 24,459 Revolving Credit Facility 34,971 29,799 Other, secured by related equipment 2,599 2,289 ------ ------ 325,953 317,360 Less current maturities 1,996 1,989 ------ ------ Long-term debt, less current maturities $323,957 $315,371 ======== ======== In August 1997 the Company completed a refinancing transaction whereby the Company repaid its 12 7/8% Senior Notes, repurchased its 15% Series B Special Stock, and issued $150 million of Senior Subordinated Notes and entered into bank financing of $230 million. The bank financing provides for (i) term loans in the aggregate amount of up to $140 million, comprised of a $75 million tranche with a 7 1/2-year term (the "Tranche B Term Loan"), a $40 million tranche with an 8-year term (the "Tranche C Term Loan"), and a $25 million tranche with a 7 1/2-year term (the "Delayed Draw Term Facility" and together with the Tranche B Term Loan and the Tranche C Term Loan, the "Term Loan Facilities"); and (ii) a $90 million revolving credit facility (the "Revolving Credit Facility") with a 6-year term. Each of these credit facilities are variable rate borrowings in accordance with a credit grid as amended. The interest rates which are currently at the highest level of the credit grid as amended and maturity dates are as follows: ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six Months Ended December 31, 1997 and 1998 Interest Maturity Rates Date Tranche B Term Loan LIBOR + 3.25% January 31, 2005 Tranche C Term Loan LIBOR + 3.50% July 31, 2005 Delayed Draw Term Facility LIBOR + 3.25% January 31, 2005 Revolving Credit Facility LIBOR + 2.75% July 31, 2003 The Revolving Credit Facility also allows for German Deutschemark borrowings at the euro deutschmark rate plus 2.75% (or 5.8% at December 31, 1998). The bank facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the U.S. Borrower and German Subsidiaries (both as defined), other than the entity which holds the Company's interest in its Louisiana operations and other non-material subsidiaries (as defined), and secured by both a U.S. and German Pledge Agreement (both as defined). The bank facility contains a number of maintenance covenants and it and the Indenture have other significant covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries to dispose of assets, incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests (as defined) or subordinated indebtedness, issue or sell equity interests of the Company's subsidiaries (as defined), engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities. Due to the low amount of EBITDA earned by the Company in the December 1998 quarter, the Company did not meet the original financial covenants in the bank facility. The Company and the banks have amended the current and future financial maintenance covenants in the bank facility effective December 31, 1998 such that the Company is in compliance with such covenants. The Senior Subordinated Notes bear interest at 10%, are due in 2007, and are general unsecured obligations of the Company, ranking subordinate in right of payment to all Senior Debt (as defined) of the Company, including indebtedness under the bank facility. The Senior Subordinated Notes will be fully and unconditionally guaranteed on a joint and several senior subordinated basis by all existing and future domestic Restricted Subsidiaries (as defined) of the Company, subject to certain exceptions including the partially-owned entities through which its Mississippi casino and Louisiana route operations are conducted. The Subsidiary Guarantees (as defined) are general unsecured obligations of the Guarantors, ranking subordinate in right of payment to all Senior Debt of the Guarantors. The Company will be able to designate other current or future subsidiaries as Unrestricted Subsidiaries (as defined) under certain circumstances. Unrestricted Subsidiaries will not be required to issue a Subsidiary Guarantee and will not be subject to many of the restrictive covenants set forth in the Indenture pursuant to which the Senior Subordinated Notes were issued. The Indenture for the Company's Senior Subordinated Notes contains various covenants, including limitations on incurrence of additional indebtedness, on restricted payments and on dividend and payment restrictions on subsidiaries. The Senior Subordinated Notes may not be redeemed for the first five years. Upon the occurrence of a Change of Control (as defined), the holders of the Senior Subordinated Notes will have the right to require the Company to purchase their notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. The refinancing transaction was completed in September 1997, and as a result, the Company recorded an extraordinary loss of $42.0 million consisting of the $27.7 million premium paid to repurchase the Senior Secured Notes, the payment of related transaction fees and expenses, and the charge-off of the unamortized debt discount and deferred financing fees. There was no tax benefit recognized for the extraordinary item as a valuation allowance was recorded to fully reserve the net operating losses created. The Company also recorded a $19.0 million charge for the cost of the Rainbow Royalty Buyout. Additionally, the Company recorded a $16.6 million charge to equity and a corresponding increase in the net loss applicable to common shares for the difference between the carrying value and the liquidation value of the Series B Special Stock, all of which was redeemed on September 8, 1997 at the liquidation price of $100 per share, plus accrued dividends. 3. INCOME TAXES The Company's effective tax rate for the three and six months ended December 31, 1997 and 1998 differs from the statutory rate of 35% due to state income taxes and the impact of taxes applicable to earnings of Bally Wulff. In addition, losses at the Company's domestic subsidiaries add to the net operating loss carryforwards for which, no benefit is recorded in the income statement. 4. SUPPLEMENTAL CASH FLOW INFORMATION The following supplemental information is related to the unaudited condensed consolidated statements of cash flows. For the six months ended December 31, 1997 and 1998, the Company recorded the following significant non-cash items: Six months ended December 31, 1997 1998 (In 000's) Reclassify other assets to property, plant and equipment $ 154 $ 242 Dividends for Series E and , for the 1997 period, Series B Special Stock 2,773 824 Reclassify inventory to equipment 3,101 2,842 Translation rate adjustment 2,352 5,911 Reclassify other current assets to accrued liabilities - 672 5. LEGAL PROCEEDINGS Litigation On September 25, 1995, Bally Gaming International, Inc. ("BGII") was named as a defendant in a class action lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf of himself and all others similarly situated. The plaintiffs filed suit against BGII and approximately 45 other defendants. Each defendant is involved in the gaming business as 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 $1.0 billion, and are asking that any damage awards be trebled under applicable Federal law. The case is in the discovery and motions stage. A trial date has not been set. Management believes the plaintiffs' lawsuit to be without merit. The Company intends to vigorously pursue all legal defenses available to it. The Company is also a party to various lawsuits relating to routine matters incidental to its business. Management does not believe that the outcome of such litigation, including the matters above, in the aggregate, will have a material adverse effect on the Company. 6. UNUSUAL ITEMS In December 1997 the Company, Alpha Hospitality and General Electric Credit Corporation settled certain customer notes receivable on which the Company had certain recourse obligations. The Company contributed $2.5 million to the final settlement with the holder of the notes, and reversed $6.0 million of reserves previously established for these recourse obligations. In addition, as part of the settlement the Company became the sole owner of approximately 566,000 shares of Alpha Hospitality common stock which trades on the NASDAQ Small Cap market. The Company is selling this stock within the limitations provided for in the settlement agreement. As a result of settling a dispute over the exclusive use of certain technologies and changes in gaming regulations, the Company evaluated the cash flow of certain of its technology assets, in accordance with the provisions of Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-lived Assets to be Disposed of," and determined certain items met the definition of having become impaired. In December 1997 the Company recorded write-downs totaling $2.8 million for these items, which amount is included in unusual items. Additionally, the Company accrued $0.7 million for the present value of contractual payments due to a former member of the board of directors who was not re-elected to the board at the December 1997 annual shareholders meeting. 7. COMPREHENSIVE INCOME (LOSS) As of July 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting of comprehensive income (loss) and its components; however, the adoption of SFAS had no impact on the Company's net income (loss) or stockholders' deficiency. SFAS 130 requires the changes in the cumulative translation adjustment account (which is a component of stockholders' deficiency) to be included as a component of other comprehensive income (loss). During the six months ended December 31, 1997 and 1998, total accumulated comprehensive income (loss) amounted to $(2.5) million and $6.2 million, respectively. 8. REVERSE STOCK SPLIT On January 14, 1999 the Company's Board of Directors announced a one-for-3.5 reverse stock split of its Common Stock effective February 1, 1999 in order to maintain the listing of the Company's Common Stock on the NASDAQ National Market System. The effects of the reverse split were to reduce the authorized number of common shares from 175.0 million to 50.0 million and to decrease the number of shares of Common Stock outstanding from 34.3 million to 9.8 million. In connection with the reverse split, the share number, exercise price and the trigger prices, as applicable, for the Company's stock options and warrants were proportionately adjusted. In lieu of fractional shares resulting from the reverse split, stockholders will receive a cash payment from the sale of the aggregate fractional shares on the open market. The reverse split also impacted the conversion ratio on the Company's Series E Special Stock. Each share of Series E Special Stock is now convertible into 4.859 shares of Common Stock instead of 17.007 shares. All share and per share data included in this report have been restated to reflect the reverse split. 9. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS The following unaudited condensed consolidating financial statements are presented to provide certain financial information regarding guaranteeing and non-guaranteeing subsidiaries in relation to the Company's Senior Subordinated Notes which were issued in the refinancing transaction (see note 2). The financial information presented includes Alliance Gaming Corporation (the "Parent") and its wholly-owned guaranteeing subsidiaries (together the "Parent and Guaranteeing Subsidiaries"), and the non-guaranteeing subsidiaries Video Services, Inc., United Gaming Rainbow, BGI Australia Pty. Limited, Bally Gaming de Puerto Rico, Inc., and Alliance Automaten GmbH & Co. KG (the subsidiary that holds the Company's German interests) (together the "Non-Guaranteeing Subsidiaries"). The notes to consolidating financial statements should be read in conjunction with these consolidating financial statements. ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEETS June 30, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ASSETS Current assets: Cash and cash equivalents $ 8,609 $ 14,878 $ $ 23,487 Accounts and notes receivable, net 44,757 52,380 (3,678) 93,459 Inventories, net 27,957 14,990 (529) 42,418 Other current assets 7,998 3,713 11,711 ------ ------ ------ ------ Total current assets 89,321 85,961 (4,207) 171,075 ------- ------- ------ ------- Long-term notes receivable, net 95,036 1,926 (89,031) 7,931 Leased equipment, net 2 7,323 7,325 Property, plant and equipment, net 45,052 32,853 77,905 Excess of costs over net assets of acquired businesses, net 39,963 19,989 59,952 Intangible assets, net 26,248 484 26,732 Investment in subsidiaries 104,219 (104,219) Other assets, net 22,453 (1,124) (5,412) 15,917 ------- -------- ------ ------- $422,294 $147,412 $(202,869) $366,837 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 7,373 $ 3,104 $ $ 10,477 Accrued liabilities 26,415 13,705 (998) 39,122 Current maturities of long-term debt 6,912 3,176 (8,092) 1,996 ------ ------ ------ ------ Total current liabilities 40,700 19,985 (9,090) 51,595 ------- ------- ------- ------- Term loan facilities 137,800 137,800 Senior Subordinated Notes, net 149,245 149,245 Other long-term debt, less current maturities 105,279 20,878 (89,245) 36,912 Other liabilities 10,729 2,330 (341) 12,718 ------- ------ ------ ------ Total liabilities 443,753 43,193 (98,676) 388,270 ------- ------ ------- ------- Minority interest 2,315 2,315 Commitments and contingencies Stockholders' equity (deficiency): Series E Special Stock 13,732 13,732 Common Stock 3,212 17,832 (17,832) 3,212 Additional paid-in capital 122,980 68,700 (68,700) 122,980 Accumulated other comprehensive loss (13,946) (14,140) 14,140 (13,946) Retained earnings (accumulated deficit) (149,752) 31,827 (31,801) (149,726) -------- ------ ------- -------- Total stockholders' equity (deficiency) (23,774) 104,219 (104,193) (23,748) ------- ------- -------- ------- $422,294 $147,412 $(202,869) $366,837 ======== ======== ========= ========
See accompanying unaudited note. CONSOLIDATING BALANCE SHEETS December 31, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ASSETS Current assets: Cash and cash equivalents $ 7,002 $ 13,516 $ $ 20,518 Accounts and notes receivable, net 34,423 52,470 (3,661) 83,232 Inventories, net 32,392 15,399 (529) 47,262 Other current assets 6,222 1,511 7,733 ------ ------- ------ ------- Total current assets 80,039 82,896 (4,190) 158,745 ------- ------- ------ ------- Long-term notes receivable, net 97,848 1,883 (92,203) 7,528 Leased equipment, net 7,813 7,813 Property, plant and equipment, net 46,363 32,616 78,979 Excess of costs over net assets of acquired businesses, net 39,434 21,185 60,619 Intangible assets, net 26,652 506 27,158 Investment in subsidiaries 93,134 (93,134) - Other assets, net 25,375 (10,362) (498) 14,515 ------- ------- ------- ------- $408,845 $136,537 $(190,025) $355,357 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 10,276 $ 3,019 $ $ 13,295 Accrued liabilities 21,682 14,049 (804) 34,927 Current maturities of long-term debt 1,413 3,252 (2,676) 1,989 ------ ------ ------ ------ Total current liabilities 33,371 20,320 (3,480) 50,211 ------- ------- ------- ------- Term loan facilities 134,600 134,600 Senior Subordinated Notes, net 149,272 149,272 Other long-term debt, less current maturities 103,866 20,303 (92,670) 31,499 Other liabilities 10,577 2,331 (318) 12,590 ------- ------- ------- ------- Total liabilities 431,686 42,954 (96,468) 378,172 ------- ------ ------- ------- Minority interest 1,978 1,978 Commitments and contingencies Stockholders' equity (deficiency): Series E Special Stock 14,532 14,532 Common Stock 3,426 17,832 (17,832) 3,426 Additional paid-in capital 127,544 68,700 (68,700) 127,544 Accumulated other comprehensive loss (7,712) (7,910) 7,910 (7,712) Retained earnings (accumulated deficit) (162,609) 14,961 (14,935) (162,583) -------- ------- ------- -------- Total stockholders' equity (deficiency) (24,819) 93,583 (93,557) (24,793) ------- ------- -------- ------- $408,845 $136,537 $(190,025) $355,357 ======== ======== ========= ========
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended December 31, 1997 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries Revenues: Gaming equipment and systems $26,611 $ 2,293 $(1,449) $ 27,455 Wall machines and amusement games 27,731 27,731 Route operations 31,950 5,090 37,040 Casino operations 3,439 11,049 14,488 ------ ------ ------ ------ 62,000 46,163 (1,449) 106,714 ------ ------ ------ ------- Costs and expenses: Cost of gaming equipment and systems 15,268 1,588 (1,523) 15,333 Cost of wall machines and amusement games 15,165 15,165 Cost of route operations 25,324 3,311 28,635 Cost of casino operations 2,069 4,202 6,271 Selling, general and administrative 12,582 10,576 23,158 Research and development 2,691 755 3,446 Depreciation and amortization 3,459 2,350 5,809 Unusual items (2,545) (2,545) ------ ------ ------ ------ 58,848 37,947 (1,523) 95,272 ------ ------ ------ ------ Operating income 3,152 8,216 74 11,442 Earnings in consolidated subsidiaries 5,929 (5,929) Other income (expense): Interest income 340 96 (226) 210 Interest expense (7,265) (458) 226 (7,497) Rainbow royalty 1,296 (1,296) Minority interest (446) (446) Other, net (33) 97 64 ------ ------ ------ ------ Income before income taxes 2,973 6,655 (5,855) 3,773 Income tax benefit (provision) 298 (725) (427) ------ ------ ------ ------ Net income 3,271 5,930 (5,855) 3,346 Special Stock dividends (373) (373) ------ ------ ------ ------ Net income applicable to common shares $ 2,898 $ 5,930 $(5,855) $ 2,973 ======= ======= ======== =======
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended December 31, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries Revenues: Gaming equipment and systems $22,287 $ 3,005 $(2,793) $22,499 Wall machines and amusement games 23,769 23,769 Route operations 37,370 5,380 42,750 Casino operations 3,553 11,339 14,892 ------ ------ ------ ------- 63,210 43,493 (2,793) 103,910 Costs and expenses: Cost of gaming equipment and systems 13,822 2,365 (2,793) 13,394 Cost of wall machines and amusement games 14,674 14,674 Cost of route operations 29,894 3,622 33,516 Cost of casino operations 2,123 4,381 6,504 Selling, general and administrative 16,107 11,759 27,866 Research and development 3,178 798 3,976 Depreciation and amortization 3,743 2,014 5,757 ------ ------ ------ ------- 68,867 39,613 (2,793) 105,687 ------ ------ ------ ------- Operating income (loss) (5,657) 3,880 (1,777) Earnings in consolidated subsidiaries 2,149 (2,149) Other income (expense): Interest income 228 104 (191) 141 Interest expense (7,268) (425) 191 (7,502) Rainbow royalty 1,333 (1,333) Minority interest (509) (509) Other, net (177) (178) (355) ------ ------ ------ ------ Income (loss) before income taxes (9,901) 2,048 (2,149) (10,002) Income tax benefit 144 101 245 ----- ------ ------ ------ Net income (loss) (9,757) 2,149 (2,149) (9,757) Special Stock dividends (418) (418) ----- ------ ------ ------ Net income (loss) applicable to common shares $(10,175) $2,149 $(2,149) $(10,175) ========= ====== ======== =========
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF OPERATIONS Six Months Ended December 31, 1997 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries Revenues: Gaming equipment and systems $53,134 $ 5,040 $ (3,552) $54,622 Wall machines and amusement games 48,792 48,792 Route operations 62,715 9,980 72,695 Casino operations 6,728 21,848 28,576 ------ ------ ------ ------- 122,577 85,660 (3,552) 204,685 ------- ------- ------- -------- Costs and expenses: Cost of gaming equipment and systems 31,548 3,631 (3,610) 31,569 Cost of wall machines and amusement games 26,733 26,733 Cost of route operations 49,376 6,447 55,823 Cost of casino operations 4,167 8,364 12,531 Selling, general and administrative 23,785 20,777 44,562 Research and development 4,842 1,472 6,314 Depreciation and amortization 6,385 4,427 10,812 Unusual items (2,545) (2,545) ------- ------ ------ ------- 117,558 71,851 (3,610) 185,799 ------- ------- ------- ------- Operating income 5,019 13,809 58 18,886 Earnings in consolidated subsidiaries 9,127 (9,127) Other income (expense): Interest income 632 207 (398) 441 Interest expense (13,068) (896) 398 (13,566) Rainbow royalty 1,976 (2,563) (587) Rainbow royalty buyout (19,000) (19,000) Minority interest (836) (836) Other, net 31 21 52 ------ ------ ------ ------- Income (loss) before income taxes (16,119) 10,578 (9,069) (14,610) Income tax benefit (provision) 531 (1,451) (920) ------- ------- ------- ------- Net income (loss) before extraordinary item (15,588) 9,127 (9,069) (15,530) Extraordinary loss, without tax benefit(42,033) (42,033) ------- ------ ------ ------- Net income (loss) (57,621) 9,127 (9,069) (57,563) Special Stock dividends (2,773) (2,773) Premium on redemption of Series B Special Stock (16,553) (16,553) ------- ------ ------ ------- Net income (loss) applicable to common shares $(76,947) $ 9,127 $(9,069) $(76,889) ========= ======= ======== =========
