UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-4281
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0104066
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6601 S. Bermuda Rd.
Las Vegas, Nevada 89119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (702) 270-7600
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of Common Stock, $0.10 par value,
outstanding as of November 7, 1996 according to the records of
the registrant's registrar and transfer agent was 31,832,539.
I N D E X
PART I. FINANCIAL INFORMATION Page
Item 1. Unaudited Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
June 30, 1996 and September 30, 1996 3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended September 30, 1995 and 1996 4
Unaudited Condensed Consolidated Statements of Stockholder's
Equity for the three months ended September 30, 1996 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 1995 and 1996 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 6. Exhibits and reports on Form 8-K 30
SIGNATURES 31
PART 1
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In 000's, except share data)
June 30, Sept. 30,
1996 1996
ASSETS
Current assets:
Cash and cash equivalents $ 48,057 $ 38,331
Accounts and notes receivable, net of allowance
for doubtful accounts of $17,727 and $18,973 93,502 89,446
Inventories, net 41,656 44,426
Other current assets 8,354 8,162
Total current assets 191,569 180,365
Long-term notes receivable, net of allowance
for doubtful accounts of $1,770 and $1,829 14,184 13,661
Property, plant and equipment, net of accumulated
depreciation of $30,144 and $32,925 78,084 76,309
Excess of costs over net assets of acquired businesses,
net of accumulated amortization of $422 and $405 60,292 60,995
Intangible assets, net of accumulated amortization of
$5,216 and $6,672 20,247 19,093
Other assets, net 11,128 11,434
Total assets $375,504 $361,857
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,479 $ 19,887
Accrued liabilities 38,304 36,610
Current maturities of long-term debt 25,777 13,328
Total current liabilities 80,560 69,825
Senior secured notes, net of unamortized discount of
$3,071 and $3,001 150,929 150,999
Other long-term debt, less current maturities 14,638 12,860
Other liabilities 6,831 6,869
Total liabilities 252,958 240,553
Minority interest 1,148 1,107
Series B Special Stock, $.10 par value, $100
liquidation value; 684,551 shares and 691,707
issued and outstanding, net of discount 51,552 52,656
Commitments and contingencies
Stockholders' equity:
Common Stock, $.10 par value; 175,000,000 shares
authorized; 31,763,000 shares and 31,835,000 issued
and outstanding 3,176 3,183
Series E Special Stock, $100 liquidation value;
113,160 shares issued and outstanding 11,316 11,316
Additional paid-in capital 139,031 138,902
Cumulative translation adjustment (287) (441)
Accumulated deficit (83,390) (85,419)
Total stockholders' equity 69,846 67,541
Total liabilities and stockholders' equity $375,504 $361,857
See notes to unaudited condensed consolidated financial
statements.
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except share data)
Three Months Ended September 30,
1995 1996
Revenues:
Gaming machine operations $26,296 $ 28,889
Casino operations 12,242 12,713
Gaming equipment and systems sales 3 34,883
Wall machine and amusement game sales --- 26,427
38,541 102,912
Costs and expenses:
Cost of gaming machine operations 20,212 21,894
Cost of casino operations 5,915 5,366
Cost of gaming equipment and systems sales --- 21,808
Cost of wall machine and amusement game sales --- 15,104
Selling, general and administrative 6,694 22,289
Provision for doubtful receivables 21 1,575
Depreciation and amortization 2,487 5,220
Unusual items --- 700
Direct merger costs 4,677 ---
40,006 93,956
Operating income (loss) (1,465) 8,956
Other income (expense):
Interest income 426 563
Interest expense (2,208) (6,250)
Royalty fees (980) (1,151)
Minority interest in income (144) (141)
Other, net 482 (1)
Income (loss) before income taxes (3,889) 1,976
Income tax provision (benefit) (471) 1,341
Net income (loss) (3,418) 635
Special Stock dividends --- (2,896)
Net loss applicable to common shares $(3,418) $(2,261)
Net loss per common share $ (.29) $ (.07)
Weighted average common shares outstanding 11,654 31,772
See notes to unaudited condensed consolidated financial
statements.
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
Three Months Ended September 30, 1996
(In 000's)
<TABLE>
<CAPTION>
Retained Total
Series E Additional Earnings Cumulative Stock-
Common Stock Special Stock Paid-in (Accum. Translation holders'
Shares Dollars Shares Dollars Capital Deficit) Adjustment Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 31,763 $3,176 113 $11,316 $139,031 $(83,390) $(287) $69,846
Net income - - - - - 635 - 635
Shares issued upon exercise
of options 75 7 - - 115 - - 122
Adjustments to merger
consideration (3) - - - (12) - - (12)
Special Stock dividends - - - - - (2,664) - (2,664)
Special Stock repurchase
premium - - - - (232) - - (232)
Foreign currency translation
adjustment - - - - - - (154) (154)
Balances at September 30,1996 31,835 $3,183 113 $11,316 $138,902 $(85,419) $(441) $67,541
</TABLE>
See notes to unaudited condensed consolidated financial
statements.
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
Three Months Ended September 30,
1995 1996
Cash flows from operating activities:
Net income (loss) $ (3,418) $ 635
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 2,487 5,220
Amortization of debt discounts 59 512
Write down of other assets 125 102
Loss on sale of assets 151 53
Provision for losses on receivables 21 1,575
Other --- (24)
Net change in operating assets and liabilities:
Accounts and notes receivable (453) 2,933
Inventories 9 (2,456)
Other current assets 1,013 43
Accounts payable (271) 3,408
Accrued liabilities 279 (750)
Net cash provided by operating activities 2 11,251
Cash flows from investing activities:
Additions to property, plant and equipment (2,226) (2,772)
Proceeds from disposal of property and equipment 296 41
Net sales of securities available for sale 3,548 ---
Other (1,110) (1,058)
Net cash provided by (used in) investing
activities 508 (3,789)
Cash flows from financing activities:
Proceeds from long-term debt, net of expenses 168 41
Reduction of long-term debt (1,024) (3,683)
Net change in lines of credit --- (12,010)
Repurchase of Series B Special Stock --- (1,653)
Issuance of common stock upon exercise of stock options --- 122
Net cash used in financing activities (856) (17,183)
Effect of exchange rate changes on cash --- (5)
Cash and cash equivalents:
Decrease for period (346) (9,726)
Balance, beginning of period 13,734 48,057
Balance, end of period $ 13,388 $ 38,331
See notes to unaudited condensed consolidated financial statements.
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated
financial statements reflect all adjustments, consisting of
normal recurring adjustments, which management believes are
necessary to present fairly the financial position, results of
operations and cash flows of Alliance Gaming Corporation
("Alliance or the "Company") for the respective periods
presented. The results of operations for an interim period are
not necessarily indicative of the results which may be
expected for any other interim period or for the year as a
whole. The accompanying unaudited interim condensed
consolidated financial statements should be read in
conjunction with the consolidated financial statements and
notes in the Company's annual report on Form 10-K for the year
ended June 30, 1996. All intercompany accounts and
transactions have been eliminated in consolidation.
The condensed consolidated balance sheet at June 30, 1996 was
derived from audited consolidated financial statements, but
does not include all disclosures required under generally
accepted accounting principles. Certain reclassifications have
been made to prior period financial statements to conform with
current period presentation.
On June 18, 1996, the Company completed the acquisition of
all the outstanding shares of Bally Gaming International,
Inc. ("BGII") (the "Merger"). The consideration paid
consisted of approximately $77,243,000 in cash, $2,957,000 in
the Company's common stock and $36,571,000 in the Company's
Series B Special Stock, totaling $11.84 per share for the
9,855,500 shares of BGII outstanding (excluding the 1,000,000
shares beneficially owned by the Company prior to the
Merger). The acquisition has been accounted for as a purchase
and the results of operations of BGII have been included in
the consolidated financial statements beginning on June 18,
1996. The purchase price was allocated based on estimated
fair values at the date of the acquisition. During the one
year period following the Merger, the Company will make
adjustments to the estimated fair values assigned to the
assets acquired from BGII based on appraisals and other
information received, which will result in changes to the
excess of purchase price over the fair value of BGII assets
acquired. The excess of purchase price over the BGII assets
acquired is being amortized on a straight-line basis over 40
years and has been adjusted during the quarter ended
September 30, 1996 for changes in values assigned to certain
buildings, deferred tax liabilities and the actual BGII
shares acquired.
2. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is related to the
condensed consolidated statements of cash flows. In the three
months ended September 30, 1995 and 1996, the Company
recorded the following significant non-cash items:
During the three months ended September 30, 1996, the Company
reclassified approximately $567,000 from other assets to
equipment and reclassified approximately $1,286,000 to
property, plant and equipment from excess costs over net
assets of acquired business based on recent appraisals
received for certain German properties. In addition, the
Company recorded non-cash dividends for its Series E and
Series B Special Stock in the amount of $2,664,000 and a
premium on the repurchase of shares of Series B Special Stock
of $232,000.
During the three months ended September 30, 1995, the Company
reclassified approximately $581,000 from other assets to
equipment as gaming machines were manufactured and placed
into service on the route. In addition, the Company recorded
a non-cash unrealized gain on securities available for sale
in the amount of $505,000 recorded in the stockholders equity
section, net of tax.
3. LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt at June 30, 1996 and September 30, 1996
consists of the following (in 000's) :
June 30, Sept. 30,
1996 1996
12 7/8% Senior Secured Notes due 2003, net of
unamortized discount of $3,071,000 and $3,001,000 $150,929 $150,999
Bally Wulff revolving lines of credit 13,664 9,179
Hospitality Franchise Systems note payable,
secured by the assets of the Rainbow Casino 7,864 7,549
Bally Gaming and Systems revolving line of credit 7,525 ---
7.5% Convertible subordinated debentures due 2003,
unsecured 1,642 1,642
Subordinated note payable to stockholder, net of
discount, secured by the assets of VSI 2,268 ---
Other, secured by related equipment 7,452 7,818
191,344 177,187
Less current maturities 25,777 13,328
Long-term debt, less current maturities $165,567 $163,859
In June 1996, the Company completed a public offering of
$154,000,000 aggregate principal amount of its 12 7/8% Senior
Secured Notes due 2003 (the "Senior Secured Notes") as part
of the financing of the BGII Merger. Interest on the Senior
Secured Notes is payable semi-annually in arrears on June 30
and December 30 of each year, commencing December 30, 1996.
The Senior Secured Notes will mature on June 30, 2003. The
Senior Secured Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
June 30, 2000 at the redemption prices of 104.292% for the
twelve months beginning June 30, 2000, 102.146% for the
twelve months beginning June 30, 2001 and 100% thereafter
plus accrued and unpaid interest, if any, to the date of
redemption. Upon the occurrence of a change of control as
defined in the indenture, the Company is required to make an
offer to repurchase the Senior Secured Notes at a price equal
to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase. The
Senior Secured Notes are secured by an exclusive pledge of
the equity interests directly or indirectly held by the
Company in its subsidiaries, except for the equity interests
in BGII and its subsidiaries, but including the equity
interests in Alliance Holding Company ("Holding"), which was
formed to hold the equity interests of BGII and its
subsidiaries. The Senior Secured Notes are fully and
unconditionally guaranteed on a joint and several senior
basis by each present and future subsidiary, as defined, of
the Company, other than (i) the partially-owned entities
through which the Company's Mississippi casino and Louisiana
gaming machine operations are conducted and (ii) specified
entities through which the Company's German operations are
conducted. The indenture for the Company's Senior Secured
Notes contains various limitations on incurrence of
additional indebtedness, on restricted payments and on
dividend and payment restrictions on subsidiaries.
In June 1996, in response to a solicitation from the Company,
holders of $83,358,000 aggregate principal amount of its
7.5% Convertible Subordinated Debentures ("Convertible
Debentures") elected to exchange for new debentures that
converted at the time of the Merger into shares of the
Company's common stock ($72,042,000 principal amount) and
shares of the Company's Series E Special Stock ($11,316,000
principal amount). At September 30, 1996, $1,642,000 of
Convertible Debentures remained outstanding.
During 1995, Hospitality Franchise Systems, Inc. ("HFS")
agreed to loan $7,750,000 to the Company's majority
controlled subsidiary Rainbow Casino Vicksburg Partnership,
LP ("RCVP") in connection with the construction of the
Rainbow Casino. The loan amount was subsequently increased
to $10,000,000. The note bears interest at 7.5% per annum
and requires monthly payments of principal and interest over
a 24-month period. In exchange for funding this loan, HFS is
also entitled to receive in perpetuity a monthly royalty fee based on
the casino's gaming revenues of 12% on the first $40.0
million, 11% on the next $10.0 million, and 10% thereafter.
The accompanying unaudited consolidated statement of
operations for the three months ended September 30, 1995 and
1996 include approximately $980,000 and $1,151,000 of such
royalties, respectively.
In March 1992, Alfred H. Wilms, director and principal
stockholder (and then Chairman of the Board of Directors and
Chief Executive Officer) of the Company, committed to provide
or cause others to provide a $6,500,000 five year loan to
Video Services, Inc. ("VSI"), the Company's controlled
subsidiary, which loan was funded in full and was secured by
a subordinated interest in all of VSI's present and future
personal property. All scheduled principal and interest
payments were made until September 1996 when the Company paid
off the remaining principal and accrued interest balance
totaling $2,826,000.
During March 1993, the Bally Wulff entities obtained two bank
lines of credit for the purpose of financing the acquisition
of assets acquired from an independent distributor. The
agreements provide for borrowings of DM16,000,000
(approximately $10,490,000, at September 30, 1996) and
DM1,500,000 (approximately $983,000 at September 30, 1996),
respectively. The DM1,500,000 line of credit was originally
DM5,000,000 and has been, and will continue to be, reduced
by DM250,000 principal amount per quarter, and expires on
March 31, 1998. Borrowings under this line of credit bear
interest at 6.95%. The working capital revolving credit line
of DM16,000,000 bears interest at a rate tied to an
international borrowing rate plus 1% (4.64% at September 30,
1996) and is due on demand. These lines are collateralized by
a pledge of the assets acquired. Approximately $1,967,000 was
outstanding under these lines at September 30, 1996. In
May 1993, the Bally Wulff entities obtained a DM16,300,000
(approximately $10,686,000 at September 30, 1996) revolving
line of credit for general working capital purposes. This
agreement bears interest at a rate tied to an international
borrowing rate plus 1% (4.67% at September 30, 1996) and is
due on demand. This line is collateralized by the receivables
of the Bally Wulff entities. Approximately $7,212,000 was
outstanding under this line at September 30, 1996.
In March 1993, BGII's domestic subsidiary, Bally Gaming,
Inc., obtained a bank revolving line of credit which, as
amended, provides for borrowings tied to a percentage of
Bally Gaming, Inc.'s eligible (as defined in the credit
agreement) inventory and accounts receivable with a maximum
borrowing capacity of $15,000,000. Borrowings under this
agreement, which expires March 31, 1997, bear interest at
1.5% above the bank's prime rate (9.75% at September 30,
1996). The Company must pay an annual facility fee of
one-half of one percent of the maximum borrowing capacity and
a monthly unused line fee of one-quarter of one percent of
the difference between the maximum borrowing capacity and the
average daily outstanding balance during any month. This line
of credit is collateralized by property, plant and equipment
and the eligible inventory and accounts receivable. The
agreement and subsequent amendments also contain certain
financial and other restrictive covenants, including the
maintenance by Bally Gaming, Inc. of specified levels of
minimum net working capital, working capital ratio, tangible
net worth, net worth ratio, and minimum net income after
taxes, all as defined in the credit agreement. Eligible
borrowing capacity under this agreement at September 30, 1996
was $15,000,000. There was no balance outstanding at
September 30, 1996.
