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 March 31, 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.)
4380 Boulder Highway
Las Vegas, Nevada 89121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (702) 435-4200
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of Common Stock, $0.10 par value,
outstanding as of May 8, 1996 according to the records of the
registrant's registrar and transfer agent, was 12,987,483. On
the same date, there were no shares outstanding of non voting
Junior Convertible Special Stock, $0.10 par value.
I N D E X
PART I. FINANCIAL INFORMATION Page
Item 1. Unaudited Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of June 30,
1995 and March 31, 1996 3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 1995 and 1996 4
Unaudited Condensed Consolidated Statements of Operations
for the nine months ended March 31, 1995 and 1996 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended March 31, 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 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and reports on Form 8-K 20
SIGNATURES 21
PART 1
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Amounts)
June 30 March 31
1995 1996
ASSETS
Current assets:
Cash, cash equivalents and securities
available for sale $ 37,414 $ 25,562
Receivables, net 3,316 2,060
Inventories 714 661
Prepaid expenses 4,148 3,289
Other 517 486
Total current assets 46,109 32,058
Property and equipment, net 50,352 52,065
Receivables, net 5,309 5,600
Excess of costs over net assets of an acquired
business,net of accumulated amortization of
$585 and $360, and reserves 3,842 2,074
Intangible assets, net of accumulated amortization
of $5,516 and $5,966 12,405 11,273
Investment in minority owned subsidiary,
net of reserves 1,585 ---
Other 6,746 8,218
Total Assets $126,348 $111,288
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long-term debt $ 3,995 $ 4,041
Accounts payable 1,758 2,089
Accrued expenses, including due to related
parties of $931 and $19 8,610 10,345
Total current liabilities 14,363 16,475
Long-term debt, less current maturities 97,402 95,048
Other liabilities 3,955 4,325
Total liabilities 115,720 115,848
Minority interest 643 1,035
Committments and contingencies
Stockholders' equity (deficiency):
Common stock, $0.10 par value; authorized
175,000,000 shares;issued and outstanding
11,654,150 and 12,987,483 1,165 1,298
Special stock, $0.10 par value; authorized
10,000,000 shares; issued and outstanding
1,333,333 and 0 133 ---
Paid-in capital 32,134 32,134
Unrealized loss on securities available for sale,
net (316) (1,067)
Accumulated deficit (23,131) (37,960)
Total stockholders' equity (deficiency) 9,985 (5,595)
Total liabilities and stockholders'
equity (deficiency) $126,348 $111,288
See notes to unaudited condensed consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1995 and 1996
(Dollars in Thousands, Except Per Share Amounts)
1995 1996
Revenues:
Gaming
Routes $ 26,878 $ 28,490
Casinos and taverns 3,662 11,217
Food and beverage sales 893 856
Net equipment sales 6 5
31,439 40,568
Costs and expenses:
Cost of gaming
Routes 20,197 21,932
Casinos and taverns 2,090 4,839
Cost of food and beverage 624 566
Cost of equipment sales 2 2
Selling, general and administrative 2,793 4,911
Business development expenses 2,139 3,496
Corporate expenses 1,956 1,569
Provision for impaired assets --- 3,179
Depreciation and amortization 2,322 2,422
32,123 42,916
Operating loss (684) (2,348)
Other income (expense):
Interest income 731 389
Interest expense (1,928) (2,053)
Minority share of income (83) (432)
Royalty fee (27) (1,024)
Other, net 320 (137)
Loss before income taxes (1,671) (5,605)
Income tax benefit (expense) (104) 207
Net loss $ (1,775) $ (5,398)
Loss per share of common stock $ (.16) $ (.42)
Weighted average common shares outstanding 11,375 12,987
See notes to unaudited condensed consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 1995 and 1996
(Dollars in Thousands, Except Per Share Amounts)
1995 1996
Revenues:
Gaming
Routes $ 79,389 $ 81,111
Casinos and taverns 11,523 32,698
Food and beverage sales 2,842 2,976
Net equipment sales 22 11
93,776 116,796
Costs and expenses:
Cost of gaming
Routes 59,411 62,293
Casinos and taverns 6,743 14,726
Cost of food and beverage 2,038 1,992
Cost of equipment sales 10 3
Selling, general and administrative 9,279 14,308
Business development expenses 5,647 14,233
Corporate expenses 6,258 4,606
Provision for impaired assets --- 3,179
Depreciation and amortization 6,934 7,328
96,320 122,668
Operating loss (2,544) (5,872)
Other income (expense):
Interest income 2,235 1,206
Interest expense (5,844) (6,341)
Minority share of income (252) (708)
Royalty Fee (27) (2,931)
Other, net 33 398
Loss before income taxes (6,399) (14,248)
Income tax expense (394) (581)
Net loss $ (6,793) $(14,829)
Loss per share of common stock $ (.61) $ (1.21)
Weighted average common shares outstanding 11,192 12,245
See notes to unaudited condensed consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1995 and 1996
(Dollars in Thousands)
1995 1996
Cash flows from operating activities:
Net loss $ (6,793) $(14,829)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,934 7,328
Loss on sale of property and equipment 825 277
Write off of other assets 1,620 396
Provision for losses on receivables 380 46
Amortization of debt discounts 237 177
Equity in losses of affiliate 386 ---
Provision for impaired assets --- 3,179
Deferred income tax provision --- 388
Net change in operating assets and liabilities:
Decrease (increase) in:
Inventories (14) 23
Prepaid expenses 1,627 864
Refundable income taxes --- 361
Other assets (47) 201
Increase (decrease) in:
Accounts and slot contracts payable (271) 331
Accrued expenses (4,163) 735
Minority interests 251 392
Other liabilities (805) (402)
Net cash provided by (used in) operating
activities 167 (533)
Cash flows from investing activities:
Additions to property and equipment (7,816) (6,624)