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF OPERATIONS Six Months Ended December 31, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries Revenues: Gaming equipment and systems $42,458 $ 6,077 $ (4,094) $44,441 Wall machines and amusement games 44,391 (11) 44,380 Route operations 72,259 10,495 82,754 Casino operations 6,860 24,246 31,106 ------ -------- ------- ------- 121,577 85,209 (4,105) 202,681 ------- -------- ------- -------- Costs and expenses: Cost of gaming equipment and systems 24,613 4,715 (4,094) 25,234 Cost of wall machines and amusement games 26,753 (11) 26,742 Cost of route operations 57,710 6,935 64,645 Cost of casino operations 4,162 9,158 13,320 Selling, general and administrative 27,969 20,934 48,903 Research and development 6,589 1,556 8,145 Depreciation and amortization 7,415 3,744 11,159 ------ -------- ------- ------- 128,458 73,795 (4,105) 198,148 -------- ------- ------- -------- Operating income (loss) (6,881) 11,414 4,533 Earnings in consolidated subsidiaries 7,251 (7,251) Other income (expense): Interest income 543 208 (378) 373 Interest expense (14,969) (814) 378 (15,405) Rainbow royalty 2,840 (2,840) Minority interest (1,048) (1,048) Other, net (190) (357) (547) ------ ------ ------- ------ Income (loss) before income taxes (12,454) 7,611 (7,251) (12,094) Income tax benefit (provision) 421 (360) 61 ------ ------ ------- ------ Net income (loss) (12,033) 7,251 (7,251) (12,033) Special Stock dividends (824) (824) ------ ------- ------- ------ Net income (loss) applicable to common shares $(12,857) $ 7,251 $(7,251) $(12,857) ======= ===== ====== =======
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF CASH FLOWS Six Months Ended December 31, 1997 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries Net cash provided by (used in) operating activities $(26,736) $ 8,231 $ 6,351 $(12,154) ------- ------ ------ ------- Cash flows from investing activities: Additions to property and equipment (4,415) (2,159) (6,574) Proceeds from disposal of property and equipment 3 221 224 Other (1,827) (147) (1,974) ----- ---- ----- ------ Net cash used in investing activities (6,239) (2,085) (8,324) ------ ------ ----- ------ Cash flows from financing activities: Refinancing fees and expenses (32,752) (32,752) Capitalized new debt issue costs (11,456) (11,456) Proceeds from long-term debt 303,734 7,279 (7,279) 303,734 Repayments of long-term debt (170,728) (8,555) 928 (178,355) Net change in lines of credit 8,631 6,043 14,674 Redemption of Series B Special Stock (77,568) (77,568) Proceeds from exercise of stock options 473 473 Dividends received (paid) 7,084 (7,084) ------- -------- -------- ------- Net cash provided by (used in) financing activities 27,418 (2,317) (6,351) 18,750 ------- -------- -------- ------- Effect of exchange rate changes on cash (149) (149) ------- -------- -------- ------- Cash and cash equivalents: Increase (decrease) for period (5,557) 3,680 (1,877) Balance, beginning of period 16,462 12,462 28,924 ------- ------- ------- ------- Balance, end of period $10,905 $16,142 $ -- $27,047 ======= ======= ======== =======
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF CASH FLOWS Six Months Ended December 31, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries Net cash provided by (used in) operating activities $(7,619) $19,743 $(1,286) $10,838 ------ ------ ------ ------- Cash flows from investing activities: Additions to property and equipment (4,227) (1,249) (5,476) Proceeds from disposal of property and equipment 54 29 83 Additions to other long term assets (3,135) (81) (3,216) ------ ------ ------ ------ Net cash used in investing activities (7,308) (1,301) (8,609) ------- ------ ------ ------ Cash flows from financing activities: Repayments of long-term debt (3,858) (1,527) 1,286 (4,099) Net change in lines of credit (6,200) (6,200) Proceeds from exercise of stock options and warrants 4,778 4,778 Dividends received (paid) 18,600 (18,600) - ------- ------- ------- ------- Net cash provided by (used in) financing activities 13,320 (20,127) 1,286 (5,521) ------- ------- ------ ------- Effect of exchange rate changes on cash 323 323 ------- ------- ------- ------- Cash and cash equivalents: Decrease for period (1,607) (1,362) (2,969) Balance, beginning of period 8,609 14,878 23,487 ------ ------- ------- Balance, end of period $7,002 $13,516 $ -- $20,518 ====== ======= ======== =======
See accompanying unaudited note. Debt and Lines of Credit Long-term debt and lines of credit at December 31, 1998 consist of the following:
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries (in 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount $149,272 $149,272 Term loan facilities: Tranche B Term Loan 72,642 72,642 Tranche C Term Loan 38,899 38,899 Delayed Draw Term Facility 24,459 24,459 Revolving Credit Facility 16,500 13,299 29,799 Intercompany notes payable 87,365 7,980 (95,345) - Other 13 2,276 2,289 -------- ------- --------- ------- 389,150 23,555 (95,345) 317,360 Less current maturities 1,413 3,252 (2,676) 1,989 ------- ------- ------ ------- Long-term debt, less current maturities $387,737 $20,303 $(92,669) $315,371 ======== ======= ======== ========
ALLIANCE GAMING CORPORATION FORM 10-Q For the Quarter Ended December 31, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources At December 31, 1998, based on the terms of the $90.0 million Revolving Credit Facility, the Company would have been able to borrow $61.4 million, of which the Company had borrowings of approximately $29.8 million outstanding. The borrowing base for the revolving credit facility consists of eligible receivables and inventory, as defined in the credit agreement. At December 31, 1998, the Company had $20.5 million in cash and cash equivalents and $31.6 million in unborrowed availability on its revolving credit facility pursuant to the borrowing base limitations contained in the credit agreement. In addition, the Company had working capital of approximately $108.5 million, a decrease of approximately $11.0 million from June 30, 1998, which is explained below. Consolidated cash and cash equivalents at December 31, 1998 includes approximately $15.9 million of cash which is utilized in Casino and Route Operations which is held in vaults, cages or change banks. The Company is in compliance with the financial and operational covenants under both the bank credit agreement as amended and the Indenture for the Senior Subordinated Notes. Management believes that cash flow from operating activities, cash and cash equivalents held and the availability under the revolving credit facility will provide the Company with sufficient capital resources and liquidity. At December 31, 1998, the Company did not have any significant commitments for capital expenditures. Working Capital During the six months ended December 31, 1998, working capital decreased $11.0 million to $108.5 million. The primary fluctuations in working capital were: (i) a decrease in accounts receivable resulting from cash collections and lower revenues, (ii) an increase in inventory due to customer imposed delays in shipping product and inventory manufactured in anticipation of new product sales expected in the March 1999 quarter, (iii) a decrease in other current assets resulting from amortizing prepaid expenses, (iv) a decrease in accrued liabilities due to payments of accrued interest payable and a final payment in settlement of litigation, (v) the impact of foreign exchange fluctuations between the dollar and the deutschemark on all working capital categories, (vi) increases in accounts payable based on the increase in inventory levels and timing of payments, and (vii) the corresponding impact of the above listed items on cash and cash equivalents. Cash Flow During the six months ended December 31, 1998, $10.8 million was provided from operating activities resulting from a net decrease in accounts receivable, a decrease in other current assets, an increase in accounts payable and increased depreciation and amortization, partially offset by a net loss, an increase in inventories primarily at Bally Gaming and Systems, and a decrease in accrued expenses based on timing of interest payments. During the six months ended December 31, 1998 the Company used $8.6 million of cash in investing activities primarily resulting from $5.5 million in capital expenditures, $2.0 million of payments made in acquiring the rights to manufacture and distribute several gaming products, and $0.9 million of payments in acquiring gaming rights of route locations. During the six months ended December 31, 1998, $5.5 million was used by financing activities primarily resulting from $10.3 million used to reduce the Company's long-term debt, partially offset by the cash proceeds from the exercise of certain warrants to purchase common stock. The following is a summary of the Company's earnings before interest, taxes, depreciation and amortization (EBITDA) by business unit: Three Months Ending Six Months Ending December 31, December 31, 1997 1998 1997 1998 (In $000's) EBITDA by Business Unit: Bally Gaming and Systems $ 2,781 $ (3,532) $ 5,927 $ (2,572) Wall Machines and Amusement Games 5,210 1,287 7,811 4,432 Route Operations 6,048 6,035 12,382 11,713 Casino Operations 4,956 4,605 9,213 10,047 Corporate Administrative Expenses (4,289) (4,415) (8,180) (7,928) Unusual Items 2,545 - 2,545 - ------- ------- ------- -------- EBITDA $17,251 $ 3,980 $29,698 $15,692 ======= ======= ======= ======== The Company believes that the analysis of EBITDA is a useful adjunct to net income, cash flow and other GAAP measurements. However, this information