4. SERIES B SPECIAL STOCK
During the quarter ended September 30, 1996, the Company
purchased on the open market 19,000 shares of
its Series B Special Stock for $1,634,000 which represented a
premium of $232,000 over the carrying value. The premium paid
is reflected in the consolidated statement of stockholder's
equity as a charge against additional paid in capital, and is
also deducted in computing net income applicable to common
shareholders.
5. INCOME TAXES
The Company's effective tax rate for the three months ended
September 30, 1996 differs from the statutory rate of 35% due
to higher tax rates applicable to earnings of Bally Wulff,
combined with the fact that earnings at the Company's domestic
subsidiaries cannot be fully offset by the utilization of net
operating loss carryforwards.
The Company's effective tax rate for the three months ended
September 30, 1995 differs from the statutory rate of 35% due
to the book tax benefit related to the change in the
unrealized gains and losses in the investments and securities
available for sale, and the fact that net operating losses
incurred during the period were fully reserved.
6. LEGAL PROCEEDINGS
Litigation Relating to the Merger.
On or about June 19, 1995, three purported class actions were
filed in the Chancery Court of Delaware by BGII stockholders
against BGII and its directors (the "Fiorella, Cignetti and
Neuman Actions") in connection with the then-proposed merger
of BGII with WMS ("WMS Merger"). Also on or about June 19,
1995, a purported class action was filed in the Delaware
Court of Chancery by a BGII stockholder against BGII and its
directors and the Company (the "Strougo Action") in
connection with the tender offer and consent solicitation
made by the Company (subsequently superseded by the execution
of the Agreement and Plan of Merger in October 1995 between
the Company and BGII). On or about July 6, 1995, the
plaintiffs in the Fiorella, Cignetti, Neuman and Strougo
Actions (collectively, the "Stockholder Plaintiffs") filed
with the Court a motion to consolidate the four actions. On
or about July 27, 1995, certain of the Stockholder Plantiffs
filed an amended complaint that adopted certain allegations
concerning self-dealing by BGII directors in connection with
the merger agreement entered into with WMS (the "WMS
Agreement"); added a claim relating to BGII's alleged failure
to hold an annual meeting as required; and added WMS as
defendant. The amended complaint also alleged that BGII
intended, in violation of Delaware law, to sell Bally Wulff
without first seeking stockholder approval of the sale. The
action sought an order enjoining defendants from proceeding
with, consummating or closing the WMS merger or rescinding
it if it closed; preventing the sale of Bally Wulff without
prior stockholder approval; declaring invalid BGII's
agreement to pay WMS a fee if the WMS Agreement is terminated
by BGII in certain circumstances; compelling an auction of
BGII and the provision of due diligence to the Company;
scheduling an immediate meeting of BGII stockholders; and
awarding compensatory damages. Management believes these
claims to be without merit and intends to vigorously defend
these actions.
On October 23, 1995, WMS instituted a suit in New York State
Court against BGII for BGII's failure to pay $4.8 million
upon termination of the WMS Agreement. Management intends to
vigorously defend this action. On November 22, 1995, BGII
answered the complaint and brought counterclaims against WMS
alleging that WMS repudiated and breached the WMS Agreement
by, among other things, failing to act in good faith toward
the consummation of the WMS Merger, advising BGII that it
would not perform as agreed but would impose new conditions
on the WMS Merger, acting in excess of its authority and
undermining the ability of BGII to perform the WMS Agreement.
On February 8, 1996 WMS moved for summary judgment. On
April 2, 1996, BGII opposed WMS's motion and cross-moved for
summary judgment.
On September 14, 1995, a stockholders' class and derivative
action was commenced by Richard Iannone, a stockholder of the
Company, against the Company, the members of its current
Board of Directors and certain of its former directors in
Federal District Court in Nevada asserting, among other
matters, that the Company has wasted corporate assets in its
efforts to acquire BGII by, among other things, agreeing to
onerous and burdensome financing arrangements that threaten
the Company's ability to continue as a going concern and that
the Company had made false and misleading statements and
omissions in connection with that effort by failing to
disclose the need to refinance an additional $53.0 million of
existing BGII indebtedness, by failing to disclose how the
Company would recapitalize the combined indebtedness of both
companies and by failing to disclose the allegedly leading
role played by Richard Rainwater in the Company's efforts to
acquire control of BGII which, given assurances made by the
Company to gaming regulators in Nevada that the unlicensed
Mr. Rainwater would not play an active role in the management
of the Company, could expose the Company to suspension or
revocation of its Nevada gaming license. In addition, the
stockholder action against the Company alleges that (i) the
Company substantially inflated its results of operations by
selling gaming machines at inflated prices in exchange for
promissory notes (without any down payment) which the Company
knew could not be paid in full but which the Company
nevertheless recorded at full value, (ii) the
Company doctored reports sent to its route customers and
(iii) the directors of the Company had caused the Company to
engage in self-dealing transactions with certain directors
which resulted in the exchange of the Company assets for
assets and services of vastly lesser value. On September 21,
1995, a United States magistrate denied the plaintiffs'
request for expedited discovery, stating that Mr. Iannone was
not an adequate representative and was not likely to succeed
on the merits. On October 4, 1995, the defendants filed a
motion to dismiss the action. On December 18, 1995, the
plaintiff filed an amended shareholder derivative complaint.
The plaintiff is no longer asserting any class claims. On
March 5, 1996 the defendants filed a motion to dismiss the
amended complaint. On May 16, 1996, the magistrate judge, on
motion of defendants,
stayed discovery in this case pending a ruling by the court
on the defendants' motion to dismiss the amended complaint.
Other Litigation
In 1994, after an intensive Federal investigation of Bally
Gaming's former Louisiana distributor, eighteen individuals
were indicted on charges of racketeering and fraud against
Bally Gaming, Inc. and the Louisiana regulatory system. Among
those indicted were the former distributor's stockholders,
directors, employees and others alleged to be associated with
organized crime. Fifteen entered pleas of guilty before trial
and the remaining three were convicted in October 1995. In
addition, Alan Maiss, a former director and president of
BGII, pled guilty to misprision of a felony in connection
with such investigation. BGII, its subsidiaries and its
current employees were not subject to such investigation.
Prior to the conclusion of the Federal criminal case, BGII's
activities with regard to its former VLT distributor in
Louisiana were the subject of inquiries by gaming regulators
and a report by the New Jersey Division of Gaming Enforcement
dated August 24, 1995. The New Jersey Commission and
Division of Gaming have indicated that in light of the Merger
and consequent personnel changes that have occurred at BGII,
there will be no need for a hearing and the inquiry can be
resolved by stipulation. There has been no indication from
the New Jersey Commission and Division of Gaming that the
inquiry will have any effect on BGII's pending license
application. The Gaming Authorities in Ontario, Canada, who
have investigated the matter, issued a gaming registration to
Bally Gaming, Inc. on February 8, 1996.
On September 25, 1995, BGII was named as a defendant in a
class action lawsuit filed in Federal District Court in
Nevada, by Larry Schreirer on behalf of himself and all
others similarly situated (the "plaintiffs"). The plaintiffs
filed suit against BGII and approximately 45 other defendants
(each a "defendant," and collectively the "defendants"). Each
defendant is involved in the gaming business as either a
gaming machine manufacturer, distributor, or casino operator.
The class action lawsuit arises out of alleged fraudulent
marketing and operation of casino video poker machines and
electronic slot machines. The plaintiffs allege that the
defendants have engaged in a course of fraudulent and
misleading conduct intended to induce people into playing
their gaming machines based on a false belief concerning how
those machines actually operate as well as the extent to
which there is actually an opportunity to win on any given
play. The plaintiffs allege that the defendants' actions
constitute violations of the Racketeer Influenced and Corrupt
Organizations Act (RICO) and give rise to claims of common
law fraud and unjust enrichment. The plaintiffs are seeking
monetary damages in excess of one billion dollars, and are
asking that any damage awards be trebled under applicable
Federal law. Management believes the plaintiffs' lawsuit to
be without merit. The Company intends to vigorously pursue
all legal defenses available to it.
