-----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, K4xuwrDN3qQWyIDtpECR8wwSvmpfVHDRwXRtDsXAdzMFapstKdV9o0a85SLeC7KJ B1wiJmpz6grYqKP6XYf9Mg== 0000950148-97-002828.txt : 19971113 0000950148-97-002828.hdr.sgml : 19971113 ACCESSION NUMBER: 0000950148-97-002828 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE GAMING CORP CENTRAL INDEX KEY: 0000002491 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880104066 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-34077 FILM NUMBER: 97716879 BUSINESS ADDRESS: STREET 1: 6601 S. BERMUDA RD. CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7022707600 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 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1997 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 October 31, 1997 according to the records of the registrant's registrar and transfer agent was 32,012,726. ================================================================================ 2 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Unaudited Financial Statements Unaudited Condensed Consolidated Balance Sheets as of June 30, 1997 and September 30, 1997 3 Unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 1996 and 1997 4 Unaudited Condensed Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) for the three months ended September 30, 1997 5 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 1996 and 1997 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 PART II OTHER INFORMATION Item 1. Legal Proceedings 25 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 26
2 3 PART 1 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In 000's, except share data)
June 30, Sept. 30, 1997 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 28,924 $ 24,053 Accounts and notes receivable, net of allowance for doubtful accounts of $21,929 and $22,254 87,701 78,987 Inventories, net of reserves of $8,856 and $8,852 37,329 38,352 Other current assets 9,627 9,175 --------- --------- Total current assets 163,581 150,567 --------- --------- Long-term notes receivable, net of allowance for doubtful accounts of $1,972 and $1,244 8,981 8,224 Leased equipment, net of accumulated depreciation of $3,377 and $4,626 7,902 8,417 Property, plant and equipment, net of accumulated depreciation of $39,695 and $40,236 74,647 74,742 Excess of costs over net assets of acquired businesses, net of accumulated amortization of $1,723 and $1,928 62,098 61,680 Intangible assets, net of accumulated amortization of $9,626 and $10,104 18,231 22,644 Other assets, net 16,576 16,426 --------- --------- Total assets $ 352,016 $ 342,700 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Accounts payable $ 14,270 $ 11,405 Accrued liabilities 37,392 38,750 Current maturities of long-term debt 1,124 2,246 --------- --------- Total current liabilities 52,786 52,401 --------- --------- Term loan facilities 138,850 Senior Secured Notes, net of unamortized discount 151,224 19 Senior Subordinated Notes due 2007, net of unamortized discount of $791 -- 149,209 Other long-term debt, less current maturities 21,491 15,173 Other liabilities 12,433 12,667 --------- --------- Total liabilities 237,934 368,319 Minority interest 1,546 1,329 Series B Special Stock, $.10 par value, $100 liquidation value; 754,198 shares issued and outstanding at June 30, 1997, net of discount 58,981 -- Commitments and contingencies Stockholders' equity (net capital deficiency): Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 123,689 shares and 127,245 shares issued and outstanding 12,368 12,725 Common Stock, $.10 par value; 175,000,000 shares authorized; 31,852,000 shares and 31,857,000 issued and outstanding 3,185 3,185 Additional paid-in capital 138,590 122,054 Cumulative translation adjustment (11,719) (12,734) Accumulated deficit (88,869) (152,178) --------- --------- Total stockholders' equity (net capital deficiency) 53,555 (26,948) --------- --------- Total liabilities and stockholders' equity (net capital deficiency) $ 352,016 $ 342,700 ========= =========
See notes to unaudited condensed consolidated financial statements. 3 4 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except per share data)
Three Months Ended September 30, 1996 1997 --------- --------- Revenues: Gaming equipment and systems $ 34,883 $ 27,167 Wall machines and amusement games 26,427 21,061 Route operations 28,889 35,655 Casino operations 12,713 14,088 --------- --------- 102,912 97,971 Costs and expenses: Cost of gaming equipment and systems 21,808 16,236 Cost of wall machines and amusement games 15,104 11,568 Cost of route operations 21,894 27,188 Cost of casino operations 5,366 6,260 Selling, general and administrative 23,864 24,272 Depreciation and amortization 5,220 5,003 Unusual items 700 -- --------- --------- 93,956 90,527 Operating income 8,956 7,444 Other income (expense): Interest income 563 231 Interest expense (6,250) (6,069) Rainbow royalty (1,151) (587) Rainbow royalty buyout (note 3) -- (19,000) Minority interest (141) (390) Other, net (1) (12) --------- --------- Income (loss) before income taxes 1,976 (18,383) Income tax provision 1,341 493 --------- --------- Net income (loss) before extraordinary item 635 (18,876) Extraordinary loss, without tax benefit (note 3) -- (42,033) --------- --------- Net income (loss) 635 (60,909) Special Stock dividends (2,664) (2,400) Premium on redemption or repurchase of Series B Special Stock (note 3) (232) (16,553) --------- --------- Net loss applicable to common shares $ (2,261) $ (79,862) ========= ========= Loss per share before extraordinary item $ (.07) $ (1.19) Extraordinary loss per share -- (1.32) --------- --------- Net loss per share $ (.07) $ (2.51) ========= ========= Weighted average common shares outstanding 31,772 31,853 ========= =========
See notes to unaudited condensed consolidated financial statements. 4 5 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Three Months Ended September 30, 1997 (In 000's)