should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of the Company's performance or to GAAP-defined cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. The bank credit facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the U.S. Borrower and German Subsidiaries (both as defined), other than the entity which holds the Company's interest in its Louisiana operations and other non-material subsidiaries (as defined), and secured by both a U.S. and German Pledge Agreement (both as defined). The bank facility contains a number of maintenance covenants and it and the indenture have other significant covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries to dispose of assets, incur additional indebtedness, issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests (as defined) or subordinated indebtedness, issue or sell equity interests of the Company's subsidiaries (as defined), engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities. Due to the low amount of EBITDA earned by the Company in the December 1998 quarter, the Company did not meet the financial covenants in the Bank Credit Facility. The Company and the banks have amended the current and future financial maintenance covenants in the bank facility effective December 31, 1998 such that the Company is in compliance with such covenants. Customer Financing Management believes that customer financing terms and leasing have become an increasingly important competitive factor for the Bally Gaming and Systems and Wall Machine and Amusement Games business units, respectively. Competitive conditions sometimes require Gaming Equipment and Systems to grant extended payment terms on gaming machines, systems and other gaming equipment, especially for sales in emerging markets. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of default may be less than the amount financed. Accordingly, the Company will have greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. Bally Wulff provides customer financing for approximately 15% of its sales and also provides lease financing to its customers. Lease terms are generally for six months, but are also available for 12 and 43 month terms. Year 2000 The Year 2000 readiness issue, which is common to most businesses, arises from the inability of information systems, and other time and date sensitive products and systems, to properly recognize and process date-sensitive information on and beyond January 1, 2000. The result could create errors in information or system failures. Assessments of the potential cost and effects of Year 2000 issues vary significantly among businesses, and it is extremely difficult to predict the actual impact. Recognizing this uncertainty, management has and is continuing to actively analyze, assess and plan for various Year 2000 issues across its businesses. The Year 2000 issue has an impact on both information technology ("IT") systems and non-IT systems, such as its manufacturing systems and physical facilities including, but not limited to, security systems and utilities. Although management believes that a majority of the Company's IT systems are Year 2000 ready, such systems still have to be tested for Year 2000 readiness. The Company plans to replace or upgrade those systems that are identified as non-Year 2000 ready during calendar 1999. Certain IT systems previously identified as non-Year 2000 compliant are being upgraded or replaced which should be complete by June 30, 1999. Non-IT system issues are more difficult to identify and resolve. The Company is actively identifying non-IT Year 2000 issues concerning its products and services, as well as its physical facility locations. As non-IT areas are identified, management formulates the necessary actions to ensure minimal disruption to its business processes. Management engaged outside consultants to assist and advise management in its assessment process and received the consultant's final report. The Company has already started to implement their recommendations, such as establishing a centralized project management organization to lead the Company through its Year 2000 efforts. This organization will include dedicated outside resources and internal business representatives. Although management believes that its efforts will be successful and the costs will be immaterial to its consolidated financial position and results of operations, it also recognizes that any failure or delay could cause a disruption in its business and have a significant financial impact. To minimize this potential impact, the Company is actively planning and designing a contingency plan to support critical business processes. The Company has also initiated efforts to ensure the Year 2000 readiness of its products and services. As part of its assessment of current products and services, the Company is currently upgrading all current Bally Systems SDS customers to version 7.0 software, for which the Company has developed a Year 2000 compliance "patch" which is currently being distributed. The Company plans to have all customers upgraded to version 7.0 with the patch by July 1999. The Company is in the final stages of testing version 7.1 of the software, which will be Year 2000 compliant. The Company expects to begin shipping and distributing version 7.1 by March 1999. Customers are also being advised that the IBM or Unix operating systems they are using must also be upgraded to versions that are Year 2000 compliant. Bally Systems has obtained the operating system upgrades from the vendors and has offered to assist users in installing the upgrade. The Company has also tested most of the current products manufactured in the United States and Germany in recent years to determine compliance with Year 2000. The Company is actively evaluating its strategy and legal obligations for any communication to its customers. Management continues to formulate new plans and update existing plans as it progresses in its research and investigation. The Year 2000 readiness of its customers varies, and the Company is encouraging its customers to evaluate and prepare their own systems. These efforts by customers to address Year 2000 issues may affect the demand for certain products and services; however, the impact to the revenue or any change in revenue patterns is highly uncertain. The Company has also initiated efforts to assess the Year 2000 readiness of its key suppliers and business partners. The Company's direction in this effort is to ensure the adequacy of resources and supplies to minimize any potential business interruptions. Management plans to complete this part of its Year 2000 readiness plan in the early part of calendar 1999. As part of the Company's contingency plans, management will begin to identify and solidify relationships with and access to alternative suppliers and resources to ensure the support and continuation of its critical business operations. The Year 2000 issue presents a number of other risks and uncertainties that could impact the Company, such as public utility failures, potential claims against it for damages arising from products and services that are not Year 2000 compliant, and the responsibility of certain government and gaming commissions of the various jurisdictions where the Company conducts business. While the Company continues to believe the Year 2000 issues described above will not materially affect its consolidated financial position or results of operations, it remains uncertain as to what extent, if any, the Company may be impacted. Euro Currency Conversion The Company's Bally Wulff subsidiary uses the German deutschmark as its functional currency. The new Euro currency will replace the deutschmark as well as most other European currencies after a phase in period which began January 1, 1999. As most of Bally Wulff's transactions are within Germany, the switch to the Euro is not expected to have a material impact on revenues, expenses or income. The Company's products can be brought into Euro compliance by moving a switch inside the wall machine. The cost of the new front glass showing Euro denominations will be borne by the customers. The Company currently has borrowings outstanding on its line of credit facility, a portion of which has a floating rate of interest tied to the Euro deutschmark rate. Upon the full implementation of the Euro, as of January 1, 2002, the interest rate will be tied to this new index. The impact of the change in this index, if any, is not known and can not be quantified at this time. Results of Operations: General The Company operates through four business units: (i) gaming equipment and systems, (ii) wall machines and amusement games (consisting of the manufacture and distribution of wall-mounted gaming machines and distribution of other recreational and amusement machines), (iii) route operations and (iv) casino operations. The following tables set forth the combined revenues and operating income (loss) for the four business units for the three months and six months ended December 31, 1997 and 1998: Three Months Ending Six Months Ending December 31, December 31, 1997 1998 1997 1998 (In $000's) Revenues: Bally Gaming and Systems $ 27,455 $ 22,499 $ 54,622 $ 44,441 Wall Machines and Amusement Games 27,731 23,769 48,792 44,380 Route Operations 37,040 42,750 72,695 82,754 Casino Operations 14,488 14,892 28,576 31,106 ------- ------- ------- ------- Total Revenues $106,714 $103,910 $204,685 $202,681 ======== ======== ======== ======== Operating Income (Loss): Bally Gaming and Systems $ 1,655 $(4,454) $ 3,527 $ (4,307) Wall Machines and Amusement Games 3,423 122 4,867 2,279 Route Operations 4,053 3,361 8,442 6,437 Casino Operations 4,447 4,023 8,199 8,885 Corporate Administrative Expenses (4,681) (4,829) (8,694) (8,761) Unusual Items 2,545 - 2,545 - ------- ------- ------- ------- Total Operating Income (Loss) $11,442 $ (1,777) $18,886 $ 4,533 ======= ========= ======= ======= Three Months Ended December 31, 1997 and 1998 Bally Gaming and Systems For the quarter ended December 31, 1998, Bally Gaming and Systems business unit reported revenues of $22.5 million, a decrease of 18% compared to revenues of $27.5 