Proceeds from sale of property and equipment 328 2,213
Additions to receivables (10,251) (9,303)
Cash collections on receivables 11,063 9,774
Net cash provided by acquisition of business 2,481 ---
Investment in subsidiary (1,585) ---
Proceeds from sale of (purchases of) securities
available for sale (577) 12,950
Additions to intangible assets (282) (487)
Additions to other long-term assets (3,152) (3,268)
Net cash provided by (used in)
investing activities (9,791) 5,255
Cash flows from financing activities:
Reduction of long-term debt (1,975) (3,167)
Proceeds from long-term debt --- 682
Issuance of stock 466 ---
Net cash used in financing activities (1,509) (2,485)
Cash and cash equivalents:
(Decrease) increase for period (11,133) 2,237
Balance, beginning of period 37,085 13,734
Balance, end of period $ 25,952 $ 15,971
See notes to unaudited condensed consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1995 and 1996
1. ADJUSTMENTS FOR FAIR PRESENTATION
In the opinion of management, the accompanying unaudited
interim financial statements contain all adjustments,
including normal recurring adjustments, necessary to present
fairly the financial condition, results of operations and cash
flows of the Company for the respective periods presented. The
results of operations for an interim period are not
necessarily indicative of the results to be expected for a
full year.
Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted.
It is suggested that the accompanying condensed consolidated
financial statements be read in conjunction with the financial
statements and notes in the Company's annual report on Form 10-
K. All intercompany accounts and transactions have been
eliminated in consolidation.
2. RECLASSIFICATIONS
Certain reclassifications have been made to prior period
financial statements to conform with current period
presentations.
3. CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE FOR SALE
For balance sheet presentation the following account balances
have been combined:
June 30, March 31,
1995 1996
(In thousands)
Cash and cash equivalents $ 13,734 $ 15,971
Securities available for sale 23,680 9,591
Total $ 37,414 $ 25,562
As of March 31, 1996 unrealized losses for securities
available for sale was $1,067,000 net of a tax effect of
$550,000 and is included as a component of stockholder's
equity.
4. RECEIVABLES
The Company's gaming route operations from time to time
involve making loans to location operators in order to
participate in revenues over extended periods of time. These
loans, generally made for buildouts, tenant improvements and
initial operating expenses, are generally guaranteed on a full
recourse basis by the location owner and are secured by the
assets of the location. The majority of the loans are
interest bearing and are expected to be repaid over a period
of time not to exceed the life of the related revenue sharing
agreement. The loans have varying payment terms requiring
either weekly or monthly payments. Annual interest rates on
the loans range from prime plus 1.5% to stated rates of 12%
with various maturity dates ranging through 2007. The loans
are expected to be repaid from the locations' cash flows or
proceeds from the sale of the leaseholds.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1995 and 1996
4. RECEIVABLES (continued)
Receivables consist of the following:
June 30 March 31
1995 1996
(In thousands)
Notes receivable-location operators $ 7,760 $ 6,160
Other receivables 865 1,500
8,625 7,660
Less current amounts (3,316) (2,060)
Long-term receivables, excluding
current amounts $ 5,309 $ 5,600
Receivables are presented net of an allowance for doubtful
accounts of approximately $1,659,000 and $1,363,000 as of June
30, 1995 and March 31, 1996, respectively. The allowance is
allocated between current and long-term receivables on a pro
rata basis related to notes receivable from location
operators.
5. DEBT
Long-term debt at June 30, 1995 and March 31, 1996 consists of
the following:
June 30 March 31
1995 1996
(In thousands)
Convertible subordinated debentures due
2003, 7.5% $85,000 $85,000
Due to stockholder due 1998, 200 basis 3,309 2,535
points over the London Inter Bank offer
rate (current rate 7.5%), net of discount
of $747,619 and $570,551
Hospitality Franchise Systems due 2001, 7.5% 9,065 8,173
National Gaming Mississippi due 2002, 10.0% 631 1,188
Other debt 3,392 2,193
101,397 99,089
Less current maturities 3,995 4,041
Long-term debt, less current maturities $97,402 $95,048
Accrued interest of approximately $1,991,000 at June 30, 1995
and $372,000 at March 31, 1996 is included in accrued expenses
in the unaudited condensed consolidated balance sheets.
Amounts due to stockholder include amounts owed to affiliates
of Alfred H. Wilms, the Company's largest stockholder and a
member of the Board of Directors of the Company, relating to
funding of the Company's majority-controlled subsidiary, Video
Services, Inc.'s ("VSI") gaming device route operations.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1995 and 1996
6. INCOME TAXES
The Company accounts for income taxes in accordance with the
provisions of Financial Accounting Standard No. 109 Accounting
for Income Taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. Under Statement 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Due to losses and the lack of available carrybacks, the
Company recognized no federal income tax expense or benefit
for the nine month period ended March 31, 1995 and 1996 other
than the tax effects of changes in the unrealized gains
(losses) on securities available for sale. At March 31, 1996,
the Company had estimated net operating loss carryforwards for
federal income tax purposes of approximately $48,000,000 which
are available to offset future federal taxable income, if any,
expiring 2007 through 2009. The deferred tax benefit from the
net operating losses has been fully reserved.