Series E Common Stock Special Stock ---------------------- ---------------------- Shares Dollars Shares Dollars ------ ------- ------ ------- Balances at June 30, 1997 31,852 $ 3,185 123 $ 12,368 Net loss -- -- -- -- Shares issued upon exercise of options 5 -- -- -- Special Stock dividends -- -- 4 357 Series B Special Stock repurchase premium -- -- -- -- Foreign currency translation adjustment -- -- -- -- --------- --------- --------- --------- Balances at September 30, 1997 31,857 $ 3,185 127 $ 12,725 ========= ========= ========= ========= Total Stock- holders' Additional Cumulative Equity (Net Paid-in Accum. Translation Capital Capital Deficit Adjustment Deficiency ------- ------- ---------- ---------- Balances at June 30, 1997 $ 138,590 $ (88,869) $ (11,719) $ 53,555 Net loss -- (60,909) -- (60,909) Shares issued upon exercise of options 17 -- -- 17 Special Stock dividends -- (2,400) -- (2,043) Series B Special Stock repurchase premium (16,553) -- -- (16,553) Foreign currency translation adjustment -- -- (1,015) (1,015) --------- --------- --------- --------- Balances at September 30, 1997 $ 122,054 $(152,178) $ (12,734) $ (26,948) ========= ========= ========= =========
See notes to unaudited condensed consolidated financial statements. 5 6 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In 000's)
Three Months Ended September 30, 1996 1997 --------- --------- Cash flows from operating activities: Net income (loss) $ 635 $ (60,909) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 5,220 5,003 Amortization of debt discounts 512 7 Extraordinary item -- 42,033 Write down of other assets 102 476 Loss (gain) on sale of assets 53 (14) Provision for doubtful receivables 1,575 771 Other (24) 259 Net change in operating assets and liabilities: Accounts and notes receivable 2,933 8,700 Inventories (3,227) (2,622) Other current assets 43 (70) Accounts payable 3,408 (2,865) Accrued liabilities (750) 1,124 --------- --------- Net cash provided by (used in) operating activities 10,480 (8,107) Cash flows from investing activities: Additions to property, plant and equipment (2,001) (3,049) Proceeds from disposal of property and equipment 41 131 Other (1,058) (862) --------- --------- Net cash provided by (used in) investing activities (3,018) (3,780) Cash flows from financing activities: Refinancing fees and expenses -- (32,752) Capitalized debt issuance costs -- (11,456) Proceeds from issuance of long-term debt 41 303,734 Reduction of long-term debt (3,683) (177,894) Net change in lines of credit (12,010) 3,072 Repurchase of Series B Special Stock (1,653) (77,568) Proceeds from exercise of stock options 122 -- --------- --------- Net cash provided by (used in) financing activities (17,183) 7,136 Effect of exchange rate changes on cash (5) (120) Cash and cash equivalents: Decrease for period (9,726) (4,871) Balance, beginning of period 48,057 28,924 --------- --------- Balance, end of period $ 38,331 $ 24,053 ========= =========
See notes to unaudited condensed consolidated financial statements. 6 7 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 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, 1997. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet at June 30, 1997 was derived from audited consolidated financial statements, but does not include all disclosures required under generally accepted accounting principles. Certain reclassifications have been made to prior period financial statements to conform with current period presentation. 2. DEBT AND LINES OF CREDIT As discussed in detail below, substantially all of the Company's indebtedness shown below at June 30, 1997 was repaid as part of the Refinancing (as defined below). Long-term debt at June 30, 1997, prior to the Refinancing and at September 30, 1997, after the Refinancing, consists of the following:
June 30, Sept. 30, 1997 1997 -------- -------- (in 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount of $791,000 $ -- $149,209 Tranche B Term Loan -- 75,000 Tranche C Term Loan -- 40,000 Delayed Draw Term Facility -- 25,000 Revolving Credit Facility -- 12,643 12 7/8% Senior Secured Notes due 2003, net of unamortized discount of $2,776,000 and $0 151,224 19 Bally Wulff revolving lines of credit 9,611 -- Hospitality Franchise Systems note payable, secured by the assets of the Rainbow Casino 6,569 -- 7.5% Convertible subordinated debentures due 2003, unsecured 1,642 -- Other, secured by related equipment 4,793 3,626 -------- -------- 173,839 305,497 Less current maturities 1,124 2,246 -------- -------- Long-term debt, less current maturities $172,715 $303,251 ======== ========
In August 1997 the Company effected a series of related transactions (as described below, the "Refinancing"). The Refinancing consisted of the private placement of $150 million of Senior Subordinated Notes and the closing of $230 million of bank financing. 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 7 8 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 facility (the "Revolving Credit Facility") with a 6-year term. Each of these credit facilities are variable rate borrowings in accordance with a credit grid. The interest rates which are currently at the highest level of the credit grid and maturity dates are as follows:
Initial Maturity Rate Date ------------- ---------------- Tranche B Term Loan LIBOR + 2.75% January 31, 2005 Tranche C Term Loan LIBOR + 3.00% July 31, 2005 Delayed Draw Term Facility LIBOR + 2.75% January 31, 2005 Revolving Credit Facility LIBOR + 2.25% July 31, 2003
The Revolving Credit Facility also allows for German Deutschemark borrowings at the Eurodollar rate plus 2.25% (or 5.4% at September 30, 1997). As part of the Refinancing, the Company used the proceeds of the Senior Subordinated Note offering together with borrowings under the Revolving Credit Facility, the Term Loan Facilities and cash on hand to fund (a) the repurchase at a premium of substantially all of the Company's 12 7/8% Senior Secured Notes, plus accrued interest to August 8, 1997 totaling $181.6 million, (b) the redemption at liquidation value of all of the Company's Series B Special Stock on September 8, 1997 totaling $77.6 million, (c) the purchase from HFS Gaming Corporation of the right to receive royalty payments based on revenues of the Rainbow Casino for $19 million (the "Rainbow Royalty Buyout"), (d) the repayment of related debt owed to an HFS affiliate, National Gaming Mississippi, Inc., on August 12, 1997 totaling $7.3 million, (e) repayment of amounts outstanding under the domestic and foreign revolving lines of credit and (f) the payment of transaction fees and expenses totaling $16.6 million. At September 30, 1997, based on the terms of the new $90 million Revolving Credit Facility, the Company would have been able to borrow $71.8 million. At September 30, 1997, borrowings under the revolving credit line totaled $12.6, of which $10.8 million were German Deutschmark borrowings and the Company had $1.5 million of credit line restrictions in place. The borrowing base for the revolving credit facility includes eligible receivables and inventory (as defined). Additionally, in July 1997 the Company redeemed the remaining balance of the 7 1/2% Convertible Debentures at a price of 104%, or a total of $1.7 million. The credit facility 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 is 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 both 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 engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. 