million in the prior year quarter. Bally Gaming reported unit sales of approximately 1,800 new gaming machines, a decrease of 47% compared to unit sales of approximately 3,400 in the prior year quarter. By market segment, Bally Gaming's unit sales for the quarter consisted of approximately 200 units to the Nevada and Atlantic City markets, 1,200 units to international markets and 400 units to riverboats, Native American and other domestic markets. The decrease in number of units shipped resulted from several customers delaying their delivery requirements until the March 1999 quarter and a slowdown in replacement demand. Bally Gaming reported revenues from the sale of new gaming machines of $8.9 million, a decrease of 49% compared to $17.5 million in the prior year quarter due to lower unit volume and a 3% decrease in average selling prices over the prior year quarter. Bally Systems reported revenues of $6.5 million, an increase of 18% compared to revenues of $5.5 million in the prior year quarter. For the quarter ended December 31, 1998, gross profit margins decreased to 41% from 44% in the prior year quarter. The decrease was due principally to the increase in international sales which traditionally have lower margins, and the impact of lower utilization at the manufacturing facility, partially offset by a greater percentage of higher margin Systems revenues. Bally Gaming and Systems reported an operating loss of $4.5 million compared to operating income of $1.7 million in the prior year quarter. The decrease resulted from lower revenues, a lower gross margin percentage, higher selling, general and administrative costs, and higher research and development costs. Research and development costs totaled $3.2 million, an increase of 18 percent over the prior year quarter, resulting from the Company's ongoing efforts to expand its new and existing product offerings. Selling, general and administrative expenses increased due to higher marketing costs related to new product launches and the implementation of a product management organization focus. Wall Machines and Amusement Games For the quarter ended December 31, 1998, the Wall Machines and Amusement Games business unit reported revenues of $23.8 million, a decrease of 14% compared to revenues of $27.7 million in the prior year quarter. The revenue decrease resulted primarily from a 29% decrease in unit shipments of new wall machines due to lower market demand, a 3% percent decrease in the average selling price of new wall machines due to competitive pricing pressures, a 15% decrease in amusement game distribution revenues and a 18% decrease in leased wall machine revenues as discussed below. The foreign currency fluctuation of the German mark versus the U.S. dollar increased revenues and EBITDA by $1.2 million and less than $0.1 million, respectively, during the 1998 quarter. Wall Machines and Amusement Games continued to develop its leasing program whereby new and used wall machines and new and used amusement games are leased to customers pursuant to operating leases. These leases provide Wall Machines and Amusement Games with a stream of revenues and cash flow over the life of the leases, which range from six months to three and one half years. Lease revenues decreased as the total number of machines out on lease decreased by 15% between quarters and the average monthly lease rate decreased by 13% due to competitive pricing pressures. For the quarter ended December 31, 1998, gross profit margin decreased to 38% from 45% in the prior year quarter This decrease was due to the unfavorable impact of lower average selling prices for new wall machines, higher volume of trade-ins of used equipment on the sales of new wall machines and lower utilization of the manufacturing facility. Wall Machines and Amusement Games reported operating income of $0.1 million, compared to $3.4 million in the prior year quarter. The decrease in operating income was primarily due to higher selling, general and administrative expenses resulting from the costs of a trade show as the prior year quarter did not include expenses for a trade show, costs incurred with the change in management brought about by hiring a new president, decreased revenues and lower gross margins, partially offset by lower depreciation expense resulting from a lower installed base of leased equipment. Route Operations For the quarter ended December 31, 1998, the Route Operations business unit reported revenues of $42.8 million, an increase of 15% compared to revenues of $37.0 million in the prior year quarter. Revenues for the Nevada operations increased 17% as net win per gaming machine per day increased to $55.50 from $53.60 in the prior year quarter, while the average number of gaming machines increased to 7,250 from 6,390 in the prior year quarter primarily resulting from the additional machines added as a result of new locations and taking over the contracts to operate locations previously served by competitors. Revenues continue to be strong in Southern Nevada, particularly in Gamblers Bonus locations. As of December 31, 1998, the Gamblers Bonus product was installed in approximately 2,300 gaming machines at 200 locations statewide or 32% of its installed base of gaming machines. Revenues for the Louisiana operations increased 6% as net win per gaming machine per day increased to $78.90 from $74.20 in the prior year quarter. The average number of gaming machines increased slightly to 742 from 740. For the quarter ended December 31, 1998, cost of revenues increased 17% to $33.5 million compared to $28.6 million in the prior year quarter. As a percentage of revenues, cost of revenues increased to 78% from 77% in the prior year quarter. Nevada route operations cost of revenues increased 18%, and as a percentage of revenues increased to 80% from 79% in the prior year quarter primarily due to the lower margins in the Northern Nevada route locations. Louisiana operations cost of revenues increased 9%, and as a percentage of revenues increased slightly to 67% from 65% in the prior year quarter due to an increase in direct costs, primarily health insurance costs. The Route Operations business unit reported operating income of $3.4 million, a decrease of 17% compared to operating income of $4.1 million in the prior year quarter. The decrease in operating income resulted primarily from higher direct costs, higher selling, general and administrative expenses, primarily increased marketing costs and salaries and wages and an increase in depreciation from an increase in the number of gaming machines deployed, partially offset by higher revenues. Casino Operations For the quarter ended December 31, 1998, the Casino Operations business unit reported revenues of $14.9 million, an increase of 3% compared to revenues of $14.5 million in the prior year quarter. This increase was a result of 3% increases at both the Rainbow Hotel Casino and the Rail City Casino. The improvement at the Rainbow Hotel Casino was attributable to an increase in the average gaming machine net win per day of 4% to $147 from $142 in the prior year quarter coupled with a 3% increase in the average number of gaming machines, partially offset by a lower number of table games. The number of gaming machines decreased from the September 1998 quarter as a result of temporarily removing machines as part of an internal remodeling project which will be completed during the June 1999 quarter. The revenue improvement at the Rail City Casino was attributable to an increase in the average gaming machine net win per day of 10% to $65 from $59 in the prior year quarter and a 3% increase in the average number of gaming machines, partially offset by a lower number of table games and lower food and beverage revenues. For the quarter ended December 31, 1998, the cost of revenues for Casino Operations increased 4% to $6.5 million compared to $6.3 million in the prior year quarter but, as a percentage of revenues, remained stable at 43% between quarters as costs increased proportionally with the increase in revenues. The Casino Operations business unit reported operating income of $4.0 million, a decrease of 9% compared to operating income of $4.4 million in the prior year quarter. The decrease in operating income resulted from higher selling, general and administrative expenses, primarily higher promotional and marketing costs at the Rainbow Hotel Casino, and an increase in depreciation from an increase in the number of gaming machines at both casinos, partially offset by the increase in revenues. Consolidated Total revenues for the quarter ended December 31, 1998, were $103.9 million, a decrease of 3% compared to revenues of $106.7 million in the prior year quarter. The decrease is primarily due to the aforementioned increases at the Route Operations and Casino Operations business units, more than offset by decreases in Bally Gaming and Systems and Wall Machines and Amusement Games business units. Cost of revenues for the quarter ended December 31, 1998, were $68.1 million, an increase of 4% compared to $65.4 million in the prior year quarter. Cost of revenues as a percentage of total revenues increased to 65% from 61% in the prior year quarter as increases at the Bally Gaming and Systems, the Wall Machines and Amusement Games and the Route Operations business units were partially offset by stable costs as a percentage of revenues at the Casino Operations business unit. Selling, general and administrative expenses for the quarter ended December 31, 1998 were approximately $27.9 million, an increase 20% compared to costs of $23.2 million for the prior year quarter. This increase is due to increases in expenses at all of the business units, and an increase in Corporate expenses. Research and development costs for the quarter ended December 31, 1998 were approximately $4.0 million, an increase of 15% compared to costs of $3.4 million in the prior year. This increase is due to increases in costs at the Bally Gaming and Systems and the Wall Machines and Amusement Games business units. Depreciation and amortization for the quarter ended December 31, 1998 remained constant at $5.8 