7. IMPAIRED ASSETS
The Company and Casino Magic Corporation, through wholly
owned subsidiaries, are members in Kansas Gaming Partners,
L.L.C. ("KGP") and Kansas Financial Partners, L.L.C. ("KFP"),
both Kansas limited liability companies. Under an option
agreement (the "option agreement") granted to KGP by Camptown
Greyhound Racing, Inc. ("Camptown") and The Racing
Association of Kansas-Southeast ("TRAK Southeast"), KGP has
been granted the exclusive right, which right expires on
September 13, 2013, to operate gaming devices and/or casino-
type gaming at Camptown's racing facility in Frontenac,
Kansas if and when such gaming is permitted in Kansas. In
December 1994, Camptown received a $3,205,000 loan from
Boatmen's Bank which was guaranteed by KFP. The Company and
Casino Magic Corporation each invested $1,580,000 in KFP
which was used to purchase a certificate of deposit to
collateralize its guaranty. Construction of Camptown's racing
facility was completed and the facility opened for
business in May 1995. The racing facility was temporarily
closed on November 5, 1995 due to poor financial results.
Camptown filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in January 1996 and has stated an
intention to reopen for business following bankruptcy
reorganization. Boatmen's Bank demanded payment of the
Camptown loan from KFP under the terms of the guaranty. KFP
paid the loan and Boatmen's Bank returned KFP's certificate
of deposit and KFP assumed Boatmen's Bank's position in the
loan to Camptown which is secured by a second mortgage on
Camptown's greyhound racing facility in Frontenac, Kansas.
TRAK Southeast and Camptown continue to be bound by the
Option Agreement. KFP intends to vigorously pursue all of its
rights and remedies which may include, among other things,
seeking authority from the bankruptcy court to commence a
foreclosure action. In the case of a foreclosure action, KFP
would be required to assume or pay the existing first
mortgage of approximately $2,000,000 if KFP becomes the
purchaser at any such sale. The Kansas legislature considered
gaming bills during the 1996 session although none passed.
There can be no assurance that gaming of any type will ever
be legalized in Kansas. Management has evaluated this
investment and determined it to be impaired because it does
not appear to be recoverable. The Company has established a
provision for the net book value of approximately $1,585,000
through a charge to operations which has been recorded in the
quarter ended March 31, 1996.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1995 and 1996
7. IMPAIRED ASSETS (continued)
Native American Investments, Inc. ("NAI"), a wholly-owned
subsidiary, has a contract to develop Class II and III gaming
opportunities with an Indian tribe in California. Class II
gaming is subject to the concurrent jurisdiction of the
National Indian Gaming Commission ("NIGC") and the applicable
Indian tribe. Class III gaming is a residual category
composed of all forms of gaming that are not Class I gaming
or Class II gaming, including casino style gaming. The
contract is subject to negotiations resulting in satisfactory
compacts with the state and approval of the contract by the
NIGC. The Governor of California has to date refused to
negotiate a compact covering Class III electronic gaming
machines and house-banked games in California and is
currently engaged in related litigation over the scope of
gaming issues with certain Indian tribes. There can be no
assurance as to the ultimate outcome of these litigation
activities or successful completion of any part of the
Company's project. On March 27, 1996, the United States
Supreme Court ruled that a portion of the Indian Gaming
Regulatory Act was unconstitutional. As a result, Federal
courts cannot oversee negotiations between Indian tribes and
state officials. The Company believes that this ruling will
have a materially adverse effect upon its Native American
casino development activities in California. Accordingly,
Management has evaluated this investment and determined it to
be impaired because it now appears to be unrecoverable.
Management has established a provision for the net book value of
approximately $1,594,000 through a charge to operations which
has been recorded in the quarter ended March 31, 1996.
Management will continue to monitor the status of Class II
and III gaming in California.
8. RAINBOW CASINO VICKSBURG PARTNERSHIP
On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. In connection
with the completion of the casino and the acquisition of its
45% limited partnership interest, through a wholly-owned
subsidiary, the Company funded a $3,250,000 advance to
Rainbow Casino Corporation ("RCC") on the same terms as RCC's
financing from Hospitality Franchise Systems, Inc. ("HFS").
On March 29, 1995 the Company consummated certain transactions
whereby the Company acquired from RCC the controlling general
partnership interest in Rainbow Casino Vicksburg Partnership
("RCVP") and increased its partnership interest and since that
date the operations of RCVP have been consolidated. In
exchange for commitments by the Company and National Gaming
Mississippi, Inc. ("NGM"), a subsidiary of National Gaming
Corporation, to provide additional financing (up to a maximum
of $2,000,000 each) to be used for the completion of certain
elements of the project which survived the opening of the
casino (for which RCC was to have been responsible for, but
failed to satisfy), the following occurred: (i) a subsidiary
of the Company became the general partner and RCC became the
limited partner and (ii) the respective partnership interests
were adjusted. RCC is entitled to receive 10% of the net
available cash flows from gaming revenues, as defined (which
amount shall increase to 20% of the incremental cash flow
generated from gaming revenues above $35,000,000 (i.e. only on
such incremental amount)), for a period of 15 years, such
period being subject to one year extensions for each year in
which a minimum payment of $50,000 is not made. In addition,
if during any continuous 12-month period until December 31,
1999 the casino achieved earnings from the project of at least
$10,500,000 before deducting depreciation, amortization,
royalty and income taxes, then the Company would be obligated
to pay to certain principals of the original partnership, as
additional consideration for the purchase of the general
partnership interest, an amount aggregating $1,000,000 in cash
or shares of Common Stock (at the Company's option) 180 days
after the occurrence. The casino has achieved the required
earnings as adjusted, and the Company is obligated to make the
required payment or issue the Common Stock by September 30,
1996.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1995 and 1996
9. PROPOSED BGII MERGER TRANSACTION
On October 18, 1995, the Company and Bally Gaming
International, Inc. ("BGII") entered into a definitive merger
agreement ("Merger') under which the outstanding shares of
BGII common stock would each be exchanged for $13 in cash and
shares of the Company's common stock.