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 new credit 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 8 9 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 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 and Liquidated Damages thereon, if any, to the date of purchase. 3. REFINANCING CHARGES As a result of the Refinancing described above, the Company recorded an extraordinary loss of $42.0 million consisting of the $27.7 million premium paid to repurchase the 12 7/8% 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 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 repurchased on September 8, 1997 at the liquidation price of $100 per share, plus accrued dividends. 4. INCOME TAXES The Company's effective tax rate for the three months ended September 30, 1996 and 1997 differs from the statutory rate of 35% due to state income taxes and the impact of taxes applicable to earnings of Bally Wulff. In addition, earnings at the Company's domestic subsidiaries cannot be fully offset by the utilization of net operating loss carryforwards. 5. SUPPLEMENTAL CASH FLOW INFORMATION The following supplemental information is related to the unaudited condensed consolidated statements of cash flows. For the three months ended September 30, 1996 and 1997, the Company recorded the following significant non-cash items:
Three months ended September 30, 1996 1997 -------- ------- (In 000's) Reclassify other assets to property, plant and equipment $ 567 $ 105 Reclassify excess costs over net assets of acquired business to property, plant and equipment 1,286 -- Dividends for Series E and Series B Special Stock 2,664 2,400 Reclassify inventory to equipment 771 1,599 Series B Special Stock redemption premium -- 16,553 Translation rate adjustment 149 895
9 10 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 6. LEGAL PROCEEDINGS LITIGATION In the action filed on December 2, 1996, the Company was named as a defendant in an action brought by Canpartners Investments IV and Cerberus Partners, pending in federal district court for the Southern District of New York. The Company entered into certain loan commitment letters with the plaintiffs in August 1995, contemplating that the plaintiffs would lend approximately $30.0 million to partially fund the Company's then pending hostile tender offer for Bally Gaming International, Inc. (BGII). The Company entered into a merger agreement with BGII in October 1995 and did not use funds provided by the plaintiffs to fund the acquisition of BGII in June 1996. On October 27, 1997, the court granted in part the Company's motion to dismiss the Canyon/Cerebus complaint. The claims for breach of the duty of good faith and fair dealing, seeking damages in excess of $12.0 million, and fraudulent concealment have been dismissed in their entirety, without prejudice to plaintiffs' right to replead. The claim for indemnification has been dismissed to the extent plaintiffs seek reimbursement of costs and fees relating to the litigation, but remains to the extent they seek reimbursemenent of expenses in connection with negotiation of the commitment letter and loan documents. The court left intact the plaintiffs' claim for breach of contract; however, the Company believes it has strong defenses to the plaintiffs' claim and intends to vigorously defend the action. On September 25, 1995, BGII was named as a defendant in a class action lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf of himself and all others similarly situated. The plaintiffs filed suit against BGII and approximately 45 other defendants. Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of $1.0 billion, and are asking that any damage awards be trebled under applicable Federal law. Management believes the plaintiffs' lawsuit to be without merit. The Company intends to vigorously pursue all legal defenses available to it. In August 1996, the Company received demand notices from a holder of customer notes receivable which were sold on a recourse basis to a third party for which payments were in arrears from December 1995. In December 1996 the holder of the notes filed suit against the Company seeking payment from the Company of approximately $3.6 million. In November 1997, the Company received demand notices from the holder of $7.0 million of customer notes receivable which were sold on a recourse basis to a third party for which payments were in arrears. The Company has recorded a provision for doubtful accounts of approximately $8.3 million on all these receivables at September 30, 1997. 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. 7. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS The following unaudited condensed consolidating financial statements are presented to provide certain financial information regarding guaranteeing and non-guaranteeing subsidiaries in relation to the Company's Senior Subordinated Notes which were issued in the Refinancing (see note 2). The financial information 10 11 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 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. 