While the ultimate outcome of the matters described above are
not presently determinable, management does not expect that
the outcome will have a material adverse effect on the
Company's results of operations, financial position or cash
flows.
The Company and its subsidiaries are also involved from time
to time in various claims and legal actions arising in the
ordinary course of business. Management believes that the
ultimate outcome of these matters will not have a material
adverse effect on the Company's consolidated financial
statements taken as a whole.
7. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS
The following unaudited consolidating financial statements
are presented to provide information regarding Alliance
Gaming Corporation in columnar presentation as follows: the
parent company and its wholly-owned "Guaranteeing
Subsidiaries", its "Pledging Subsidiaries" consisting of VSI,
Rainbow Casino Vicksburg L.P. and Alliance Holding Company
(the entity that holds the Company's investment in BGII) and
its non-pledging and non-guaranteeing subsidiary, Alliance
Automaten GmbH & Co KG (the subsidiary that holds the
Company's German interests). The "Pledging Subsidiaries" are
shown separately because all of the Company's interest in
these entities is pledged as collateral for the Senior
Secured Notes. The note to consolidating financial statements
should be read in conjunction with these consolidating
financial statements.
CONSOLIDATING BALANCE SHEETS
June 30, 1996
(In 000's)
<TABLE>
<CAPTION>
Alliance
Non-Pledging Gaming
Parent and Non- Corporation
Guaranteeing Pledging Guaranteeing Adjust- and
Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,249 $ 8,684 $ 2,124 $ $ 48,057
Accounts and notes receivable, net 47,915 35 46,850 (1,298) 93,502
Inventories, net 24,996 12 16,648 41,656
Other current assets 6,317 552 1,485 8,354
Total current assets 116,477 9,283 67,107 (1,298) 191,569
Long-term notes receivable, net 16,935 1,773 (4,524) 14,184
Property, plant and equipment, net 39,336 26,937 11,811 78,084
Excess of costs over net assets of
acquired businesses, net 40,396 18,332 1,564 60,292
Intangible assets, net 19,827 420 20,247
Investment in subsidiaries 88,154 (88,154)
Other assets, net 8,576 2,835 2,744 (3,027) 11,128
$329,701 $39,475 $101,767 $(95,439) $375,504
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $15,076 $213 $3,750 $(2,560) $16,479
Accrued liabilities 53,474 4,110 6,140 (25,420) 38,304
Current maturities of long-term debt 8,200 3,913 13,664 25,777
Total current liabilities 76,750 8,236 23,554 (27,980) 80,560
Senior Secured Notes due 2003, net 150,929 150,929
Other long-term debt, less current
maturities 2,750 12,984 3,007 (4,103) 14,638
Other liabilities 7,343 (512) 6,831
Total liabilities 237,772 21,220 26,561 (32,595) 252,958
Minority interest 1,147 1 1,148
Series B Special Stock 51,552 51,552
Commitments and contingencies
Stockholders' equity:
Common Stock 3,547 2 (373) 3,176
Series E Special Stock 11,316 11,316
Additional paid-in capital 118,513 2,455 75,222 (57,159) 139,031
Cumulative translation adjustment 3 (290) (287)
Retained earnings (Accumulated deficit) (93,002) 14,651 274 (5,313) (83,390)
Total stockholders' equity 40,377 17,108 75,206 (62,845) 69,846
$329,701 $39,475 $101,767 $(95,439) $375,504
</TABLE>
See accompanying unaudited note.
CONSOLIDATING BALANCE SHEETS
September 30, 1996
(In 000's)
<TABLE>
<CAPTION>
Alliance
Non-Pledging Gaming
Parent and Non- Corporation
Guaranteeing Pledging Guaranteeing Adjust- and
Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,992 $ 8,047 $ 3,292 $ $ 38,331
Accounts and notes receivable, net 43,230 40 47,323 (1,147) 89,446
Inventories, net 28,250 14 16,162 44,426
Other current assets 5,827 517 1,818 8,162
Total current assets 104,299 8,618 68,595 (1,147) 180,365
Long-term notes receivable, net 15,856 2,113 (4,308) 13,661
Property, plant and equipment, net 39,273 26,723 10,313 76,309
Excess of costs over net assets of
acquired businesses, net 39,953 19,478 1,564 60,995
Intangible assets, net 18,718 375 19,093
Investment in subsidiaries 88,154 (88,154)
Other assets, net 9,371 2,518 (34) (421) 11,434
$315,624 $38,234 $100,465 $(92,466) $361,857
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,872 $ 455 $ 2,513 $ 47 $ 19,887
Accrued liabilities 49,565 3,965 8,349 (25,269) 36,610
Current maturities of long term-debt 641 2,525 10,162 13,328
Total current liabilities 67,078 6,945 21,024 (25,222) 69,825
Senior Secured Notes due 2003, net 150,999 150,999
Other long-term debt, less current
maturities 2,595 11,218 2,955 (3,908) 12,860
Other liabilities 7,316 1 46 (494) 6,869
Total liabilities 227,988 18,164 24,025 (29,624) 240,553
Minority interest 1,106 1 1,107
Series B Special Stock 52,656 52,656
Commitments and contingencies
Stockholders' equity:
Common Stock 3,554 2 (373) 3,183
Series E Special Stock 11,316 11,316
Additional paid-in capital 118,382 2,455 75,222 (57,157) 138,902
Cumulative translation adjustment (5) (436) (441)
Retained earnings (Accumulated deficit) (98,267) 16,507 1,654 (5,313) (85,419)
Total stockholders' equity 34,980 18,964 76,440 (62,843) 67,541
$315,624 $38,234 $100,465 $(92,466) $361,857
</TABLE>
See accompanying unaudited note.
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1995
(In 000's)
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C>
Revenues:
Gaming machine operations $22,716 $ 3,784 $(204) $26,296
Casino and tavern operations 4,623 8,303 (684) 12,242
Gaming equipment sales 3 3
27,342 12,087 (888) 38,541
Costs and expenses:
Cost of gaming machine operations 18,032 2,384 (204) 20,212
Cost of casino and tavern operations 2,950 3,075 (110) 5,915
Selling, general and administrative 4,767 2,426 (499) 6,694
Provision for doubtful receivables 10 11 21
Depreciation and amortization 1,959 528 2,487
Direct merger costs 4,677 4,677
32,395 8,424 (813) 40,006
Operating income (loss) (5,053) 3,663 (75) (1,465)
Other income (expense):
Interest income 479 60 (113) 426
Interest expense (1,759) (562) 113 (2,208)
Royalty fees (980) (980)
Minority interest in income (144) (144)
Other, net 351 312 (181) 482
Income (loss) before income taxes (5,982) 2,349 (256) (3,889)
Income tax provision (benefit) (536) 321 (256) (471)
Net income (loss) $ (5,446) $ 2,028 $ --- $ (3,418)
</TABLE>
See accompanying unaudited note.
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1996
(In 000's)
<TABLE>
<CAPTION>
Alliance
Non-Pledging Gaming
Parent and Non- Corporation
Guaranteeing Pledging Guaranteeing Adjust- and
Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C> <C>
Revenues:
Gaming machine operations $24,569 $ 4,320 $ $ $ 28,889
Casino operations 3,375 9,899 (561) 12,713
Gaming equipment and systems sales 34,883 34,883
Wall machine and amusement game sales 26,427 26,427
62,827 14,219 26,427 (561) 102,912
Costs and expenses:
Cost of gaming machine operations 19,117 2,777 21,894
Cost of casino operations 1,866 3,500 5,366
Cost of gaming equipment and systems
sales 21,808 21,808
Cost of wall machines and amusement
game sales 15,104 15,104
Selling, general and administrative 12,905 3,104 6,858 (578) 22,289
Provision for doubtful receivables 1,180 395 1,575
Depreciation and amortization 3,258 556 1,406 5,220
Unusual items 700 700
60,834 9,937 23,763 (578) 93,956
Operating income 1,993 4,282 2,664 17 8,956
Other income (expense):
Interest income 586 90 (113) 563
Interest expense (5,294) (866) (203) 113 (6,250)
Royalty fees (1,151) (1,151)
Minority interest in income (141) (141)
Other, net (136) 152 (17) (1)
Income (loss) before income taxes (2,851) 2,366 2,461 1,976
Income tax provision (benefit) (250) 510 1,081 1,341
Net income (loss) (2,601) 1,856 1,380 635
Special Stock dividends (2,896) (2,896)
Net income (loss) applicable to
common shares $ (5,497) $ 1,856 $ 1,380 $ --- $ (2,261)
</TABLE>
See accompanying unaudited note.
CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1995
(In 000's)
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(5,446) $2,028 $ $ (3,418)
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,959 528 2,487
Amortization of debt discounts 59 59
Write down of other assets 147 (22) 125
Loss on sale of assets 159 (8) 151
Provision for losses on receivables 10 11 21
Net change in operating assets and
liabilities:
Accounts and notes receivable (610) (3) 160 (453)
Inventories 6 3 9
Other current assets 387 626 1,013
Accounts payable (169) (102) (271)
Accrued liabilities (158) 601 (164) 279
Intercompany accounts 439 (439)
Net cash provided by (used in)
operating activities (3,276) 3,282 (4) 2
Cash flows from investing activities:
Additions to property and equipment (1,278) (948) (2,226)
Proceeds from disposal of property and
equipment 288 8 296
Net sale of securities available for
sale 3,548 3,548
Other (752) (358) (1,110)
Net cash provided by (used in)
investing activities 1,806 (1,298) 508
Cash flows from financing activities:
Proceeds from long-term debt,
net of expenses 329 (161) 168
Reduction of long-term debt (69) (1,120) 165 (1,024)
Net cash used in financing activities (69) (791) 4 (856)
Cash and cash equivalents:
Increase (decrease) for period (1,539) 1,193 (346)
Balance, beginning of period 8,235 5,499 13,734
Balance, end of period $6,696 $6,692 $--- $13,388
</TABLE>
See accompanying unaudited note.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1996
(In 000's)
<TABLE>
<CAPTION>
Alliance
Non-Pledging Gaming
Parent and Non- Corporation
Guaranteeing Pledging Guaranteeing Adjust- and
Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,601) $1,856 $1,380 $ $ 635
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,258 556 1,406 5,220
Amortization of debt discounts 17 495 512
(Gain) loss on sale of property and
equipment 49 (4) 8 53
Write down of other assets 95 7 102
Provision for losses on receivables 1,180 395 1,575
Other (24) (24)
Change in operating assets and
liabilities:
Accounts and notes receivable 4,513 (5) (1,208) (367) 2,933
Inventories (2,940) (2) 486 (2,456)
Other current assets 482 35 (474) 43
Intercompany accounts (518) 317 2,807 (2,606)
Accounts payable 1,795 242 (1,237) 2,608 3,408
Accrued liabilities (3,925) (185) 3,192 168 (750)
Net cash provided by (used in)
operating activities 1,405 3,305 6,738 (197) 11,251
Cash flows from investing activities:
Additions to property, plant and
equipment (1,447) (297) (1,028) (2,772)
Proceeds from disposal of property
and equipment 37 4 41
Other (1,058) (1,058)
Net cash provided by (used in)
investing activities (2,468) (293) (1,028) (3,789)
Cash flows from financing activities:
Proceeds from long-term debt 41 41
Reduction of long-term debt (179) (3,649) (52) 197 (3,683)
Net change in lines of credit (7,525) (4,485) (12,010)
Repurchase of Series B Special Stock (1,653) (1,653)
Issuance of common stock upon
exercise of stock options 122 122
Net cash provided by (used in)
financing activities (9,194) (3,649) (4,537) 197 (17,183)
Effect of exchange rate changes on cash (5) (5)
Cash and cash equivalents:
Increase (decrease) for period (10,257) (637) 1,168 (9,726)
Balance, beginning of period 37,249 8,684 2,124 48,057
Balance, end of period $26,992 $8,047 $3,292 $ --- $38,331
</TABLE>
See accompanying unaudited note.
Debt and Lines of Credit
Long-term debt and lines of credit at September 30, 1996 consist
of the following (in 000's):
<TABLE>
<CAPTION>
Alliance
Non-Pledging Gaming
Parent and Non- Corporation
Guaranteeing Pledging Guaranteeing Adjust- and
Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries
<C> <C> <C> <C> <C> <C>
12 7/8% Senior Secured notes due
2003, net of unamortized discount $150,999 $ $ $ $150,999
Hospitality Franchise Systems
note payable 7,549 7,549
Bally Wulff revolving line of credit 9,179 9,179
7.5% Convertible subordinated
debentures due 2003 1,642 1,642
Other 1,594 6,194 3,938 (3,908) 7,818
154,235 13,743 13,117 (3,908) 177,187
Less current maturities 641 2,525 10,162 13,328
Long-term debt, less current
maturities $153,594 $11,218 $ 2,955 $(3,908) $163,859
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
On June 18, 1996, the Company completed the acquisition of all the
outstanding shares of BGII. The consideration paid consisted of
$77,243,000 in cash, $2,957,000 in the Company's common stock
and $36,571,000 in the Company's Series B Special Stock and
totaled $11.84 per share for the 9,855,500 shares outstanding
(excluding the 1,000,000 shares beneficially owned by the Company
prior to the Merger). The Company incurred direct merger costs of
approximately $4,677,000 and $0 during the three months ended
September 30, 1995, and 1996, respectively. Such costs include
legal, accounting, transaction financing fees, public and
investor relations and printing costs and related costs.
At September 30, 1996, the Company had $38,331,000 in cash and cash
equivalents and $27,980,000 in availability on revolving lines
of credit (representing a paydown in the lines of credit during
the quarter of $12,010,000). In addition the Company had working
capital of approximately $110,540,000, a decrease of
approximately $469,000 from June 30, 1996. Consolidated cash and
cash equivalents at September 30, 1996 includes approximately
$8,000,000 of cash which is utilized in gaming operations which
is held in vaults, cages or change banks.
The following table presents an analysis of the consolidated working
capital at June 30, 1996 and September 30, 1996 and the
components of the changes from the prior period:
June 30, Sept. 30, Total
1996 1996 Change
(In $000's)
Cash and Cash Equivalents $48,057 $38,331 $ (9,726)
Accounts and Notes Receivable, net 93,502 89,446 (4,056)
Inventories, net 41,656 44,426 2,770
Other Current Assets, net 8,354 8,162 (192)
Total Current Assets 191,569 180,365 (11,204)
Accounts Payable 16,479 19,887 (3,408)
Accrued Liabilities 38,304 36,610 1,694
Current Maturities of Long Term Debt 25,777 13,328 12,449
Total Current Liabilities 80,560 69,825 10,735
Net Working Capital $111,009 $110,540 $ (469)
The following are the significant changes in the components of the
Company's working capital during the three months ended September
30, 1996:
Cash and Cash Equivalents
The net change in cash and cash equivalents resulted from cash used
for principal reductions of the revolving lines of credit
borrowings associated with Bally Gaming and Systems of $7,525,000
and Bally Wulff of $4,485,000 and to fully pay a loan associated
with VSI in the amount of $2,826,000, payments made for accrued
direct merger costs, accrued compensation, and the accrued
distribution payable to the limited partner in the Rainbow Casino
Vicksburg Partnership, L.P., and cash used to purchase shares of
Series B Special Stock, partially offset by the cash received
from the reduction in accounts and notes receivable.
Accounts and Notes Receivable, Accounts Payable and Accrued
Liabilities
During the three months ended September 30, 1996, the Company received
a net cash inflow from its accounts and notes receivable.
Accounts payable and accrued liabilities decreased over the prior
year due to the payments made for accrued direct merger costs,
accrued compensation, and the accrued distribution payable to the
limited partner in the Rainbow Casino Vicksburg Partnership, L.P.