million with the prior year quarter as increases at the Route Operations and Casino Operations business units were offset by decreases at the Bally Gaming and Systems and the Wall Machines and Amusement Games business units. Net Interest Expense and Income Taxes Net interest expense in the three months ended December 31, 1998 increased to $7.4 million from $7.3 million in the 1997 quarter. The increase is due primarily to a higher average amount of working capital borrowings in the current quarter, partially offset by lower interest rates. During the quarter, the Company reduced its total indebtedness by $10 million, primarily by principal repayments and reducing working capital borrowings. The Company recorded an income tax benefit of $0.2 million in the quarter ended December 31, 1998 compared to an income tax provision of $0.4 million in the prior fiscal year quarter. The current quarter benefit is primarily due to tax losses, which will be carried back for the Bally Wullf entities, partially offset by various state income tax provisions. Six Months Ended December 31, 1997 and 1998 Bally Gaming and Systems For the six months ended December 31, 1998 the Bally Gaming and Systems business unit reported revenues of $44.4 million, a decrease of 19% compared to revenues of $54.6 million in the prior year period. Bally Gaming reported unit sales of approximately 4,000 new gaming machines, a decrease of 48% compared to unit sales of approximately 7,600 in the prior year period. By market segment, Bally Gaming's unit sales for the period consisted of approximately 1,000 units to the Nevada and Atlantic City markets, 2,300 units to international markets and 700 units to riverboats, Native American and other domestic markets. The decrease in number of units shipped resulted primarily from lower replacement demand from existing casinos, coupled with several customers delaying their delivery requirements to the March 1999 quarter. Bally Gaming reported revenues from the sale of new gaming machines of $20.9 million, a decrease of 45% compared to $38.0 million in the prior year quarter due to lower unit volume partially offset by a 5% increase in average selling price of new gaming machines. In addition, Systems sales increased to $11.2 million compared to $8.8 million in the prior year period. For the six months ended December 31, 1998 gross profit margins improved to 43% from 42% in the prior year period. The increase was due principally to a higher proportion of higher margin System revenues partially offset by an increase in lower margin international sales and the impact of lower utilization at the manufacturing facility in the current year period. Bally Gaming and Systems reported an operating loss of $4.3 million, compared to operating income of $3.5 million for the prior year period. The decrease in operating income resulted primarily from lower revenues, higher selling, general and administrative expenses, primarily higher marketing costs related to new product launches and the implementation of a product management organization focus and higher research and development costs, partially offset by improved gross margins. Wall Machines and Amusement Games For the six months ended December 31, 1998, the Wall Machines and Amusement Games business unit reported revenues of $44.4 million, a decrease of 9% compared to revenues of $48.8 million in the prior year period. The currency translation impact of the fluctuation of the German mark versus the U.S. dollar increased revenues by $1.7 million during the current year period. The revenue decrease resulted primarily from a 22% decrease in unit shipments of new wall machines due to lower market demand, a 7% decrease in leased wall machine revenues due to a lower installed base of leased machines and a 15% decrease in amusement game distribution revenues, partially offset by a 45% increase in used wall machine revenues as a result of having a higher used machine inventory. Wall Machines and Amusement Games continued to develop its leasing program whereby new and used wall machines and new and used amusement games are leased to customers pursuant to operating leases which provide Wall Machines and Amusement Games with a stream of revenues and cash flow over the life of the leases, which range from six months to three and one half years. Wall Machines and Amusement Games experienced an 8% increase in units leased during the six months ended December 31, 1998 compared to the prior year period and approximately 4,800 machines are currently out on lease. For the six months ended December 31, 1998, gross profit margin decreased to 40% from 45% in the prior year period. The decrease in gross margin resulted primarily from higher volume of trade-ins of used equipment on the sale of new wall machines, higher fixed costs per unit due to lower sales volume and by a decrease in higher margin lease revenues. Wall Machines and Amusement Games reported operating income of $2.3 million compared to operating income of $4.9 million in the prior year period. The decrease in operating income resulted primarily from the aforementioned decrease in revenues and lower gross margins, partially offset by lower selling, general and administrative expenses. Route Operations For the six months ended December 31, 1998, the Route Operations business unit reported revenues of $82.8 million, an increase of 14% compared to revenues of $72.7 million in the prior year period. Nevada route operations revenues increased 15% as net win per gaming machine per day increased 2% to $54.00 from $53.00 in the prior year period, while the average number of gaming machines increased 13% to 7,190 from 6,390 in the prior year period. The increase in the average number of gaming machines in Nevada reflects the additional machines added for new locations and taking over the contracts to operate locations previously served by competitors. 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. Louisiana route operations revenues increased 5% as net win per gaming machine per day increased 5% to $78.00 from $74.50 in the prior year period and the average number of gaming machines increased 1% to 730 machines. For the six months ended December 31, 1998, Nevada route operations cost of revenues increased 17% and, as a percentage of revenues, increased to 80% from 79% in the prior year period primarily due to lower margins in the northern Nevada route and higher direct costs, primarily increased salaries and wages. Louisiana route operations cost of revenues increased 8% and as a percentage of revenues increased to 66% from 65% in the prior year period due to higher direct costs, primarily increased health insurance costs. Route Operations reported operating income of $6.4 million, a decrease of 24% compared to operating income of $8.4 million in the prior year quarter. The decrease in operating income resulted primarily by the increase in operating costs, an increase in selling, general and administrative expenses due to increases in advertising and salaries and wages, and an increase in depreciation expense as a result of the increase in the number of gaming machines deployed, partially offset by the increase in revenues. Casino Operations For the six months ended December 31, 1998, the Casino Operations business unit reported revenues of $31.1 million, an increase of 9% compared to revenues of $28.6 million in the prior year period. This increase reflects an 11% increase at the Rainbow Hotel Casino and a 2% increase at the Rail City Casino. The improvement at the Rainbow Hotel Casino was attributable to an increase in the average gaming machine net win per day of 9% to $152 from $140 in the prior year quarter coupled with a 6% increase in the average number of gaming machines. The increase in revenues at the Rail City Casino resulted from an increase in the average gaming machine net win per day of 8% to $62 from $57 in the prior year quarter and a 3% increase in the average number of gaming machines, partially offset by lower food and beverage revenues. For the six months ended December 31, 1998, the cost of revenues for Casino Operations increased 6% to $13.3 million compared to $12.5 million in the prior year period but, as a percentage of revenues, improved to 43% from 44% in the prior year period. Casino Operations reported operating income of $8.9 million, an increase of 8% compared to operating income of $8.2 million in the prior year period. The operating income improvement resulted from the aforementioned increase in revenues and a decrease in the percentage of cost of revenues as a percentage of revenues, partially offset by an increase in selling, general and administrative expenses primarily due to higher promotion and marketing costs. Consolidated Total revenues for the six months ended December 31, 1998, were $202.7 million, a decrease of 1% compared to revenues of $204.7 million in the prior year period as the improvements at the Route Operations and Casino Operations business units and were more than offset by decreases in revenues at the Bally Gaming and Systems and Wall Machines and Amusement Games business units. Cost of revenues for the six months ended December 31, 1998, were $129.9 million, an increase of 3% compared to $126.7 million in the prior year period. Cost of revenues as a percentage of total revenues increased to 64% from 62% in the prior year period as the improvements at the Bally Gaming and Systems and Casino Operations business units were more than offset by increases at the Wall Machines and Amusement Games and Route Operations business units. Selling, general and administrative expenses for the six months ended December 31, 1998 were approximately $48.9 million, an increase of 10% compared to costs of $44.6 million for the prior year quarter. This increase is due to an increase in expenses at the Bally Gaming and Systems, the Route Operations and the Casino Operations business units, partially offset by a decrease in expenses at the Wall Machines and Amusement Games business unit and a decrease in Corporate expenses. Research and development costs for the six months ended December 31, 1998 were