11 12 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS June 30, 1997 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ----- ------------ ASSETS Current assets: Cash and cash equivalents $ 16,462 $ 12,462 $ $ 28,924 Accounts and notes receivable, net 31,799 57,207 (1,305) 87,701 Inventories, net 19,231 18,778 (680) 37,329 Other current assets 6,695 2,932 9,627 --------- --------- --------- --------- Total current assets 74,187 91,379 (1,985) 163,581 --------- --------- --------- --------- Long-term notes receivable, net 96,271 1,501 (88,791) 8,981 Leased equipment, net 7,902 7,902 Property, plant and equipment, net 41,836 32,811 74,647 Excess of costs over net assets of acquired businesses, net 41,185 21,031 (118) 62,098 Intangible assets, net 17,979 252 18,231 Investment in subsidiaries 100,478 (100,478) Other assets, net 22,310 (5,758) 24 16,576 --------- --------- --------- --------- $ 394,246 $ 149,118 $(191,348) $ 352,016 ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,936 $ 4,262 $ 72 $ 14,270 Accrued liabilities 21,129 16,727 (464) 37,392 Current maturities of long-term debt 585 1,348 (809) 1,124 --------- --------- --------- --------- Total current liabilities 31,650 22,337 (1,201) 52,786 --------- --------- --------- --------- Senior Secured Notes due 2003, net 151,224 151,224 Other long-term debt, less current maturities 87,924 22,676 (89,109) 21,491 Other liabilities 9,366 3,500 (433) 12,433 --------- --------- --------- --------- Total liabilities 280,164 48,513 (90,743) 237,934 --------- --------- --------- --------- Minority interest 1,546 1,546 Series B Special Stock 58,981 58,981 Stockholders' equity: Series E Special Stock 12,368 12,368 Common Stock 3,185 17,832 (17,832) 3,185 Additional paid-in capital 138,590 68,699 (68,699) 138,590 Cumulative translation adjustment (11,719) (11,880) 11,880 (11,719) Retained earnings (accumulated deficit) (88,869) 25,954 (25,954) (88,869) --------- --------- --------- --------- Total stockholders' equity 53,555 100,605 (100,605) 53,555 --------- --------- --------- --------- $ 394,246 $ 149,118 $(191,348) $ 352,016 ========= ========= ========= =========
See accompanying unaudited note. 12 13 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS September 30, 1997 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ----- ------------ ASSETS Current assets: Cash and cash equivalents $ 9,389 $ 14,664 $ $ 24,053 Accounts and notes receivable, net 30,057 52,458 (3,528) 78,987 Inventories, net 19,483 19,512 (643) 38,352 Other current assets 5,797 3,378 9,175 --------- --------- --------- --------- Total current assets 64,726 90,012 (4,171) 150,567 --------- --------- --------- --------- Long-term notes receivable, net 100,430 1,426 (93,632) 8,224 Leased equipment, net 8,417 8,417 Property, plant and equipment, net 42,270 32,472 74,742 Excess of costs over net assets of acquired businesses, net 41,088 20,710 (118) 61,680 Intangible assets, net 22,134 510 22,644 Investment in subsidiaries 97,562 (97,562) -- Other assets, net 22,560 (5,719) (415) 16,426 --------- --------- --------- --------- $ 390,770 $ 147,828 $(195,898) $ 342,700 ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Accounts payable $ 8,526 $ 3,309 $ (430) $ 11,405 Accrued liabilities 21,122 18,655 (1,027) 38,750 Current maturities of long-term debt 1,726 2,944 (2,424) 2,246 --------- --------- --------- --------- Total current liabilities 31,374 24,908 (3,881) 52,401 --------- --------- --------- --------- Term loan facilities 138,850 138,850 Senior Secured Notes due 2003, net 19 19 Senior Subordinated Notes due 2007, net 149,209 149,209 Other long-term debt, less current maturities 87,602 21,616 (94,045) 15,173 Other liabilities 9,335 3,742 (410) 12,667 --------- --------- --------- --------- Total liabilities 416,389 50,266 (98,336) 368,319 --------- --------- --------- --------- Minority interest 1,329 1,329 Stockholders' equity (net capital deficiency): Series E Special Stock 12,725 12,725 Common Stock 3,185 17,832 (17,832) 3,185 Additional paid-in capital 122,054 68,848 (68,848) 122,054 Cumulative translation adjustment (12,734) (12,895) 12,895 (12,734) Retained earnings (accumulated deficit) (152,178) 23,777 (23,777) (152,178) --------- --------- --------- --------- Total stockholders' equity (net capital deficiency) (26,948) 97,562 (97,562) (26,948) --------- --------- --------- --------- $ 390,770 $ 147,828 $(195,898) $ 342,700 ========= ========= ========= =========
See accompanying unaudited note. 13 14 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended September 30, 1996 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ----- ------------ Revenues: Gaming equipment and systems $33,603 $ 2,988 $(1,708) $ 34,883 Wall machines and amusement games 26,427 26,427 Route operations 24,569 4,320 28,889 Casino operations 3,140 9,598 (25) 12,713 ------- ------- ------- ------- 61,312 43,333 (1,733) 102,912 ------- ------- ------- ------- Costs and expenses: Cost of gaming equipment and systems 21,087 2,429 (1,708) 21,808 Cost of wall machines and amusement games 15,104 15,104 Cost of route operations 19,117 2,777 21,894 Cost of casino operations 1,865 3,501 5,366 Selling, general and administrative 13,169 10,737 (42) 23,864 Depreciation and amortization 3,247 1,973 5,220 Unusual item 700 700 ------- ------- ------- ------- 59,185 36,521 (1,750) 93,956 ------- ------- ------- ------- Operating income 2,127 6,812 17 8,956 Earnings in consolidated subsidiaries 3,188 (3,188) Other income (expense): Interest income 586 90 (113) 563 Interest expense (5,293) (1,070) 113 (6,250) Rainbow royalty (1,151) (1,151) Minority interest (141) (141) Other, net (136) 152 (17) (1) ------- ------- ------- ------- Income before income taxes 331 4,833 (3,188) 1,976 Income tax (benefit) provision (304) 1,645 1,341 ------- ------- ------- ------- Net income 635 3,188 (3,188) 635 Special Stock dividends (2,664) (2,664) Premium on repurchase of Series B Special Stock (232) (232) ------- ------- ------- ------- Net income (loss) applicable to common shares $(2,261) $ 3,188 $(3,188) $(2,261) ======= ======= ======= =======