Current Maturities of Long Term Debt
During the three months ended September 30, 1996, current maturities
of long term debt were reduced primarily due to the principal
reductions of revolving line of credit borrowings associated
with Bally Gaming and Systems and Bally Wulff, and to a lesser
extent, the payment of a subordinated loan associated with VSI,
partially offset by the reclassification to current maturities of
long-term debt of certain debt instruments which now have
maturities less than one year.
Cash Flow and Other Information
Cash provided in operating activities for three months ended September
30, 1996 increased approximately $11,249,000 from amounts
reported for the same period in 1995. Significant changes in
operating assets and liabilities in the 1996 period from the 1995
period were (1) net income of $635,000 compared to a net loss of
$3,418,000 in the prior year quarter, (2) a decrease in net
current and long-term accounts and notes receivable of
$2,933,000 as collections from prior period sales exceeded
customer financing on current period sales, (3) an increase in
inventories of $2,456,000 primarily related to increased
production activity, (4) an increase of $3,408,000 in accounts
payable primarily related to the increase in inventory and (5) a
decrease in accrued liabilities and other payables primarily due
to payments made during the quarter on accrued and unpaid direct
merger costs, accrued compensation and the accrued distribution
payable to the limited partner in RCVP. Significant non-cash
items added to net income in the computation of cash flows from
operating activities for three months ended September 30, 1996
include $5,220,000 of depreciation and amortization representing
an increase of $2,733,000 over the prior year quarter and a
provision for doubtful receivables of $1,575,000 representing an
increase of $1.554,000 over the prior year quarter.
Cash flows used in investing activities for three months ended
September 30, 1996 decreased by $4,297,000 from the same period
in 1995. The decrease is primarily the result of the net sale of
securities available for sale during the prior period totaling
$3,548,000 compared to $0 in the current period.
Cash flows from financing activities for three months ended September
30, 1996 decreased $16,327,000 from the same period in 1995. The
decrease was primarily the result of cash used for principal
reductions of and revolving line of credit borrowings in the
amount of $12,010,000, payment of the remaining principal and
accrued interest balance of the loan associated with VSI totaling
$2,826,000 and the repurchase for $1,653,000 of 19,000 shares of
the Company's Series B Special Stock.
In the prospectus for the Senior Secured Notes and Series B Special
Stock issued to finance the Merger, the Company had presented
adjusted operating cash flow for the combined companies which
consists of the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA"), net of casino royalty
and minority interest and adjusted to exclude direct merger costs
and unusual items and, in periods prior to the Merger, as further
adjusted to include BGII's results for the entire period and to
assume cost savings synergies resulting from the Merger and to
adjust business development expenses to assumed annual amount of
$3,000,000. The Company experienced a significant increase in
adjusted operating cash flow from $9,249,000 in the three months
ended September 30, 1995 to $13,784,000 in the three months ended
September 30, 1996. Each of the Company's four business units
contributed to this improvement.
The following is summary of EBITDA, as adjusted by business unit
reconciled to adjusted operating cash flows:
Three Months Ending September 30,
1995(a) 1996(a)
(In $000's)
EBITDA by Business Unit:
Bally Gaming and Systems $ 2,410 $5,463
Bally Wulff 3,159 4,050
Gaming Machine Operations 3,983(b) 4,760(b)
Casino Operations 2,776(b) 3,284(b)
Corporate Administrative Expenses and Other (4,667) (3,973)
Direct Merger Costs (4,951) ---
Unusual Items (1,529) (700)
EBITDA, as adjusted 1,181 12,884
Adjustments:
Direct Merger Costs 4,951 ---
Unusual Items or Non-recurring Charges 1,929 900
Development Expense (62)(c) ---
Synergy Cost Savings 1,250(d) ---
Adjusted Operating Cash Flows $9,249 $13,784
_________________
(a) Includes the consolidated results of the Company (including BGII)
for the three months ended September 30, 1996 and the combined historical
results of the Company andBGII for the three months ended September30, 1995.
(b) Minority interest and, for Casino Operations, casino royalty have been
offset against business unit EBITDA.
(c) Adjusts business development expense for the quarter ended September 30,
1995 to an assumed annual amount of $3,000,000 or $750,000 for each
quarter. Actual business development expenses for the quarter ended
September 30, 1996 was $603,000 and is included in corporate
administrative expenses.
(d) Adjusts for estimated synergy cost savings including elimination of certain
duplicative costs, such as facility, legal, accounting, and compensation.
The Company believes that the above analysis of adjusted operating
cash flows is a useful adjunct to net income, cash flow and other
GAAP measurements. However, this information should not be
construed as an alternative to net income or any other GAAP
measure of performance as an indicator of the Company's
performance or to GAAP-defined cash flows generated by operating,
investing and financing activities as an indicator of cash flows
or a measure of liquidity.
During March 1993, Bally Wulff obtained two bank revolving lines of
credit that currently provide for borrowings up to DM17,500,000
(approximately $11,473,000 at September 30, 1996) of which
approximately $1,967,000 had been borrowed at September 30, 1996.
In May 1993, Bally Wulff obtained a working capital line of
credit that provides for borrowings up to DM16,300,000
(approximately $10,686,000 at September 30, 1996) of which
approximately $7,212,000 had been borrowed at September 30, 1996.
Bally Gaming, Inc., BGII's domestic subsidiary, obtained a bank
revolving line of credit in March 1993 which, as amended,
provides for borrowings tied to a percentage of Bally Gaming,
Inc.'s eligible (as defined in the credit agreement) inventory
and accounts receivable with a maximum borrowing capacity of
$15,000,000 with the expiration date of March 31, 1997. At
September 30, 1996 Bally Gaming, Inc.'s eligible borrowing
capacity under this agreement was approximately $15,000,000 of
which $0 was outstanding. Through bank credit agreements at
Bally Wulff and Bally Gaming, Inc., the Company has unused lines
of credit of approximately $27,980,000 at September 30, 1996.
The Company is currently evaluating new financing alternatives,
including a replacement of Bally Gaming, Inc.'s revolving line of
credit facility, in order to free up certain non-working capital
based collateral and to obtain a lower interest rate. The
indenture for the Company's Senior Secured Notes limits the
Company's worldwide maximum borrowings under working capital or
revolving credit facilities to $40,000,000.
The indenture for the Company's Senior Secured Notes contains various
limitations on incurrence of additional indebtedness, on
restricted payments and on dividend and payment restrictions on
subsidiaries. The Company does not have any material capital
expenditure commitments at September 30, 1996. The Company
anticipates that cash flow from operations and borrowings
available under existing lines of credit will be sufficient to
fund its cash needs for at least the next twelve months.
Management believes that customer financing terms have become an
increasingly important competitive factor in certain emerging
markets for the Bally Gaming and Systems business unit.
Competitive conditions sometimes require Bally Gaming and Systems
to grant extended payment terms on gaming machines and other
gaming equipment. While these financings are normally
collateralized by such equipment, the resale value of the
collateral in the event of a default may be less than the amount
financed. In conjunction with sales by Bally Gaming and Systems,
with recourse to the Company, of certain trade receivables to
third parties, the Company had guaranteed amounts due from
various customers of approximately $14,000,000 at September 30,
1996. It is possible that one or more customers whose obligation
has been guaranteed by Bally Gaming and Systems may be unable to
make payments as such amounts become due. In such event, Bally
Gaming and Systems may become responsible for repayment of at
least a portion of such amounts over the term of the receivables.
In general, under the terms of these contracts, the Company may
be responsible for monthly payments of the outstanding
obligations. Accordingly, the Company will have greater exposure
to the financial condition of its customers in emerging markets
than has historically been the case in established markets like
Nevada and Atlantic City. In August 1996, the Company received
demand notices from the holder of notes related to one customer's
trade receivables for which payments were in arrears from
December 1995. The demand notice is for $3,571,000 and although
the Company is negotiating a restructuring with the holder of
these notes and the customer, there can be no assurance that a
successful restructuring will take place. In order to be
competitive in meeting customer demand for financing of gaming
equipment in emerging markets, the Company plans to continue to
evaluate the need to involve third party finance companies or
secure additional financing, although there is no assurance that
such additional financing will be obtained. Bally Wulff provides
customer financing for approximately 20% of its sales, and
management expects this practice temporarily to increase during
the latter half of calendar 1996.