approximately $8.1 million, an increase of 29% compared to costs of $6.3 million in the prior year. This increase is due to increases in costs at the Bally Gaming and Systems and the Wall Machines and Amusement Games business units. Depreciation and amortization for the six months ended December 31, 1998 was $11.2 million, a 3% increase compared to depreciation and amortization of $10.8 million in the prior year quarter as increases at the Route Operations and Casino Operations business units were partially offset by decreases at the Bally Gaming and Systems and the Wall Machines and Amusement Games business units. Net Interest Expense and Income Taxes Net interest expense in the six months ended December 31, 1998 increased to $15.0 million compared to the net interest expense of $13.1 million in the prior year period. The increase is due primarily to higher interest costs which resulted from the additional debt taken on in the Refinancing Transaction completed in September 1997 and a higher average amount of working capital borrowings in the current period, partially offset by the elimination of interest on the 12 7/8% Senior Secured Notes and lower interest rates. The Company recorded an income tax benefit of $0.1 million in the six months ended December 31, 1998 compared to a provision of $0.9 million in the prior year period. The current year benefit is due primarily to tax losses, which will be carried back for the Bally Wulff entities, partially offset by various state income tax provisions. * * * * * The information contained in this Form 10-Q may contain "forward-looking" statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1933, as amended, and is subject to the safe harbor created thereby. Such information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward looking statements herein. Future operating results may be adversely affected as a result of a number of factors such as the Company's high leverage, its holding company structure, its operating history and recent losses, competition, risks of product development, customer financing, sales to non-traditional gaming markets, foreign operations, dependence on key personnel, strict regulation by gaming authorities, gaming taxes and value added taxes, uncertain effect of National Gambling Commission, and other risks including Year 2000 issues, as detailed from time to time in the Company's filings with the Securities and Exchange Commission. PART II Item 4. Submission of Matters to a Vote of Security Holders On December 3, 1998, the Company held its annual shareholders meeting at which the shareholders were asked to vote on the election of two directors. Of the 34,261,167 shares of common stock outstanding, 18,990,871 shares were voted for, and 10,450,459 withheld from Mr. Jacques Andre; 18,990,851 shares were voted for, and 10,450,479 withheld from Mr. Michael Hirschfeld. Item 6. Exhibits and Reports on Form 8-K a. Exhibits 4. (ii) Second Amendment to the Credit Agreement. 11 Computation of per share amounts 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1998. 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/ Morris Goldstein President and Chief Executive Officer (Principal Executive Officer) By /s/ Scott D. Schweinfurth Sr. Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) EX-4.(II) 2 SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 4.(ii) Second amendment to credit agreement SECOND AMENDMENT SECOND AMENDMENT (this "Amendment"), dated as of January 27, 1999, among ALLIANCE GAMING CORPORATION, a Nevada corporation (the "U.S. Borrower"), BALLY WULFF VERTRIEBS GMBH, a company with limited liability organized under the laws of the Federal Republic of Germany ("Bally Wulff Vertriebs"), BALLY WULFF AUTOMATEN GMBH, a company with limited liability organized under the laws of the Federal Republic of Germany ("Bally Wulff Automaten" and, together with Bally Wulff Vertriebs, the "German Borrowers," and each a "German Borrower" and the German Borrowers, together with the U.S. Borrower, the "Borrowers," and each a "Borrower"), the financial institutions party to the Credit Agreement referred to below (the "Lenders") and CREDIT SUISSE FIRST BOSTON, as Administrative Agent. Unless otherwise defined herein, all capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. W I T N E S S E T H : WHEREAS, the Borrowers, the Lenders and the Administrative Agent are parties to a Credit Agreement, dated as of August 8, 1997 (as amended, modified or supplemented through, but not including, the date hereof the "Credit Agreement"); WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: 1. Section 9.05(xx) of the Credit Agreement is hereby amended by inserting the following proviso at the end of such Section 9.05(xx): ", provided that from and after the Second Amendment Effective Date, neither the U.S. Borrower nor any of its Subsidiaries may make Investments pursuant to this clause (xx) in aggregate amount in excess of $2,000,000 at any one time outstanding, provided, however, from and after the last day of any Test Period ending after the Second Amendment Effective Date when the Leverage Ratio is less than or equal to 5.00:1 the U.S. Borrower and its Subsidiaries may make Investments pursuant to this clause (xx) in the amount otherwise permitted in this clause (xx) without giving effect to the preceding proviso". 2. Section 9.07(a) of the Credit Agreement is hereby amended by deleting the table appearing therein and inserting the following new text in lieu thereof: "Period of Four Consecutive Quarters Ended Closest To Amount June 30, 1998 $18.5 million each June 30 ended thereafter $14 million; provided, however, that in the event that the Leverage Ratio is less than or equal to 5.00:1 on the last day of any Test Period ending after the Second Amendment Effective Date, then from and after such date, the U.S. Borrower and its Subsidiaries shall instead be allowed to make Capital Expenditures pursuant to this clause (a) in an aggregate amount not to exceed, during any period of four consecutive fiscal quarters (taken as one accounting period) ending on the last day of a fiscal quarter described below (so long as ended after the last day of the Test Period referenced above in this proviso), the amount set forth opposite such fiscal quarter below: "Period of Four Consecutive Fiscal Quarters Ended Amount Closest to June 30, 1999 $18.5 million June 30, 2000 $15 million June 30, 2001 $15 million each June 30 ended thereafter $16 million" 3. Section 9.07(b) of the Credit Agreement is hereby amended by adding the following new sentence immediately at the end thereof: "For the purposes hereof, Capital Expenditures permitted to be made during any period of four fiscal quarters shall be the relevant amounts actually permitted to be spent during the relevant period from which the carry-forward is being made (whether pursuant to the first or second table appearing in Section 9.07(a))." 4. Section 9.08 of the Credit Agreement is hereby amended by (i) deleting clauses (x) and (y) contained therein in their entirety and inserting in lieu thereof the following new clauses (x), (y) and (z): "(x) in the case of any such Test Period ended on or prior to September 30, 1998, 1.00:1, (y) in the case of any such Test Period ended after September 30, 1998 and on or prior to September 30, 1999, 0.80:1 and (z) in the case of any Test Period ended after September 30, 1999, 1.05:1". 5. Section 9.09 of the Credit Agreement is hereby amended by deleting the table appearing therein in its entirety and inserting the following new table in lieu thereof: "Test Periods Ending Ratio After December 1, 1997 and on or prior to September 30, 1998 1.75:1 After September 30, 1998 and prior to December 31, 1999 1.25:1 On December 31, 1999 and prior to June 30, 2000 1.75:1 On June 30, 2000 and prior to June 30, 2001 2.00:1 Thereafter 2.75:1". 6. Section 9.10 of the Credit Agreement is hereby amended by deleting the table appearing therein in its entirety and inserting the following new table in lieu thereof: "Period Ratio From and including December 31, 1997 to but excluding December 31, 1998 5.75:1 From and including December 31, 1998 to but excluding 7.50:1 March 31, 1999 From and including 7.90:1 March 31, 1999 to but excluding September 30, 1999 From and including September 30, 1999 to but excluding December 31, 1999 7.00:1 From and including December 31, 1999 to but excluding 5.50:1 March 31, 2000 From and including March 31, 2000 to but excluding 5.25:1 June 30, 2001 From and including June 30, 2001 to but excluding 4.25:1 June 30, 2002 From and including June 30, 3.75:1 2002 and thereafter 7. Section 9.11 of the Credit Agreement is hereby amended by deleting the table appearing therein in its entirety and inserting the following new table in lieu thereof: "Period Amount On December 31, 1998 to but excluding $42,000,000 March 31, 1999 On March 31, 1999 to but excluding $40,000,000 September 30, 1999 On September 30, 1999 to but excluding $44,000,000 December 31, 1999 On December 31, 1999 to but excluding $56,000,000 March 31, 2000 On March 31, 2000 to but excluding $59,000,000 June 30, 2001 on June 30, 2001 to but excluding $70,000,000 June 30, 2002 On June 30, 2002 and thereafter $74,000,000 8. The definitions of "Applicable Commitment Commission Percentage" and "Applicable Margin" appearing in Section 11.01 of the Credit Agreement are hereby amended by (i) deleting the text "Level4, Level 5 or Level 6" appearing in the second parenthetical appearing in said definition and inserting the text ", or Level 4" in lieu thereof, (ii) deleting the text beginning at "Level 1: Leverage Ratio less than 3:00" through the text "Level 6: Leverage Ratio is greater than or equal to 4.75 to 1." and inserting the following new text in lieu thereof: Level 1: Leverage Ratio is less than 4.50 to 1. Level 2: Leverage Ratio is greater than or equal to 4.50 to 1 but less than 4.75 to 1. Level 3: Leverage Ratio is greater than or equal to 4.75 to 1 but less than 5.25 to 1. Level 4: Leverage Ratio is greater than or equal to 5.25 to 1. ,(iii) deleting the table appearing in said definition in its entirety and inserting the following new table in lieu thereof: Level Level Level Level "Ratio 1 2 3 4 Euro Rate Loan Margin for U.S. Borrower Tranche A Term Loans, German Borrower Tranche A Term Loans and Revolving Loans 1.75% 2.00% 2.25% 2.75% Base Rate Loan Margin for U.S. Borrower Tranche A Term Loans, Revolving Loans and Swingline Loans 0.75% 1.00% 1.25% 1.75% Euro Rate Loan Margin for Delayed Draw Term Loans and Tranche B Term Loans 2.50% 2.50% 2.75% 3.25% Base Rate Loan Margin for Delayed Draw Term Loans and Tranche B Term Loans 1.50% 1.50% 1.75% 2.25% Euro Rate Loan Margin for Tranche C Term Loans 2.75% 2.75% 3.00% 3.5% Base Rate Loan Margin for Tranche C Term Loans 1.75% 1.75% 2.00% 2.5% Applicable Commitment Commission Percentage 0.40% 0.45% 0.50% 0.50% and (iv) deleting each reference to "Level 6" in each instance where same appears in the proviso to the the first sentence of said definition and in the last sentence of said definition and inserting in lieu thereof in each such instance the text "Level 4". 