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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-4281
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0104066
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6601 S. Bermuda Rd.
Las Vegas, Nevada 89119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (702) 270-7600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The number of shares of Common Stock, $0.10 par value, outstanding as of
November 4, 1998 according to the records of the registrant's registrar and
transfer agent was 34,261,167.
<PAGE>
ALLIANCE GAMING CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
I N D E X
PART I. FINANCIAL INFORMATION Page
Item 1. Unaudited Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
June 30, 1998 and September 30, 1998 3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended September 30, 1997 and 1998 4
Unaudited Condensed Consolidated Statements of Stockholders'
Deficiency for the three months ended September 30, 1998 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 1997 and 1998 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
<PAGE>
PART 1
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In 000's, except share data)
June 30, Sept. 30,
1998 1998
ASSETS
Current assets:
Cash and cash equivalents $ 23,487 $26,916
Accounts and notes receivable, net of allowance
for doubtful accounts of $11,932 and $11,909 93,459 87,510
Inventories, net of reserves of $6,797 and $6,085 42,418 47,395
Other current assets 11,711 9,179
-------- --------
Total current assets 171,075 171,000
------- -------
Long-term notes receivable, net of allowance for doubtful
accounts of $1,109 and $988 7,931 7,441
Leased equipment, net of accumulated depreciation of
$4,020 and $3,564 7,325 7,229
Property, plant and equipment, net of accumulated
depreciation of $46,090 and $50,211 77,905 79,139
Excess of costs over net assets of acquired businesses,
net of accumulated amortization of $3,199 and $3,864 59,952 60,940
Intangible assets, net of accumulated amortization of
$13,358 and $14,001 26,732 27,868
Other assets, net 15,917 15,476
------- -------
Total assets $366,837 $369,093
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 10,477 $ 12,926
Accrued liabilities 39,122 29,542
Current maturities of long-term debt 1,996 2,116
--------- ------
Total current liabilities 51,595 44,584
-------- -------
Term loan facilities 137,800 137,450
Senior Subordinated Notes due 2007, net 149,245 149,258
Other long-term debt, less current maturities 36,912 38,609
Other liabilities 12,718 12,658
------- -------
Total liabilities 388,270 382,559
-------- --------
Minority interest 2,315 1,956
Commitments and contingencies
Stockholders' deficiency:
Special Stock, 10,000,000 shares authorized:
Series E, $100 liquidation value; 137,317 shares
and 141,265 shares issued and outstanding 13,732 14,127
Common Stock, $.10 par value; 175,000,000 shares
authorized; 32,122,000 shares and 34,261,000 issued
and outstanding 3,212 3,426
Additional paid-in capital 122,980 127,609
Accumulated other comprehensive income (13,946) (8,176)
Accumulated deficit (149,726) (152,408)
------- -------
Total stockholders' deficiency (23,748) (15,422)
------ ------
Total liabilities and stockholders' deficiency $366,837 $369,093
======= ========
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except per share data)
Three Months Ended September 30,
1997 1998
Revenues:
Gaming equipment and systems $ 27,167 $ 21,942
Wall machines and amusement games 21,061 20,611
Route operations 35,655 40,004
Casino operations 14,088 16,214
------- -------
97,971 98,771
Costs and expenses:
Cost of gaming equipment and systems 16,236 11,840
Cost of wall machines and amusement games 11,568 12,068
Cost of route operations 27,188 31,129
Cost of casino operations 6,260 6,816
Selling, general and administrative 21,403 21,012
Research and development 2,869 4,194
Depreciation and amortization 5,003 5,402
------ -----
90,527 92,461
Operating income 7,444 6,310
Other income (expense):
Interest income 231 232
Interest expense (6,069) (7,903)
Rainbow royalty (587) -
Rainbow royalty buyout (19,000) -
Minority interest (390) (539)
Other, net (12) (192)
------- -------
Loss before income taxes (18,383) (2,092)
Income tax provision (493) (184)
------ --------
Net loss before extraordinary item (18,876) (2,276)
Extraordinary loss, without tax benefit (note 2) (42,033) -
------- -------
Net loss (60,909) (2,276)
Special Stock dividends and redemption premium on
Series B Special Stock (18,953) (406)
------ ----
Net loss applicable to common shares $(79,862) $(2,682)
======== =======
Basic and diluted loss per share:
Loss per share before extraordinary item $ (1.19) $ (0.08)
Extraordinary loss per share (1.32) -
------- -----
Net loss per share $ (2.51) $ (0.08)
======== =======
Weighted average common shares outstanding 31,853 32,982
======= =======
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Three Months Ended September 30, 1998
(In 000's)
<TABLE>
<CAPTION>
Accumulated Total