On January 22, 1996, the parties reached an agreement to amend
the terms of the Merger. Under the amended agreement, each
share of BGII common stock outstanding (10,799,501 as of
September 30, 1995 less the 1,000,000 shares already owned by
the Company) will receive $7.83 per share in cash, $3.57 per
share in the Company's Series B Special Stock which is a Pay-
in-Kind (PIK) preferred stock, and $0.30 per share of the
Company's common stock totaling $11.70 per share of BGII
common stock. The PIK preferred stock has an eight-year
maturity and has a dividend rate of 15% as follows: PIK at 15%
for the first five years; 8% PIK and 7% cash for years six and
seven; and 15% cash in the eighth year of the term. All shares
of Series B Special Stock are mandatorily redeemable by the
eighth anniversary of the date of initial issuance. If the
Company fails to redeem such shares by that date, then the
number of directors constituting the Company's Board will be
increased by two and the holders of the shares of Series B
Special Stock will have the right to elect no more than two
directors total to the Company's Board. The holders of Series
B Special Stock will have no other remedies upon such failure
to redeem the outstanding shares of Series B Special Stock by
such date. Other than as described herein, the holders of
shares of Series B Special Stock have no other voting rights
except as stated by law. The Company intends to seek to have
the Series B Special Stock quoted on NASDAQ. The aggregate
amount of cash is unchanged from the previous agreement.
On April 2, 1996, shareholders of both companies approved the
pending Merger. The Company has filed registration statements
with the Securities and Exchange Commission covering offerings
of $140,000,000 senior secured notes and $15,000,000 Series B Special
Stock , the proceeds of which will be used to fund the cash portion
of the consideration of the merger agreement, to refinance existing
BGII debt, and for working capital purposes.
On April 17, 1996, both companies agreed to a Mutual Waiver to
Agreement and Plan of Merger extending the termination date of
the Merger until June 18, 1996. In addition the Company will
pay interest at the rate of 5.5% on the cash portion of the
merger consideration to BGII shareholders from May 3, 1996
through the effective date of the transaction. Similarly, the
dividend on the PIK preferred stock portion of the merger
consideration will begin accruing on May 3, 1996. In addition,
in order to facilitate completion of the offerings, the Company has
filed a registration statement in respect of an offer to exchange for
its outstanding convertable subordinated debentures new convertable
subordinated debentures which would be senior to the outstanding
dedentures. The new debentures would automatically convert on
consummation of the Merger into shares of the Company's common stock
at a conversion price of $5.56 per share (or, at the option of the
holder, into a new series of junior convertable pay-in-kind preferred
stock). The transaction is subject to obtaining customary regulatory
approvals, the successful completion of the offerings, and certain
other conditions. The merger is expected to occur no later
than June 18, 1996.
10. INITIAL SERIES SPECIAL STOCK
In September 1993, Kirkland-Ft. Worth Investment Partners,
L.P. ("Kirkland") invested $5,000,000 in the Company in
exchange for 1,333,333 shares of the Company's Non-Voting
Junior Convertible Special Stock, which were convertible on a
share for share basis into shares of the Company's Common
Stock, and warrants to purchase up to 2,750,000 shares of
common stock subject to certain conditions. In December 1995,
Kirkland elected to convert the entire 1,333,333 shares of
Special Stock into shares of the Company's Common Stock.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1995 and 1996
11. LEGAL PROCEEDINGS
In June 1995, Bally Entertainment Corporation ("BEC") asserted
that a certain agreement between BEC and BGII (the "Noncompete
Agreement') prohibits the use of the trade name "Bally" if it
is merged with a company that is in the casino business within
or without the United States and operates such business prior
to January 8, 1996. BGII believes such claim is entirely
without merit since the restriction referred to expires on
January 8, 1996 and in any event does not relate to the use of
the "Bally" trade name, which is covered by the License
Agreement. The restriction in the Noncompete Agreement will
not have any impact on the combined company after the Merger
since the effective time of the Merger contemplates a closing
of the Merger after the restriction in the Noncompete
Agreement lapses. BEC has not reasserted this position since
it was informed by BGII in July 1995 that the restriction
lapses on January 8, 1996. Consequently, BGII believes BEC has
determined not to contest with BGII's position.