In March 1992, Alfred H. Wilms, director and principal stockholder
(and then Chairman of the Board of Directors and Chief Executive
Officer) of the Company, committed to provide or cause others to
provide a $6,500,000 five year loan to VSI, the Company's
controlled subsidiary, which loan was funded in full and was
secured by a subordinated interest in all of VSI's present and
future personal property. All scheduled principal and interest
payments were made until September 1996 when the remaining
principal and accrued interest thereon totaling $2,826,000 was
paid.
Results of Operations:
Three Months Ended September 30, 1995 and 1996
General
The company operates through four business units: (i) Bally Gaming and
Systems, (ii) Bally Wulff (consisting of the manufacture and
distribution of wall-mounted gaming machines and distribution of
other recreational and amusement machines), (iii) gaming machine
operations and (iv) casino operations. The results of operations
of the BGII business units have been consolidated since June 18,
1996. However, to enhance the comparability to prior periods, the
following discussion presents the results of the operations of
BGII for the three months ended September 30, 1995 which was
prior to the Merger and therefore such results are not included
in the accompanying consolidated financial statements.
The following tables set forth the combined revenues and operating
income (loss) for the four business units for the three months
ended September 30, 1995 and 1996:
1995 1996
(In 000's)
Revenues:
Bally Gaming and Systems $27,720 $34,883
Bally Wulff 23,754 26,427
Gaming Machine Operations 26,296 28,889
Casino Operations 12,242 12,713
Total Revenues $90,012 $102,912
1995 1996
(In 000's)
Operating income (loss):
Bally Gaming and Systems 1,875 4,772
Bally Wulff 1,588 2,644
Gaming Machine Operations 2,407(a) 3,049(a)
Casino Operations 2,335(a) 2,814(a)
Corporate and Other (5,569) (4,916)
Subtotal 2,636 8,363
Direct merger costs (4,971) ---
Unusual items (1,529) (700)
Total operating income (loss): $(3,864) $7,663
(a) Net of minority interest and, for Casino Operations, net of casino
royalty.
Bally Gaming and Systems
For the quarter ended September 30, 1996, Bally Gaming and Systems
reported revenues of $34.9 million, an increase of 26%, compared
to revenues of $27.7 million in the prior year quarter. Bally
Gaming reported unit sales of approximately 4,900 new gaming
machines, an increase of 40%, compared to unit sales of
approximately 3,500 in the prior year quarter. The volume
improvement resulted primarily from sales to Casino Niagara in
Niagara Falls, Canada where Bally Gaming placed approximately
1,500 new gaming machines, representing 50% of the casino floor.
By market segment, Bally Gaming's unit sales for the quarter
consisted of approximately 1,700 units to the Nevada and Atlantic
City markets, 2,500 units to international markets and 700 units
to riverboats, Native American and other domestic markets. Bally
Gaming reported revenues from the sale of new gaming machines of
$24.3 million, an increase of 29%, compared to $18.8 million in
the prior year quarter due to higher unit volume partially offset
by lower average selling prices. Bally Systems reported revenues
of $5.2 million, an increase of 160%, compared to revenues of
$2.0 million in the prior year quarter. The revenue improvement
resulted primarily from the Casino Rama installation in Ontario,
Canada and recognition of approximately one-half of the hardware
revenues during the quarter for Casino Niagara.
For the quarter ended September 30, 1996, gross profit margins
improved to 37.5% from 34.9% in the prior year quarter. The
gross margin improvement resulted primarily from the favorable
impact of greater production volume in the Company's
manufacturing facility, partially offset by the effect of higher
international sales which traditionally have lower profit
margins. Bally Gaming and Systems reported operating income of
$4.8 million, an increase of 154%, compared to operating income
of $1.9 million in the prior year quarter. The operating income
improvement resulted primarily from the aforementioned revenue
and gross margin increases, as well as relatively flat selling,
general and administrative expenses, partially offset by an
increased provision for doubtful receivables.
Bally Wulff
For the quarter ended September 30, 1996, Bally Wulff reported
revenues of $26.4 million, an increase of 11%, compared to
revenues of $23.8 million in the prior year quarter. The revenue
improvement resulted primarily from a 44% increase in new wall
machine units sold, partially offset by a decrease in amusement
game sales as operators weighted their mix of capital
expenditures toward new wall machines. The currency translation
impact of the fluctuation of the German mark versus the U.S.
dollar reduced revenues by $1.9 million during the 1996 quarter.
For the quarter ended September 30, 1996, gross profit margin improved
to 42.8% from 40.3% in the prior year quarter. The gross margin
improvement resulted primarily from the favorable impact of
greater production volume in Bally Wulff's production facility.
Bally Wulff reported operating income of $2.6 million, an
increase of 66%, compared to $1.6 million in the prior year
quarter. The operating income improvement resulted primarily
from the aforementioned revenue and gross margin increases,
partially offset by an increased provision for doubtful
receivables as well as higher selling, general and administrative
expenses due to costs of a trade show.
Gaming Machine Operations
For the quarter ended September 30, 1996, the gaming machine
operations business unit reported revenues of $28.9 million, an
increase of 10%, compared to revenues of $26.3 million in the
prior year quarter. Louisiana revenues increased 14% as net win
per gaming machine per day increased 21% to $72.10 from $59.78 in
the prior year quarter, partially offset by a decline in the
average number of gaming machines to 653 from 677 in the prior
year quarter. Nevada revenues increased 9% as net win per gaming
machine per day increased 6% to $49.36 from $46.67 in the prior
year quarter, while the average number of gaming machines
increased to 5,552 from 5,270 in the prior year quarter. The
improvement in net win per gaming machine per day in Nevada
resulted primarily from the continuing favorable impact of
Gamblers Bonus, a cardless slot player's club and player tracking
system launched in December 1995. The increase in the average
number of gaming machines in Nevada reflects the addition of
approximately 150 gaming machines in Northern Nevada operated by
Bally Gaming prior to the Merger and the continued roll-out of
the Gamblers Bonus machines. Gamblers Bonus is currently
installed in 86 locations representing 1,091 machines in Southern
Nevada.
For the quarter ended September 30, 1996, cost of revenues increased
8% to $21.9 million compared to $20.2 million in the prior year
quarter. As a percentage of revenues, cost of revenues improved
to 75.8% from 76.8% in the prior year quarter. Louisiana cost of
revenues, increased 16% and, as a percentage of revenues
increased slightly to 64.3% from 63.0% in the prior year quarter
primarily due to the new location which opened in October 1995.
Nevada cost of revenues increased 7% but, as a percentage of
revenues, improved to 77.8% from 79.2% in the prior year quarter
primarily due to higher revenues while costs associated with new and renewed
contracts which remained relatively flat. The gaming machine operations
business unit reported operating income, net of minority
interest, of $3.0 million, an increase of 27% compared to
operating income of $2.4 million in the prior year quarter. The
operating income improvement resulted primarily from the
aforementioned increase in revenues and an improvement in
operating costs as a percentage of revenues, partially offset by
a slight increase in selling, general and administrative
expenses.
On November 5, 1996 voters in Louisiana approved a proposition to
allow video poker to continue in six of the seven parishes in
which the Company operates within off-track betting locations in
the greater New Orleans area. In the one parish in which the
Company operates where video poker was voted down, the Company
will be allowed to continue to conduct business through June 30,
1999. The two off-track betting locations in this parish
accounted for only 13% of the VSI revenues and less than $0.4
million of EBITDA for the year ended June 30, 1996.