Series E Additional Other Stock-
Special Stock Common Stock Paid-in Comprehensive Accum. holders'
Shares Dollars Shares Dollars Capital Income Deficit Deficiency
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 137 $13,732 32,122 $3,212 $122,980 $(13,946) $(149,726) $(23,748)
Net loss -- -- -- -- -- -- (2,276) (2,276)
Shares issued upon exercise of
Options and warrants -- -- 2,139 214 4,629 -- -- 4,843
Special Stock dividends 4 395 -- -- -- -- (406) (11)
Foreign currency translation
Adjustment -- -- -- -- -- 5,770 -- 5,770
--- ------- ------ ------ -------- -------- --------- --------
Balances at September 30, 1998 141 $14,127 34,261 $3,426 $127,609 $ (8,176) $(152,408) $(15,422)
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
Three Months Ended September 30,
1997 1998
Cash flows from operating activities:
Net loss $(60,909) $ (2,276)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 5,003 5,402
Amortization of debt discounts 7 13
Extraordinary item 42,033 -
Write down of other assets 476 185
Loss (gain) on sale of assets (14) (21)
Provision for doubtful receivables 771 (353)
Other 259 (198)
Net change in operating assets and liabilities:
Accounts and notes receivable 8,700 10,281
Inventories (2,622) (4,420)
Other current assets (70) 2,692
Accounts payable (2,865) 2,449
Accrued liabilities 1,124 (9,723)
Net cash provided by (used in) operating activities (8,107) 4,031
Cash flows from investing activities:
Additions to property, plant and equipment (3,049) (3,483)
Proceeds from disposal of property and equipment 131 36
Additions to other long term assets (862) (2,008)
Net cash used in investing activities (3,780) (5,455)
Cash flows from financing activities:
Refinancing fees and expenses (32,752) -
Capitalized debt issuance costs (11,456) -
Proceeds from issuance of long-term debt 303,734 -
Reduction of long-term debt (177,894) (467)
Net change in lines of credit 3,072 300
Repurchase of Series B Special Stock (77,568) -
Proceeds from exercise of stock options and warrants - 4,843
------- -----
Net cash provided by financing activities 7,136 4,676
Effect of exchange rate changes on cash (120) 177
Cash and cash equivalents:
Increase (decrease) for period (4,871) 3,429
Balance, beginning of period 28,924 23,487
------ -------
Balance, end of period $ 24,053 $ 26,916
======== ========
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Three Months Ended September 30, 1997 and 1998
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring
adjustments, which management believes are necessary to present fairly the
financial position, results of operations and cash flows of Alliance Gaming
Corporation ("Alliance" or the "Company") for the respective periods
presented. The results of operations for an interim period are not
necessarily indicative of the results which may be expected for any other
interim period or for the year as a whole. The accompanying unaudited
interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes in the
Company's annual report on Form 10-K as amended for the year ended June 30,
1998. All intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying condensed consolidated financial statements at June 30,
1998 were derived from audited consolidated financial statements, but do not
include all disclosures required under generally accepted accounting
principles. Certain reclassifications have been made to prior period
financial statements to conform with current period presentation.
2. DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION
Long-term debt at June 30, 1998 and September 30, 1998 consists of the
following:
June 30, Sept. 30,
1998 1998
(in 000's)
10% Senior Subordinated Notes due 2007, net of
unamortized discount of $755,000 and $742,000 $149,245 $149,258
Term loan facilities:
Tranche B Term Loan 74,438 74,250
Tranche C Term Loan 39,700 39,600
Delayed Draw Term Facility 25,000 25,000
Revolving Credit Facility 34,971 36,253
Other, secured by related equipment 2,599 3,072
------- -------
325,953 327,433
Less current maturities 1,996 2,116
------ -------
Long-term debt, less current maturities $323,957 $325,317
======== ========
In August 1997 the Company completed a refinancing transaction whereby the
Company repaid its 12 7/8% Senior Notes, repurchased its 15% Series B
Special Stock, and issued $150 million of Senior Subordinated Notes and
entered into bank financing of $230 million. The bank financing provides for
(i) term loans in the aggregate amount of up to $140 million, comprised of a
$75 million tranche with a 7 1/2-year term (the "Tranche B Term Loan"), a
$40 million tranche with an 8-year term (the "Tranche C Term Loan"), and a
$25 million tranche with a 7 1/2-year term (the "Delayed Draw Term Facility"
and together with the Tranche B Term Loan and the Tranche C Term Loan, the
"Term Loan Facilities"); and (ii) a $90 million revolving credit facility
(the "Revolving Credit Facility") with a 6-year term. Each of these credit
facilities are variable rate borrowings in accordance with a credit grid.