See accompanying unaudited note. 14 15 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended September 30, 1997 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ----- ------------ Revenues: Gaming equipment and systems $26,523 $ 2,747 $ (2,103) $27,167 Wall machines and amusement games 21,061 21,061 Route operations 30,765 4,890 35,655 Casino operations 3,289 10,799 14,088 -------- ------- ------- -------- 60,577 39,497 (2,103) 97,971 -------- ------- ------- -------- Costs and expenses: Cost of gaming equipment and systems 16,280 2,043 (2,087) 16,236 Cost of wall machines and amusement games 11,568 11,568 Cost of route operations 24,052 3,136 27,188 Cost of casino operations 2,098 4,162 6,260 Selling, general and administrative 13,354 10,918 24,272 Depreciation and amortization 2,927 2,076 5,003 -------- ------- ------- -------- 58,711 33,903 (2,087) 90,527 -------- ------- ------- -------- Operating income 1,866 5,594 (16) 7,444 Earnings in consolidated subsidiaries 3,181 (3,181) Other income (expense): Interest income 292 111 (172) 231 Interest expense (5,802) (439) 172 (6,069) Rainbow royalty 680 (1,267) (587) Minority interest (390) (390) Rainbow royalty buyout (19,000) (19,000) Other, net 64 (76) (12) -------- ------- ------- -------- Income (loss) before income taxes (19,109) 3,923 (3,197) (18,383) Income tax (benefit) provision (233) 726 493 -------- ------- ------- -------- Net income (loss) before extraordinary item (18,876) 3,197 (3,197) (18,876) Extraordinary loss, without tax benefit (42,033) (42,033) -------- ------- ------- -------- Net income (loss) (60,909) 3,197 (3,197) (60,909) Special Stock dividends (2,400) (2,400) Premium on redemption of Series B Special Stock (16,553) (16,553) -------- ------- ------- -------- Net loss applicable to common shares $(79,862) $ 3,197 $(3,197) $(79,862) ========= ======== ======= =========
See accompanying unaudited note. 15 16 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF CASH FLOWS Three Months Ended September 30, 1996 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ----- ------------ Net cash provided by operating activities 829 9,848 (197) 10,480 ------- ------- -------- ------- Cash flows from investing activities: Additions to property, plant and equipment (1,418) (583) (2,001) Proceeds from disposal of property and equipment 37 4 41 Other (1,058) (1,058) ------- ------- -------- ------- Net cash used in investing activities (2,439) (579) (3,018) ------- ------- -------- ------- Cash flows from financing activities: Proceeds from issuance of long-term debt, net of expenses 41 41 Reduction of long-term debt (179) (3,701) 197 (3,683) Net change in lines of credit (7,525) (4,485) (12,010) Repurchase of Series B Special Stock (1,653) (1,653) Proceeds from exercise of stock options 122 122 Dividends received (paid) 143 (143) -- ------- ------- -------- ------- Net cash used in financing activities (9,051) (8,329) 197 (17,183) ------- ------- -------- ------- Effect of exchange rate changes on cash (5) (5) Cash and cash equivalents: Increase (decrease) for period (10,661) 935 (9,726) Balance, beginning of period 36,954 11,103 48,057 ------- ------- -------- ------- Balance, end of period $26,293 $12,038 $ -- $38,331 ======== ======== ======== =======
See accompanying unaudited note. 16 17 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF CASH FLOWS Three Months Ended September 30, 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 (23,015) 7,968 6,940 (8,107) ------- ------- ------ ------- Cash flows from investing activities: Additions to property and equipment (2,288) (761) (3,049) Proceeds from disposal of property and equipment 62 69 131 Other (710) (152) (862) ------- ------- ------ ------- Net cash used in investing activities (2,936) (844) (3,780) ------- ------- ------ ------- Cash flows from financing activities: Refinancing fees and expenses (32,752) (32,752) Capitalized new debt fees (11,456) (11,456) Proceeds from issuance of long-term debt, net of expenses 303,734 7,279 (7,279) 303,734 Reduction of long-term debt (170,294) (7,939) 339 (177,894) Net change in lines of credit 1,840 1,232 3,072 Redemption of Series B Special Stock (77,568) (77,568) Dividends received (paid) 5,374 (5,374) -- ------- ------- ------ ------- Net cash provided by (used in) financing activities 18,878 (4,802) (6,940) 7,136 ------- ------- ------ ------- Effect of exchange rate changes on cash (120) (120) Cash and cash equivalents: Increase (decrease) for period (7,073) 2,202 (4,871) Balance, beginning of period 16,462 12,462 28,924 ------- ------- ------- ------- Balance, end of period $ 9,389 $14,664 $ -- $24,053 ======= ======= ======= =======
See accompanying unaudited note. 17 18 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DEBT AND LINES OF CREDIT Long-term debt and lines of credit at September 30, 1997 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 149,209 149,209 Tranche B Term Loan 75,000 75,000 Tranche C Term Loan 40,000 40,000 Delayed Draw Term Facility 25,000 25,000 Revolving Credit Facility 1,800 10,843 12,643 12 7/8% Senior Secured notes due 2003 19 19 Intercompany notes payable 85,426 11,043 (96,469) -- Other 952 2,674 3,626 ------ ------ --------- -------- 377,406 24,560 (96,469) 305,497 Less current maturities 1,726 2,944 (2,424) 2,246 ------- ------ ------- ------- Long-term debt, less current maturities $375,680 $21,616 $(94,045) $303,251 ======== ======= ========= ========
18 19 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES In August 1997 the Company completed a series of related transactions as described below ("the Refinancing") which consisted of the private placement of $150.0 million of Senior Subordinated Notes and the closing of $230.0 million of bank financing. The bank financing provides for (i) term loans in the aggregate amount of up to $140.0 million, comprised of a $75.0 million tranche with a 7 1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche with an 8-year term (the "Tranche C Term Loan"), and a $25.0 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 $90.0 million revolving credit facility with a 6-year term (the "Revolving Credit Facility"). As part of the Refinancing, the Company used the proceeds of the Senior Subordinated Note offering, together with borrowings under the Revolving Credit Facility, the Term Loan Facilities and cash on hand, to fund (a) the repurchase at a premium of substantially all the Company's 12 7/8% Senior Secured Notes, plus accrued interest to August 8, 1997, for $181.6 million, (b) the redemption at liquidation value of all of the Company's Series B Special Stock on September 8, 1997 totaling $77.6 million, (c) the purchase from HFS Gaming Corporation of the right to receive royalty payments based on revenues of the Rainbow Casino and the purchase of related debt owed to an HFS affiliate, National Gaming