BEC has also asserted that its permission is required for use
of the "Bally' trade name by any entity other than BGII and
that a merger between BGII and another company would violate
the terms of the License Agreement. BGII has denied these
claims and believes that the surviving company in a merger
will be permitted to use the "Bally" trade name in accordance
with the terms of such License Agreement. BGII believes that
no breach of such License Agreement is caused by the Merger
and the use of the "Bally" trade name by the surviving
corporation. In a letter dated November 9, 1995, BEC
reasserted its position. On November 20, 1995 the Company, the
Company's Merger subsidiary, and BGII commenced an action
against BEC in Federal District Court in Delaware seeking a
declaratory judgment, among other things, that the surviving
company in the Merger will be permitted to use the "Bally"
trade name in accordance with the terms of the License
Agreement, and seeking injunctive relief (the " Alliance
Action"). On November 28, 1995, BEC commenced an action
against BGII, Bally Gaming (a BGII subsidiary), the Company,
and the Company's Merger subsidiary in Federal District Court
in New Jersey to enjoin the defendants from using the
"Bally" trade name (the "BEC Action"). The BEC Action alleges
that BGII's continued use of the trade name after the Merger
will (1) constitute a prohibited assignment of BGII's rights
to use the trade name and (2) exceed the scope of the license
granted to BGII because BGII will be under control of the
Company. Also on November 28, 1995, BEC filed a motion to di
smiss, transfer to New Jersey, or stay the Alliance Action
pending resolution of the BEC Action. BGII, Bally Gaming, the
Company, and the Company's Merger subsidiary intend to
vigorously defend their position in these actions. However,
there can be no assurance that BEC will not be successful in
its action to prohibit the surviving corporation in the Merger
from using the "Bally" trade name. The loss of the "Bally"
trade name would have a material adverse effect on the gaming
machine operations of the surviving corporation in the Merger.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Liquidity and Capital Resources:
At March 31, 1996, the Company had working capital of
approximately $15,583,000, a decrease of approximately
$16,163,000 from June 30, 1995. The decrease in working capital
is due in part to a decrease in cash and cash equivalents which
were used to fund development activities in connection with the
Company's business strategy. As of March 31, 1996, the Company
had $25,562,000 in cash, cash equivalents and securities
available for sale, of which approximately $9,000,000 is
necessary to conduct ongoing gaming operations in the ordinary
course of business.
On October 18, 1995, the Company and Bally Gaming International,
Inc. ("BGII") entered into a definitive agreement under which the
outstanding shares of BGII common stock will each be exchanged
for $13 in cash and the Company's shares of common stock. On
January 22, 1996, the parties reached an agreement to amend the
terms of the merger agreement. Under the amended agreement, each
share of BGII common stock outstanding (10,799,501 as of
September 30, 1995 less the 1,000,000 shares already owned by the
Company) will receive $7.83 per share in cash, $3.57 per share in
the Company's Series B Special Stock which is a Pay-in-Kind (PIK)
preferred stock, and $0.30 per share of the Company's common
stock totaling $11.70 per share of BGII common stock. The PIK
preferred stock has an eight-year maturity and has a dividend
rate of 15% as follows: PIK at 15% for the first five years; 8%
PIK and 7% cash for years six and seven; and 15% cash in the
eighth year of the term. All shares of Series B Special Stock are
mandatorily redeemable by the eighth anniversary of the date of
initial issuance. If the Company fails to redeem such shares by
that, then the number of directors constituting the Company's
Board will be increased by two and the holders of the shares of
Series B Special Stock will have the right to elect no more than
two directors total to the Company's Board. The holders of Series
B Special Stock will have no other remedies upon such failure to
redeem the outstanding shares of Series B Special Stock by such
date. Other than as described herein, the holders of shares of
Series B Special Stock have no other voting rights except as
stated by law. The Company intends to seek to have the Series B
Special Stock quoted on NASDAQ. The aggregate amount of cash is
unchanged from the previous agreement. On April 2, 1996,
shareholders of both companies approved the pending Merger. The
Company has filed registration statements with the Securities and
Exchange Commission covering offerings of $140,000,000 senior secured
notes and $15,000,000 Series B Special Stock, the proceeds of which will
be used to fund the cash portion of the consideration of the merger
agreement, to refinance existing BGII debt, and for working capital purposes.
On April 17, 1996, both companies agreed to a Mutual Waiver to
Agreement and Plan of Merger extending the termination date of
the Merger until June 18, 1996. In addition the Company will pay
interest at the rate of 5.5% on the cash portion of the Merger
consideration to BGII shareholders from May 3, 1996 through the
effective date of the transaction. Similarly, the dividend on the
PIK preferred stock portion of the merger consideration will
begin accruing on May 3, 1996. In addition, in order to facilitate completion
of the offerings, the Company has filed a registration statement in respect
of an offer to exchange for its outstanding convertable subordinated
debentures new convertable subordinated debentures which would be senior to
the outstanding debentures. The new debentures would automatically convert
on consummation of the Merger into shares of the Company's common stock at
a conversion price of $5.56 per share (or, at the option of the holder,
into a new series of junior convertable pay-in-kind preferred stock). The
transaction is subject to obtaining customary regulatory approvals, the
successful completion of the offerings, and certain other conditions.
The merger is expected to occur no later than June 18, 1996.