9. Section 11.01 of the Credit Agreement is hereby further amended by inserting the following new definitions in the proper alphabetical order: "Second Amendment" shall mean the Second Amendment to this Agreement, dated as of January 27, 1999. "Second Amendment Effective Date" shall have the meaning provided in the Second Amendment. 10. This Amendment shall become effective on the date (the "Second Amendment Effective Date") when (i) each Borrower, each Credit Party and the Required Lenders have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at the Notice Office and (ii) the Borrower shall have paid to the Administrative Agent for the account of each Lender which executes and delivers the counterpart of this Amendment to the Administrative Agent on or prior to 5:00 p.m. New York time, an amendment fee equal to 0.25 of 1% of the sum of such Lender's outstanding (x) Term Loans and (y) Revolving Loan Commitment, in each case on the Second Amendment Effective Date. 11. In order to induce the Lenders to enter into this Amendment, each Borrower hereby represents and warrants that (i) the representations and warranties contained in Section 7 of the Credit Agreement are true and correct in all material respects on and as of the Second Amendment Effective Date after giving effect to this Amendment (it being understood and agreed that, as to any representation or warranty which by its terms is made as of a specified date, each Borrower represents and warrants that such representation and warranty is true and correct in all material respects only as of such specified date) and (ii) there exists no Default or Event of Default on the Second Amendment Effective Date after giving effect to this Amendment. 12. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 13. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the U.S. Borrower and the Administrative Agent. 14. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 15. From and after the Second Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as modified hereby. * * * IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Amendment as of the date first above written. ALLIANCE GAMING CORPORATION By_______________________________ Name: Title: BALLY WULFF VERTRIEBS GMBH By_______________________________ Name: Title: BALLY WULFF AUTOMATEN GMBH By_______________________________ Name: Title: CREDIT SUISSE FIRST BOSTON, Individually and as Administrative Agent By_______________________________ Title: By_______________________________ Title: THE BANK OF NOVA SCOTIA By_______________________________ Name: Title: KZH ING-1 LLC By_______________________________ Name: Title: SUMITOMO BANK OF CALIFORNIA By_______________________________ Name: Title: THE MITSUBISHI TRUST AND BANKING CORP. By_______________________________ Name: Title: SOUTHERN PACIFIC BANK By_______________________________ Name: Title: CRESCENT/MACH I PARTNERS By: TCW Asset Management Company, Its Investment Advisor By_______________________________ Name: Title: MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By_______________________________ Name: Title: TCW LEVERAGED INCOME TRUST, L.P. By_______________________________ Name: Title: VAN KAMPEN PRIME RATE INCOME TRUST By_______________________________ Name: Title: VAN KAMPEN CLO I, LIMITED By: VAN KAMPEN MANAGERMENT INC., as Collateral Manager By_______________________________ Name: Title: INDOSUEZ CAPITAL FUNDING III, LIMITED By: Indosuez Capital, as Portfolio Advisor By_______________________________ Name: Title: DEEPROCK & COMPANY By: Eaton Vance Management As Investment Advisor By_______________________________ Name: Title: PILGRIM PRIME RATE TRUST By: Pilgrim Investments, Inc. as its Investment Manager By_______________________________ Name: Title: MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By_______________________________ Name: Title: ROYALTON COMPANY By: Pacific Investment Management Company By: PIMCO Management Inc., a general partner By_______________________________ Name: Bradley W. Paulson Title: Vice President SENIOR DEBT PORTFOLIO By: Boston Management and Research as Investment Advisor By_______________________________ Name: Title: KZH-CRESCENT CORP. By_______________________________ Name: Title: PAMCO CAYMAN LTD. By_______________________________ Name: Title: CYPRESSTREE INVESTMENT PARTNERS I, LTD., By: Cypresstree Investment Management Company, Inc., as Portfolio Manager By_______________________________ Name: Title: TEXAS COMMERCE BANK By_______________________________ Name: Title: ARCHIMEDES FUNDING, L.L.C. By: ING Capital Advisors, Inc., as Collateral Manager By_______________________________ Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION By_______________________________ Name: Title: EATON VANCE SENIOR INCOME TRUST| By: EATON VANCE MANAGEMENT AS ADVISOR By: Name: Title: ROYALTON COMPANY By: Pacific Investment Management Company By: PIMCO Management Inc., a general partner By: Name: Bradley W. Paulson Title: Vice President CAPTIVA III FINANCE LTD., as advised by Pacific Investment Management Company By: Name: Title: MASSMUTUAL HIGH YIELD PARTNERS II, LLC By: HYP Management, Inc., as Managing Member By: Name: Title: Its: CALIFORNIA BANK & TRUST By: Name: Title: Each of the undersigned, each being a Subsidiary Guarantor, acknowledges and agrees to the provisions of the foregoing Second Amendment. [add signature lines for Subsidiary Guarantors] EX-11 3 EARNINGS PER SHARE COMPUTATIONS Exhibit 11 Earnings per share computations (In 000's except share data) Three Months ended December 31, 1997 Income Shares Per share (Numerator) (Denominator) Amounts Basic EPS Income applicable to common shares $2,973 9,135 $0.33 ===== Effect of Diluted Securities Stock options 311 Warrants 285 Convertible preferred stock dividends -- ------ ----- 596 Diluted EPS Income applicable to common shares with assumed exercises and conversions $2,973 9,731 $0.31 ====== ===== ===== Six Months ended December 31, 1997 Loss Shares Per share (Numerator) (Denominator) Amounts Net loss before extraordinary item $(15,530) Less: Special stock dividends and redemption premium on Series B Special Stock (19,326) Basic EPS Net loss before extraordinary item $34,856 9,118 $(3.81) Extraordinary loss (42,033) 9,118 (4.62) ------- ----- Net loss applicable to common shares $(76,889) 9,118 $(8.43) ======== ====== Effect of Diluted Securities (a) Stock options -- Warrants -- Convertible preferred stock dividends -- -------- ----- Diluted EPS Net loss applicable to common shares with assumed exercises and conversions $(76,889) 9,118 $(8.43) ========= ===== ======= cont. Three Months ended December 31, 1998 Loss Shares Per share (Numerator)(Denominator) Amounts Basic EPS Loss applicable to common shares $(10,175) 9,790 $(1.04) Effect of Diluted Securities (a) Stock options -- Warrants -- Convertible preferred stock dividends -- -------- ----- Diluted EPS Loss applicable to Common Shares with assumed exercises and conversions $(10,175) 9,790 $(1.04) ========= ===== ======= Six Months ended December 31, 1998 Loss Shares Per share (Numerator)(Denominator) Amounts Basic EPS Loss before extraordinary item $(12,857) 9,607 $(1.34) Effect of Diluted Securities (a) Stock options -- Warrants -- Convertible preferred stock dividends -- -------- ----- Diluted EPS Loss applicable to common shares with assumed exercises and conversions $(12,857) 9,607 $(1.34) ========= ===== ======= (a) Effect would be anti-diluted for these periods. cont. The following securities were in-the-money as of the period end but were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented:
For the three months ended For the six months ended December 31, December 31, December 31, December 31, 1997 1998 1997 1998 ---- ---- ---- ---- (in 000s) Stock options N/A 34 1,275 70 Warrants - - - - Convertible Preferred Stock - - - - --- -- ----- -- N/A 34 1,275 70 === == ===== == Adjusted for application of the treasury stock method N/A 9 468 9 === === === ===
Under the treasury stock method, the assumed net proceeds from the exercise of the weighted average number of common stock equivalents outstanding during the period are assumed to be used to repurchase common stock at its average market price during the period. Such repurchase of common stock reduces the dilutive effect of the common stock equivalents. EX-27.1 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary information excerpted from Form 10-Q for the six months ended 12/31/98 1,000 6-MOS JUN-30-1999 DEC-31-1998 20,518 0 94,988 11,756 47,262 158,745 131,794 52,815 355,357 50,211 0 0 14,532 3,426 (42,751) 355,357 88,821 202,681 51,976 129,941 69,129 (922) 15,405 (12,094) (61) (12,033) 0 0 0 (12,857) (1.34) (1.34)
EX-27.2 5 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains restated summary information excerpted from Form 10-Q for the six months ended 12/31/97 1,000 6-MOS JUN-30-1998 DEC-31-1997 27,047 0 101,111 13,661 34,982 157,962 130,826 47,685 347,345 42,402 0 0 12,975 3,201 (40,816) 347,345 103,414 204,685 58,302 126,656 57,619 1,524 13,566 (14,640) 920 (15,230) 0 (42,033) 0 (76,889) (8.43) (8.43)
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