Mississippi, Inc. on August 12, 1997 totaling $26.3 million and (d) the payment of transaction fees and expenses totaling $16.6 million. Additionally, in July 1997 the Company redeemed the remaining balance of its 7 1/2% Convertible Debentures at a price of 104%, or a total of $1.7 million. At September 30, 1997, based on the terms of the new $90.0 million Revolving Credit Facility, the Company would have been able to borrow $71.8 million, of which the Company had borrowings of approximately $12.6 million at September 30, 1997 and the Company had $1.5 million of credit line restrictions in place. The borrowing base for the revolving credit facility consists of eligible receivables and inventory, as defined in the credit agreement. At September 30, 1997, the Company actually had $24.1 million in cash and cash equivalents. The Company also had working capital of approximately $98.2 million, a decrease of approximately $12.6 million from June 30, 1997 which is explained below. Consolidated cash and cash equivalents at September 30, 1997 includes approximately $9.8 million of cash which is utilized in Casino and Route Operations which is held in vaults, cages or change banks. Management believes that cash flow from operating activities, cash and cash equivalents held and the new $90.0 million Revolving Credit Facility will provide the Company with sufficient capital resources and liquidity. At September 30, 1997, the Company did not have any significant commitments for capital expenditures. Working Capital During the three months ended September 30, 1997, working capital decreased $12.6 million to $98.2 million. The primary fluctuations contributing to the decline in working capital were: (i) decreases in cash and cash equivalents of $4.9 million, (ii) a reduction in accounts receivable in relation to decreased product sales and collections on accounts receivable, and (iii) the impact of foreign exchange fluctuations between the dollar and the deutschmark. 19 20 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 Cash Flow During the three months ended September 30, 1997, the Company used cash from operating activities of $8.1 million. The largest components consisted of the net loss of $60.9 million, partially offset by the $42.0 million of extraordinary loss and $8.7 million net cash collected from receivables. During the three months ended September 30, 1997 cash was used in investing activities primarily related to capital expenditures of $3.0 million. During the three months ended September 30, 1997, cash was provided by the issuance of the Senior Subordinated Notes and the new credit facility, and was used to repurchase the 12 7/8% Notes, redeem the Series B Special Stock, fund the Rainbow Royalty Buyout, repay certain other debt and pay related fees and expenses. The following is a summary of the Company's earnings before interest, taxes, depreciation and amortization (EBITDA) by business unit:
Three Months Ending September 30, 1996 1997 -------- -------- (In $000's) Gaming Equipment and Systems $ 5,463 $ 3,146 Wall Machines and Amusement Games 4,050 2,601 Route Operations 4,719 6,334 Casino Operations 4,617 4,257 Corporate Administrative Expenses (3,973) (3,891) Unusual Items (700) -- -------- -------- EBITDA $ 14,176 $ 12,447 ======== ========
The Company believes that the above 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 credit facility 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 is 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 both 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 engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. 20 21 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 Customer Financing Management believes that customer financing terms and leasing have become an increasingly important competitive factor for the Gaming Equipment and Systems and Wall Machine and Amusement Games business units, respectively. Competitive conditions sometimes require Gaming Equipment and Systems to grant extended payment terms on gaming machines, systems and other gaming equipment, especially for sales in emerging markets. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of default may be less than the amount financed. In conjunction with sales by Gaming Equipment and Systems, with recourse to the Company, of certain trade receivables to third parties, the Company had guaranteed amounts due from various customers of approximately $10.5 million at September 30, 1997. The Company has reserved approximately $8.3 million at September 30, 1997 for all of its sales of receivables with recourse to the Company. It is possible that one or more customers whose obligation has been guaranteed by Gaming Equipment and Systems may be unable to make payments as such amounts become due. In such event, Gaming Equipment and Systems may become responsible for repayment of at least a portion of such amounts over the term of the receivables. Accordingly, the Company will have greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. In August 1996, the Company received demand notices from the holder of notes related to one customer's trade receivables for which payments were in arrears since December 1995 and in December 1996 the holder of the notes filed suit against the Company to seek payment from the Company. The lawsuit is for approximately $3.6 million. In November 1997, the Company received demand notices from the holder of $7.0 million of customer notes receivable which were sold on a recourse basis to a third party for which payments were in arrears. Bally Wulff provides customer financing for approximately 10% 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. 21 22 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 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 ended September 30, 1996 and 1997:
1996 1997 --------- --------- (In 000's) REVENUES: Gaming Equipment and Systems $ 34,883 $ 27,167 Wall Machines and Amusement Games 26,427 21,061 Route Operations 28,889 35,655 Casino Operations 12,713 14,088 --------- --------- TOTAL REVENUES $ 102,912 $ 97,971 ========= =========
1996 1997 --------- --------- (In 000's) OPERATING INCOME (LOSS): Gaming Equipment and Systems $ 4,772 $ 1,871 Wall Machines and Amusement Games 2,644 1,444 Route Operations 3,008 4,388 Casino Operations 4,148 3,754 Corporate and Other (4,916) (4,013) --------- --------- SUBTOTAL 9,656 7,444 Unusual items (700) -- --------- --------- TOTAL OPERATING INCOME: $ 8,956 $ 7,444 ========= =========