On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. In connection with
the completion of the casino and the acquisition of its 45%
limited partnership interest, through a wholly-owned subsidiary,
the Company funded a $3,250,000 advance to Rainbow Casino
Corporation ("RCC") on the same terms as RCC's financing from
Hospitality Franchise Systems, Inc. ("HFS"). On March 29, 1995
the Company consummated certain transactions whereby the Company
acquired from RCC the controlling general partnership interest in
Rainbow Casino Vicksburg Partnership ("RCVP") and increased its
partnership interest and since that date the operations have been
consolidated. In exchange for commitments by the Company and
National Gaming Mississippi, Inc. ("NGM"), a subsidiary of
National Gaming Corporation, to provide additional financing (up
to a maximum of $2,000,000 each) to be used for the completion of
certain elements of the project which survived the opening of the
casino (for which RCC was to have been responsible for, but
failed to satisfy), the following occurred: (i) a subsidiary of
the Company became the general partner and RCC became the limited
partner and (ii) the respective partnership interests were
adjusted. RCC is entitled to receive 10% of the net available
cash flows from gaming revenues, as defined (which amount shall
increase to 20% of the incremental cash flow generated from
gaming revenues above $35,000,000 (i.e. only on such incremental
amount)), for a period of 15 years, such period being subject to
one year extensions for each year in which a minimum payment of
$50,000 is not made. In addition, if during any continuous 12-
month period until December 31, 1999 the casino achieved earnings
from the project of at least $10,500,000 before deducting
depreciation, amortization, royalty and income taxes, then the
Company would be obligated to pay to certain principals of the
original partnership, as additional consideration for the
purchase of the general partnership interest, an amount
aggregating $1,000,000 in cash or shares of Common Stock (at the
Company's option) 180 days after the occurrence. The casino has
achieved the required earnings as adjusted, and the Company is
obligated to make the required payment or issue the Common Stock
by September 30, 1996.
The Company and Casino Magic Corporation, through wholly owned
subsidiaries, are members in Kansas Gaming Partners, L.L.C.
("KGP") and Kansas Financial Partners, L.L.C. ("KFP"), both
Kansas limited liability companies. Under an option agreement
(the "option agreement") granted to KGP by Camptown Greyhound
Racing, Inc. ("Camptown") and The Racing Association of Kansas-
Southeast ("TRAK Southeast"), KGP has been granted the exclusive
right, which right expires on September 13, 2013, to operate
gaming devices and/or casino-type gaming at Camptown's racing
facility in Frontenac, Kansas if and when such gaming is
permitted in Kansas. In December 1994, Camptown received a
$3,205,000 loan from Boatmen's Bank which was guaranteed by KFP.
The Company and Casino Magic Corporation each invested $1,580,000
in KFP which was used to purchase a certificate of deposit to
collateralize its guaranty. Construction of Camptown's racing
facility was completed and the facility opened for business
in May 1995. The racing facility was temporarily closed on
November 5, 1995 due to poor financial results. Camptown filed
for reorganization under Chapter 11 of the U.S. Bankruptcy Code
in January 1996 and has stated an intention to reopen for
business following bankruptcy reorganization. Boatmen's Bank
demanded payment of the Camptown loan from KFP under the terms of
the guaranty. KFP paid the loan and Boatmen's Bank returned KFP's
certificate of deposit and KFP assumed Boatmen's Bank's position
in the loan to Camptown which is secured by a second mortgage on
Camptown's greyhound racing facility in Frontenac, Kansas. TRAK
Southeast and Camptown continue to be bound by the Option
Agreement. KFP intends to vigorously pursue all of its rights and
remedies which may include, among other things, seeking authority
from the bankruptcy court to commence a foreclosure action. In
the case of a foreclosure action, KFP would be required to assume
or pay the existing first mortgage of approximately $2,000,000 if
KFP becomes the purchaser at any such sale. The Company intends
to continue to monitor its investment in KFP. The Kansas
legislature considered gaming bills during the 1996 session
although none passed. There can be no assurance that gaming of
any type will ever be legalized in Kansas. Management has
evaluated this investment and determined it to be impaired
because it does not appear to be recoverable. The Company established
a provision for the net book value of approximately $1,585,000 through a
charge to operations which has been recorded in the quarter ended
March 31, 1996.
Native American Investments, Inc. ("NAI"), a wholly owned
subsidiary, has a contract to develop Class II and III gaming
opportunities with an Indian tribe in California. Class II gaming
is subject to the concurrent jurisdiction of the National Indian
Gaming Commission ("NIGC") and the applicable Indian tribe. Class
III gaming is a residual category composed of all forms of gaming
that are not Class I gaming or Class II gaming, including casino
style gaming. The contract is subject to negotiations resulting
in satisfactory compacts with the state and approval of the
contract by the NIGC. The Governor of California has to date
refused to negotiate a compact covering Class III electronic
gaming machines and house-banked games in California and is
currently engaged in related litigation over the scope of gaming
issues with certain Indian tribes. There can be no assurances as
to the ultimate outcome of these litigation activities or
successful completion of any part of the Company's project. On
March 27, 1996, the United States Supreme Court ruled that a
portion of the Indian Gaming Regulatory Act was unconstitutional.
As a result, Federal courts cannot oversee negotiations between
Indian tribes and state officials. The Company believes that this
ruling will have a materially adverse effect upon its Native
American casino development activities in California. Accordingly,
Management has established a provision for the net book value of approximately
$1,594,000 through a charge to operations which has been recorded
in the quarter ended March 31, 1996. Management will continue to
monitor the status of Class II and III gaming in California.
During the nine months ended March 31, 1996, the Company incurred
approximately $14,233,000 in costs associated with pursuit of the
Company's business strategy relating to mergers and acquisitions.