Casino Operations
For the quarter ended September 30, 1996, the casino operations
business unit reported revenues of $12.7 million, an increase of
16%, compared to revenues of $11.0 million in the prior year
quarter. This increase is due to an 18% increase at the Rainbow
Casino and a 9% increase at the Plantation Casino. The
improvement at the Rainbow Casino was attributable to the
continuing success of its direct marketing campaigns and a 23%
higher average market share than in the prior year quarter.
Revenues from the Plantation Casino improved as revenues in the
prior year quarter had been negatively impacted by an internal
remodeling project.
For the quarter ended September 30, 1996, the cost of revenues for
casino operations increased 7% to $5.4 million compared to $5.0
million in the prior year quarter but, as a percentage of
revenues, improved to 42.2% from 45.5% in the prior year quarter
due to higher revenues with relatively stable costs.
For the quarter ended September 30, 1996, the casino operations
business unit reported operating income, net of casino royalty
and minority interest, of $2.8 million, an increase of 21%,
compared to operating income of $2.3 million in the prior year
quarter. The operating income improvement resulted from the
aforementioned increase in revenues and an improvement in
operating costs as a percentage of revenues, partially offset by
an increase in selling, general and administrative due to higher
advertising and promotional costs at the Rainbow Casino
operations.
Revenues and Expenses for Closed Casinos and Taverns
During the year ended June 30, 1996, the Company disposed of or
terminated operations at several small casinos and taverns as
these operations were not deemed to be compatible with the
Company's long-term growth strategy. The Company does not
believe these businesses constitute a disposal of a segment of a
business, as defined in APB Opinion 30, and therefore the results
of operations from these businesses are included in the
applicable revenue and expense captions in the consolidated
statements of operations. No revenues or expenses were reported
for these properties in the quarter ended September 30, 1996. For
the quarter ended September 30, 1995, revenues for these
properties are included in casino revenues and totaled $1.3
million. The related costs of revenues are included in casino
cost of revenues and totaled $0.9 million. The related selling,
general and administrative expenses are included in selling
general and administrative expenses and totaled $0.4 million.
Consolidated
As previously discussed, the Company acquired BGII on June 18, 1996.
Therefore the consolidated results of operations for the three
months ended September 30, 1996 include the results of
operations of BGII while the consolidated results for the three
months ended September 30, 1995 do not include BGII's results. The
discussion below does not include results for BGII in the 1995
quarter.
Total revenues for the quarter ended September 30, 1996, were $102.9
million, an increase of 167% compared to revenues of $38.5
million in the prior year quarter. This increase is due to
including $61.3 million of revenues from BGII in the 1996 quarter
as well as the aforementioned increases in revenues at both the
gaming machine operations and casino operations business units.
Cost of revenues for the quarter ended September 30, 1996, were $64.2
million, an increase of 146% compared to $26.1 million in the prior
year quarter due to the inclusion of $36.9 million of BGII cost
of revenues in the 1996 quarter as well as the aforementioned
increases in cost of revenues at both the gaming machine
operations and casino operations business units. Cost of revenues
as a percentage of total revenues improved to 62.4% from 67.8% in
the prior year quarter due to the aforementioned improvements at
both the gaming machine operations and casino operations business
units as well as the impact of the inclusion of the BGII business
units.
Corporate administrative expenses for the quarter ended September 30,
1996, were $4.0 million, an increase of 82% compared to
corporate administrative costs of $2.2 million in the prior year
quarter. This increase is due to inclusion of BGII corporate
administrative expenses in the 1996 quarter partially offset by
synergy cost savings such as elimination of certain duplicative
costs, for example facility, legal, accounting, and compensation
costs. Corporate administrative expenses include salaries and
wages, related taxes and benefits, rent, professional fees and
other expenses associated with maintaining the corporate office
and providing centralized corporate services for the Company.
Exclusive of the corporate administrative expenses noted above,
selling, general and administrative expenses for the quarter
ended September 30, 1996, were $18.3 million an increase of 307%
compared to selling, general and administrative costs of $4.5
million in the prior year quarter. This increase is due to the
inclusion of $13.3 million of BGII selling, general and
administrative expenses in the 1996 quarter and the
aforementioned increase at both the gaming machine operations and
casino operations business units partially offset by the decrease
in expenses as the result of the aforementioned disposed or
terminated operations at several small casinos and taverns.
Provisions for bad debt for the quarter ended September 30, 1996,
increased $1.6 million from the prior fiscal year quarter. The
increase was due to the impact of including BGII's operations in
the 1996 quarter. Depreciation and amortization for the quarter
ended September 30, 1996 was $5.2 million, an increase of 110%
compared to depreciation and amortization of $2.5 million in the
prior year quarter. This increase is due to the inclusion of
BGII depreciation and amortization in the 1996 quarter, higher
depreciation and amortization in the gaming machine operations
business unit and the impact of amortizing goodwill and other
intangibles acquired in the BGII Merger.
During the quarter ended September 30, 1996, the Company incurred
unusual charges of $0.7 million related primarily to separation
costs of Alliance personnel subsequent to the Merger. During the
quarter ended September 30, 1995, the Company expensed direct
merger costs related to the pursuit of BGII totaling $4.7
million. Such costs included legal, accounting, financial
advisory, printer, SEC filing fees and other related expenses.
Net Interest Expense and Income Taxes
Net interest expense in the quarter ended September 30, 1996,
increased $5.7 million, an increase of 219% compared to the net
interest expense of $1.8 million in the prior year quarter. The
increase is primarily due to interest on the Company's 12 7/8%
Senior Secured Notes due 2003 which were issued in June 1996,
partially offset by lower interest expense on the Company's 7
1/2% Convertible Debentures due 2003, substantially all of which
were converted into equity as part of the financing of the
Merger.
The Company recorded an income tax provision of $1.3 million in the
quarter ended September 30, 1996 compared to a benefit from
income taxes of $0.5 million in the prior fiscal year quarter.
The current quarter provision is primarily due to income taxes
related to Bally Wulff.
The information contained in this Form 10-Q may contain forward-
looking statements that involve risks and uncertainties,
including, but not limited to, the impact of competitive products
and pricing, product demand and market acceptance risks, the
presence of competitors with greater financial resources, product
development and commercialization risks, costs associated with
the integration and administration of acquired operations,
capacity and supply constraints or difficulties, the results of
financing efforts and other risks detailed from time to time in
the Company's filings with the Securities and Exchange
Commission.
PART II
Item 1. Legal Proceedings
See "Notes to Unaudited Condensed Consolidated Financial
Statements- 6. Legal Proceedings" for
a description of certain legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Reports on Form 8-K
The registrant submitted items on Form 8-K as follows :
(i) On July 3, 1996 to disclose the completion of the merger
with BGII and the closing of the related financings.
(ii) On September 10, 1996 to file a consent by KPMG
Peat Marwick, LLP related to the Company's Registration
Statement (No. 33-45811).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934 the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto authorized.
ALLIANCE GAMING CORPORATION
(Registrant)
By /s/ Steve Greathouse
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Scott D. Schweinfurth
Sr. Vice President, Treasurer and
Chief Financial Officer (Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information excerpted from Form 10-Q
for the quarter ended 09/30/96.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 38,331
<SECURITIES> 0
<RECEIVABLES> 108,419
<ALLOWANCES> 18,973
<INVENTORY> 44,426
<CURRENT-ASSETS> 180,365
<PP&E> 108,234
<DEPRECIATION> 32,925
<TOTAL-ASSETS> 361,857
<CURRENT-LIABILITIES> 69,825
<BONDS> 150,999
<COMMON> 3,183
52,656
0
<OTHER-SE> 64,358
<TOTAL-LIABILITY-AND-EQUITY> 361,857
<SALES> 63,310
<TOTAL-REVENUES> 102,912
<CGS> 36,912
<TOTAL-COSTS> 64,172
<OTHER-EXPENSES> 29,784
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,250
<INCOME-PRETAX> (920)
<INCOME-TAX> 635
<INCOME-CONTINUING> (2,261)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,261)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
</TABLE>