GAMING EQUIPMENT AND SYSTEMS For the quarter ended September 30, 1997, the Gaming Equipment and Systems business unit reported revenues of $27.2 million, a decrease of 22% compared to revenues of $34.9 million in the prior year quarter. Bally Gaming reported unit sales of approximately 4,200 new gaming machines, a decrease of 14% compared to unit sales of approximately 4,900 in the prior year quarter. By market segment, Bally Gaming's unit sales for the quarter consisted of approximately 1,200 units to the Nevada and Atlantic City markets, 2,000 units to international markets and 1,000 units to riverboats, Native American and other domestic markets. The decrease in number of units shipped resulted from fewer new casino openings and lower replacement demand from existing casinos. Bally Gaming reported revenues from the sale of new gaming machines of $20.5 million, a decrease of 16% compared to $24.3 million in the prior year quarter due to lower unit volume while average selling prices remained relatively flat between quarters. Bally Systems reported revenues of $3.3 million, a decrease of 36% compared to revenues of $5.2 million in the prior year quarter. Bally Systems results were also impacted by fewer new casino openings. 22 23 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 For the quarter ended September 30, 1997, gross profit margins improved to 40% from 37% in the prior year quarter. The gross margin improvement resulted primarily from a change in the mix of product sales to higher margin products coupled with lower provisions for inventory obsolescence in the current year quarter. Gaming Equipment and Systems reported operating income of $1.9 million, a decrease of 60% compared to operating income of $4.8 million in the prior year quarter. The decrease in operating income resulted primarily from lower revenues and higher research and development costs, partially offset by improved gross margins and a lower provision for doubtful receivables. WALL MACHINES AND AMUSEMENT GAMES For the quarter ended September 30, 1997, the Wall Machines and Amusement Games business unit reported revenues of $21.1 million, a decrease of 20%, compared to revenues of $26.4 million in the prior year quarter. The currency translation impact of the fluctuation of the German mark versus the U.S. dollar reduced revenues by $4.3 million during the 1997 quarter. The revenue decrease resulted primarily from a 10% decrease in unit shipments of new wall machines and a 28% decrease in amusement game distribution revenues partially offset by a 71% increase in leased wall machine revenues. Bally Wulff management believes that the general slowdown in the German economy has resulted in customers acquiring only enough units to replace those units whose licenses are expiring, and deferring purchases of other equipment. Wall Machines and Amusement Games continued to expand its leasing program whereby new wall machines 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 a 128% increase in new units leased compared to the prior year quarter and a total of 5,300 machines are currently out on lease. For the quarter ended September 30, 1997, gross profit margin improved to 45% from 43% in the prior year quarter. The gross margin improvement resulted primarily from the favorable impact of the increase in higher margin lease revenues, partially offset by a 5% decrease in the average selling price of new wall machines. Wall Machines and Amusement Games reported operating income of $1.4 million, a decrease of 46% compared to $2.6 million in the prior year quarter. The decrease resulted primarily from the aforementioned decrease in revenues, partially offset by the improved gross margins and lower selling, general and administrative expenses. ROUTE OPERATIONS For the quarter ended September 30, 1997, the Route Operations business unit reported revenues of $35.7 million, an increase of 24% compared to revenues of $28.9 million in the prior year quarter. Revenues for the Nevada operations increased 25% as net win per gaming machine per day increased to $52.40 from $49.36 in the prior year quarter, while the average number of gaming machines increased to 6,340 from 5,550 in the prior year quarter primarily resulting from the additional machines added as a result of taking over operations of 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 launched in December 1995. Gamblers Bonus is currently installed in approximately 1,700 gaming machines at 150 locations throughout Nevada. Revenues for the Louisiana operations increased 13% as net win per gaming machine per day increased to $74.80 from $72.10 in the prior year quarter and an increase in the average number of gaming machines to 710 from 650 in the prior year quarter 23 24 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 For the quarter ended September 30, 1997, cost of revenues increased 24% to $27.2 million compared to $21.9 million in the prior year quarter. As a percentage of revenues, cost of revenues remained relatively flat at 76% from the prior year quarter. Nevada operations cost of revenues increased 26%, but as a percentage of revenues remained flat at 78% between quarters, and Louisiana operations cost of revenues increased 13%, but as a percentage of revenues remained flat at 64% between quarters, as costs at both operations increased proportionally with the revenue growth. The Route Operations business unit reported operating income of $4.4 million, an increase of 47% compared to operating income of $3.0 million in the prior year quarter. The operating income improvement resulted primarily from the aforementioned increase in revenues and by a decrease in selling, general and administrative expenses. CASINO OPERATIONS For the quarter ended September 30, 1997, the Casino Operations business unit reported revenues of $14.1 million, an increase of 11% compared to revenues of $12.7 million in the prior year quarter. This increase is due to a 12% increase at the Rainbow Casino and a 6% increase at the Rail City Casino. The improvement at the Rainbow Casino was attributable to the continuing success of