Included in these costs are direct expenses of $12,235,000
associated with the Company's previous tender offer and consent
solicitation for the common stock of, and subsequent entering
into a definitive merger agreement with, BGII. The Company's
strategy is to use its strengthened management team, diversified
gaming expertise and business and investment community
relationships to develop new complimentary gaming opportunities.
Cash provided by operations for the nine months decreased by
approximately $700,000 from amounts reported for the prior year
period. The change is primarily due to an increase in cash
provided by the casino and tavern operations of approximately
$7,795,000 which was attributable to the Rainbow Casino, offset
by an increase in business development costs over the same period
from the prior year of $8,586,000, primarily related to the BGII
merger.
Cash provided by investing activities for the nine months
improved $15,046,000 from the same period in the prior year due
primarily to the proceeds from the sale of approximately
$12,950,000 securities available for sale. Also, proceeds from
the sale of property and equipment increased by $1,885,000
compared to the same period last year.
Cash used in financing activities for the nine months increased
$976,000 from the same period last year due primarily to an
increase in the Company's principal reductions on its existing
long-term debt by $1,192,000.
Management believes the Company's present working capital and
funds generated from operations will be sufficient to meet its
existing commitments, debt payments and other obligations as they
become due. As discussed in previous reports, however, it
remains a part of the Company's business strategy to seek
complementary gaming opportunities, including opportunities in
which its route and casino experience may be applicable. As part
of its business activities, the Company is regularly involved in
the identification, investigation and development of such
opportunities. Accordingly, in order to support such activities,
the Company may in the future elect to issue additional debt or
equity securities if and when appropriate opportunities become
available on terms satisfactory to management.
Results of Operations.
Three Months Ended March 31, 1995 and 1996
Revenues:
Total revenues for the three months ended March 31, 1996 were
$40,568,000, an increase of $9,129,000 (29.0%) over those for the
same period in 1995. Revenues from all gaming route operations
increased $1,612,000 (6.0%) to approximately $28,490,000 in the
third quarter of fiscal 1996. Revenues from the Louisiana route
operations increased $320,000 (an increase of 7.6%) primarily as
a result of an expansion of operations from the opening of a new
OTB parlor in October 1995. Revenue from Nevada route operations
increased approximately $1,292,000 (5.7%) over those for the same
period last year. The increase in the Nevada gaming route
revenues was attributable to a $2.68 increase in the average net
win per gaming device per day for the three months ended March
31, 1996 compared to the same period in 1995 (accounting for an
increase of approximately $1,289,000) and a slight increase in
the weighted average number of gaming devices on location for the
three months ended March 31, 1996 as compared to the same period
in 1995 (accounting for a increase of approximately $3,000).
Revenues from casino and tavern operations, including food and
beverage sales, increased approximately $7,518,000 (165.0%)
during the current year quarter as compared to those for the
prior year as revenues recognized from the Rainbow Casino, which
were consolidated beginning March 29, 1995, exceeded the revenues
lost from the reduction of operations at the Company's tavern
locations. Net equipment sales decreased $1,000 (16.7%) from the
prior period.
Costs and Expenses:
Costs of Revenues
Cost of gaming route revenues for the quarter ended March 31,
1996 increased $1,735,000 (8.6%) over the same quarter in 1995.
Costs of revenues from route operations in Louisiana increased
$240,000 (an increase of 8.9% from last year) as a result of an
expansion of operations from the opening of a new OTB parlor in
October 1995. Costs of gaming revenues for Nevada gaming route
revenues increased $1,495,000 (8.5%) as compared to the prior
year primarily due to increased costs associated with additional
and renewed space lease contracts. Cost of route revenues includes rents
under both space lease and revenue sharing arrangements, gaming taxes
and direct labor, including related taxes and benefits. The cost of
casino and tavern revenues including costs of food and beverage revenues
increased $2,691,000 (99.2%) compared to 1995 results primarily
due to the Rainbow Casino cost of revenues which were
consolidated beginning March 29, 1995. This increase was
partially offset from the reduction of operations at the
Company's tavern locations. Cost of casino and tavern revenues
includes cost of goods sold, gaming taxes, rent and direct labor,
including related taxes and benefits.
Expenses
Selling, general and administrative expenses for the period
increased approximately $2,118,000 (75.8%) from the quarter ended
the prior year. Expenses for casinos and taverns increased
$1,949,000 (234.5%) from the prior year primarily due to the
Rainbow Casino expenses which were consolidated beginning March
29, 1995. This increase was partially offset from the reduction
of operations at the Company's tavern locations. Such expenses
related to gaming route operations increased $169,000 (8.6%)
primarily due to a non-recurring charge to payroll related costs
for the Nevada route operations. Corporate general and
administrative expenses decreased $387,000 (19.8%). This decrease
was caused primarily by controlling costs and reducing staffing
levels. Business developmental expenses associated with pursuing
the Company's growth strategy increased $1,357,000 (63.4%) over
the same period from last year. The increase was the result of
incurring direct costs of $2,897,000 related to the Company's
merger with BGII. The increase was partially offset by a
reduction in other business development activities and the
termination of two executives.
Nine Months Ended December 31, 1995 and 1996
Revenues:
Total revenues for the nine months ended March 31, 1996 were
$116,796,000, an increase of $23,020,000 (24.5%) over those for
the same period in fiscal year 1995. Revenues from all gaming
route operations increased $1,722,000 (2.2%) to approximately
$81,111,000 in the first nine months of fiscal 1996. Revenues
from the Louisiana route operations increased $467,000 (a
increase of 3.9%) primarily as a result of an expansion of
operations from the opening of a new OTB parlor in October 1995.