its direct marketing campaigns and a 16% higher average market share than in the prior year quarter. Revenues from the Rail City Casino improved as revenues in the prior year quarter had been negatively impacted by an internal remodeling project. For the quarter ended September 30, 1997, the cost of revenues for Casino Operations increased 17% to $6.3 million compared to $5.4 million in the prior year quarter and, as a percentage of revenues, increased to 44% from 42% in the prior year quarter due to higher costs associated with the Rainbow Casino operating the restaurant, which the Company believes attracts patrons to the property. The restaurant was not operated by the Company in the prior year quarter and such operations have lower margins than gaming operations. For the quarter ended September 30, 1997, the Casino Operations business unit reported operating income of $3.8 million, a decrease of 7% compared to operating income of $4.1 million in the prior year quarter. The decrease in operating income resulted from the aforementioned increase in operating costs and an increase in selling, general and administrative expenses, as both casinos incurred higher promotion and marketing programs in the quarter, partially offset by the increase in revenues. At Rainbow Casino, the higher costs were incurred to help overcome the impact of construction of a porte cochere at the main entrance to the casino, which has now been completed. At Rail City Casino, the higher costs were attributable to the renaming of the casino and the grand re-opening festivities. CONSOLIDATED Total revenues for the quarter ended September 30, 1997, were $98.0 million, a decrease of 5% compared to revenues of $102.9 million in the prior year quarter. The decrease is primarily due the aforementioned decreases in Gaming Equipment and Systems and Wall Machines and Amusement Games and the impact of foreign exchange rate fluctuations, partially offset by increases in revenues at the Route Operations and Casino Operations business units. Cost of revenues for the quarter ended September 30, 1997, were $61.3 million, a decrease of 5% compared to $64.2 million in the prior year quarter. Cost of revenues as a percentage of total revenues remained flat at 62% from the prior year quarter as the aforementioned increase at Casino Operations business unit was offset by improvements in costs as a percentage for both Gaming Equipment and Systems and Wall Machines and Amusement Games. 24 25 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 Selling, general and administrative expenses for the quarter ended September 30, 1997 were approximately $23.5 million, an increase 5% compared to costs of $22.3 million for the prior year quarter. This increase is due to increases in expenses at the Gaming Equipment and Systems and the Casino Operations business units, partially offset by decreases in expenses at the Wall Machines and Amusement Games and the Route Operations business units. Corporate selling, general and administrative expenses for the current quarter decreased slightly compared to the prior year quarter. Provisions for bad debt for the quarter ended September 30, 1997 was $0.8 million, a decrease of $0.8 million from the prior year quarter. Depreciation and amortization for the quarter ended September 30, 1997 was $5.0 million, a decrease of 4% compared to depreciation and amortization of $5.2 million in the prior year quarter. During the quarter ended September 30, 1996, the Company incurred unusual charges of $0.7 million related primarily to separation costs of Alliance personnel subsequent to the BGII acquisition. During the quarter ended September 30, 1997, the Company recorded an extraordinary loss of $42.0 million related to the debt refinancing. The extraordinary loss was comprised of the premium on the repurchase of the 12 7/8% notes of $27.7 million and $14.3 million for transaction fees and expenses. In addition the Company recorded a charge of $16.6 million for the difference between the carrying value and the liquidation value of the Series B Special Stock, and a charge of $19.0 million for the cost of the Rainbow Royalty Buyout. NET INTEREST EXPENSE AND INCOME TAXES Net interest expense in the quarter ended September 30, 1997, increased slightly to $5.8 million compared to net interest expense of $5.7 million in the prior year quarter. The increase is primarily due to higher interest on the Company's 10% Senior Subordinated Notes due 2007 and other term loan facilities which replaced substantially all of the Company's 12 7/8% Senior Secured Notes and the 15% Series B Special Stock as part of the refinancing of the Company's capital structure, completed in September 1997. The Company recorded an income tax provision of $0.5 million in the quarter ended September 30, 1997 compared to an income tax provision of $1.3 million in the prior fiscal year quarter. The current quarter provision is primarily due to income taxes related to the Bally Wulff entities and state income taxes. * * * * * The information contained in this Form 10-Q may contain forward-looking statements that involve risks and uncertainties, including, but not limited to, the Company's high leverage, its ability to service debt, its holding company structure, its operating history and recent losses, competition, 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, the uncertain effect of the National Gambling Commission, change in control, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. 25 26 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 PART II ITEM 1. LEGAL PROCEEDINGS See "Notes to Unaudited Condensed Consolidated Financial Statements- 6. Legal Proceedings" for a description of certain legal proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 27 Financial Data Schedule b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1997. 26 27 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 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) 27 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-1998 SEP-30-1997 24,053 0 101,241 22,254 38,352 150,567 128,021 44,862 342,700 52,401 0 0 12,725 3,185 (42,858) 342,700 48,228 97,971 27,804 61,252 23,501 771 6,069 (18,867) 493 (18,876) 0 (42,033) 0 (79,862) (2.51) (2.51)
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