Revenues from Nevada route operations increased approximately
$1,255,000 (1.9%) over those for the same period last year. The
increase in the Nevada gaming route revenues was attributable to
a $0.66 increase in the average net win per gaming device per day
for the nine months ended March 31, 1996 compared to the same
period in fiscal year 1995 (accounting for an increase of
approximately $942,000) and an increase in the weighted average
number of gaming devices on location for the nine months ended
March 31, 1996 as compared to the same period in fiscal year 1995
(accounting for an increase of approximately $313,000). Revenues
from casino and tavern operations, including food and beverage
sales, increased approximately $21,309,000 (148.3%) during the
current nine months as compared to those for the prior year as
revenues recognized from the Rainbow Casino, which were
consolidated beginning March 29, 1995, exceeded the revenues lost
with the termination of the Company's lease at the Royal Casino
and the reduction of operations at the Company's tavern
locations. Net equipment sales decreased $11,000 (50%) from the
prior period.
Costs and Expenses:
Costs of Revenues
Cost of gaming route revenues for the nine months ended March 31,
1996 increased $2,882,000 (4.8%) over the same period in fiscal
year 1995. Costs of revenues from route operations in Louisiana
increased $187,000 (an increase of 2.4% from last year) as a
result of an expansion of operations from the opening of a new
OTB parlor in October 1995. Costs of gaming revenues for Nevada
gaming route revenues increased $2,695,000 (5.2%) as compared to
the prior year primarily due to increased costs associated with additional
and renewed space lease contracts. Cost of route revenues includes rents
under both space lease and revenue sharing arrangements, gaming taxes
and direct labor, including related taxes and benefits. The cost
of casino and tavern revenues including costs of food and
beverage revenues increased $7,937,000 (90.4%) compared to the
same period of fiscal year 1995 results primarily due to the
Rainbow Casino cost of revenues which were consolidated beginning
March 29, 1995. This increase was partially offset from the
termination of the Company's lease at the Royal Casino and the
reduction of operations at the Company's tavern locations. Cost
of casino and tavern revenues includes cost of goods sold, gaming
taxes, rent and direct labor, including related taxes and
benefits.
Expenses
Selling, general and administrative expenses for the nine months
ended March 31, 1996 increased approximately $5,029,000 (54.2%)
from the prior year. Expenses for casinos and taverns increased
$5,577,000 (209.5%) from the prior year primarily due to the
Rainbow Casino expenses which were consolidated beginning March
29, 1995. This increase was partially offset from the termination
of the Company's lease at the Royal Casino and the reduction of
operations at the Company's tavern locations. Such expenses
related to gaming route operations decreased $548,000 (8.3%) from
the prior year reflecting steps taken to control costs, including
reduced staffing levels. Corporate general and administrative
expenses decreased $1,652,000 (26.4%). This decrease was caused
primarily by controlling costs and reducing staffing levels.
Business developmental expenses associated with pursuing the
Company's growth strategy increased $8,586,000 (152.0%) over
the same period from last year. The increase was the result of
incurring direct costs of $12,235,000 related to the Company's
tender and consent solicitation for the common stock of, and
subsequent entering into a definitive merger agreement with, BGII.
The increase was partially offset by a reduction in other
business development activities and the termination of two
executives.
PART II
Item 1. Legal Proceedings
See "Notes to Unaudited Condensed Consolidated Financial
Statements- 11. Legal Proceedings" for a description of
certain legal proceedings.
Item 4. Submission of Mattters to a Vote of Security Holders
The Registrant held its annual meeting on April 2, 1996
in Las Vegas, Nevada. Security holders voted on the
following matters:
Proposal 1: Election of Directors
The following persons were elected to terms expiring at
the 1998 annual meeting based on the results indicated:
Christopher Baj David Robbins
For 12,174,597 12,174,597
Against 56,233 56,233
Proposal 2:
Adoption of the Agreement and Plan of Merger dated as of
October 18, 1995, as amended, among the Company, BGII
Acquisition Corp., the Company's wholly-owned
subsidiary, and Bally Gaming International, Inc.:
For 9,816,775
Against 33,859
Abstain 15,297
Broker Non-votes 2,264,899
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
10.54 Employment Agreement, dated as of March 31, 1995,
between the Company and Anthony Di Cesare.
10.67 Agreement and Plan of Merger among Alliance
Gaming Corporation, BGII Acquisition Corp. and Bally
Gaming International, Inc. as of October 18, 1995.
10.68 Employment Agreement, dated as of October 28, 1995,
between the Company and Robert Miodunski.
10.69 Amendment to Agreement and Plan of Merger among Alliance
Gaming Corporation, BGII Acquistion Corp. and Bally
Gaming International, Inc. as of January 22, 1996.
10.70 Mutual Waiver to Agreement and Plan of Merger among
Alliance Gaming Corporation, BGII Acuisition Corp. and
Bally Gaming International, Inc. as of April 17, 1996.
b. Reports on Form 8-K
There were no reports filed on Form 8-K for the three months
ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934 the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto authorized.
ALLIANCE GAMING CORPORATION
(Registrant)
By /s/ Steve Greathouse
Chairman of the Board of Directors,
President and Chief Executive Officer
By /s/ John W. Alderfer
Sr. Vice President, Treasurer
and Chief Financial Officer
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This schedule contains summary financial information excerpted from Form 10-Q
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