The interest rates which are currently at the highest level of the credit
grid and maturity dates are as follows:
<PAGE>
Interest Maturity
Rates Date
Tranche B Term Loan LIBOR + 2.75% January 31, 2005
Tranche C Term Loan LIBOR + 3.00% July 31, 2005
Delayed Draw Term Facility LIBOR + 2.75% January 31, 2005
Revolving Credit Facility LIBOR + 2.25% July 31, 2003
The Revolving Credit Facility also allows for German Deutschemark borrowings
at the euro deutschmark rate plus 2.25% (or 5.4% at September 30, 1998).
The bank facility is collateralized by substantially all domestic property
and is guaranteed by each domestic subsidiary of the U.S. Borrower and
German Subsidiaries (both as defined), other than the entity which holds the
Company's interest in its Louisiana operations and other non-material
subsidiaries (as defined), and secured by both a U.S. and German Pledge
Agreement (both as defined). The bank facility contains a number of
maintenance covenants and it and the Indenture have other significant
covenants that, among other things, restrict the ability of the Company and
certain of its subsidiaries to dispose of assets, incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, enter into certain acquisitions, repurchase equity interests
(as defined) or subordinated indebtedness, issue or sell equity interests of
the Company's subsidiaries (as defined), engage in mergers or acquisitions,
or engage in certain transactions with subsidiaries and affiliates, and that
otherwise restrict corporate activities.
The Senior Subordinated Notes bear interest at 10%, are due in 2007, and are
general unsecured obligations of the Company, ranking subordinate in right
of payment to all Senior Debt (as defined) of the Company, including
indebtedness under the bank financing. The Senior Subordinated Notes will be
fully and unconditionally guaranteed on a joint and several senior
subordinated basis by all existing and future domestic Restricted
Subsidiaries (as defined) of the Company, subject to certain exceptions
including the partially-owned entities through which its Mississippi casino
and Louisiana route operations are conducted. The Subsidiary Guarantees (as
defined) are general unsecured obligations of the Guarantors, ranking
subordinate in right of payment to all Senior Debt of the Guarantors. The
Company will be able to designate other current or future subsidiaries as
Unrestricted Subsidiaries (as defined) under certain circumstances.
Unrestricted Subsidiaries will not be required to issue a Subsidiary
Guarantee and will not be subject to many of the restrictive covenants set
forth in the Indenture pursuant to which the Senior Subordinated Notes were
issued. The Indenture for the Company's Senior Subordinated Notes contains
various covenants, including limitations on incurrence of additional
indebtedness, on restricted payments and on dividend and payment
restrictions on subsidiaries. The Senior Subordinated Notes may not be
redeemed for the first five years. Upon the occurrence of a Change of
Control (as defined), the holders of the Senior Subordinated Notes will have
the right to require the Company to purchase their notes at a price equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
The refinancing transaction was completed in September 1997, and as a
result, the Company recorded an extraordinary loss of $42.0 million
consisting of the $27.7 million premium paid to repurchase the Senior
Secured Notes, the payment of related transaction fees and expenses, and the
charge-off of the unamortized debt discount and deferred financing fees.
There was no tax benefit recognized for the extraordinary item as a
valuation allowance was recorded to fully reserve the net operating losses
created. The Company also recorded a $19.0 million charge for the cost of
the Rainbow Royalty Buyout. Additionally, the Company recorded a $16.6
million charge to equity and a corresponding increase in the net loss
applicable to common shares for the difference between the carrying value
and the liquidation value of the Series B Special Stock, all of which was
redeemed on September 8, 1997 at the liquidation price of $100 per share,
plus accrued dividends.
3. INCOME TAXES
The Company's effective tax rate for the three months ended September 30,
1997 and 1998 differs from the statutory rate of 35% due to state income
taxes and the impact of taxes applicable to earnings of Bally Wulff. In
addition, earnings at the Company's domestic subsidiaries cannot be fully
offset by the utilization of net operating loss carryforwards.
4. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is related to the unaudited condensed
consolidated statements of cash flows. For the three months ended September
30, 1997 and 1998, the Company recorded the following significant non-cash
items:
Three months ended September 30,
1997 1998
(In 000's)
Reclassify other assets to property, plant and
equipment $ 105 $ 108
Dividends for Series E and Series B Special Stock 2,400 406
Reclassify inventory to equipment 1,599 459
Series B Special Stock redemption premium 16,553 -
Translation rate adjustment 895 5,593
Capitalized obligation incurred in acquisition
of route asset - 652
5. LEGAL PROCEEDINGS
Litigation
On September 25, 1995, BGII was named as a defendant in a class action
lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on
behalf of himself and all others similarly situated. The plaintiffs filed
suit against Bally Gaming International, Inc. ("BGII") and approximately 45
other defendants. Each defendant is involved in the gaming business as a
gaming machine manufacturer, distributor, or casino operator. The class
action lawsuit arises out of alleged fraudulent marketing and operation of
casino video poker machines and electronic slot machines. The plaintiffs
allege that the defendants have engaged in a course of fraudulent and
misleading conduct intended to induce people into playing their gaming
machines based on a false belief concerning how those machines actually
operate as well as the extent to which there is actually an opportunity to
win on any given play. The plaintiffs allege that the defendants' actions
constitute violations of the Racketeer Influenced and Corrupt Organizations
Act (RICO) and give rise to claims of common law fraud and unjust
enrichment. The plaintiffs are seeking monetary damages in excess of $1.0
billion, and are asking that any damage awards be trebled under applicable
Federal law. Management believes the plaintiffs' lawsuit to be without
merit. The Company intends to vigorously pursue all legal defenses available
to it.
The Company is also a party to various lawsuits relating to routine matters
incidental to its business. Management does not believe that the outcome of
such litigation, including the matters above, in the aggregate, will have a
material adverse effect on the Company.
6. COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting of comprehensive income (loss) and
its components; however, the adoption of SFAS had no impact on the Company's
net income (loss) or stockholders' equity (deficiency). SFAS 130 requires
the changes in the cumulative translation adjustment account (which is a
component of stockholders' deficiency) to be included as a component of
other comprehensive income (loss).
During the three months ended September 30, 1998 and 1997, total
comprehensive income (loss) amounted to $3,088,000 and $(80,877,000)
respectively.
7. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS
The following unaudited condensed consolidating financial statements are
presented to provide certain financial information regarding guaranteeing
and non-guaranteeing subsidiaries in relation to the Company's Senior
Subordinated Notes which were issued in the Refinancing (see note 2). The
financial information presented includes Alliance Gaming Corporation (the
"Parent") and its wholly-owned guaranteeing subsidiaries (together the
"Parent and Guaranteeing Subsidiaries"), and the non-guaranteeing
subsidiaries Video Services, Inc., United Gaming Rainbow, BGI Australia Pty.
Limited, Bally Gaming de Puerto Rico, Inc., and Alliance Automaten GmbH &
Co. KG (the subsidiary that holds the Company's German interests) (together
the "Non-Guaranteeing Subsidiaries"). The notes to consolidating financial
statements should be read in conjunction with these consolidating financial
statements.
<PAGE>
ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONSOLIDATING BALANCE SHEETS
June 30, 1998
(In 000's)
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,609 $ 14,878 $ $ 23,487
Accounts and notes receivable, net 44,757 52,380 (3,678) 93,459
Inventories, net 27,957 14,990 (529) 42,418
Other current assets 7,998 3,713 11,711
------ ------ ------ ------
Total current assets 89,321 85,961 (4,207) 171,075
------ ------ ------ -------
Long-term notes receivable, net 95,036 1,926 (89,031) 7,931
Leased equipment, net 2 7,323 7,325
Property, plant and equipment, net 45,052 32,853 77,905
Excess of costs over net assets of
acquired businesses, net 39,963 19,989 59,952
Intangible assets, net 26,248 484 26,732
Investment in subsidiaries 104,219 (104,219)
Other assets, net 22,453 (1,124) (5,412) 15,917
------- ------- --------- --------
$422,294 $147,412 $(202,869) $366,837
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 7,373 $ 3,104 $ $ 10,477
Accrued liabilities 26,415 13,705 (998) 39,122
Current maturities of long-term debt 6,912 3,176 (8,092) 1,996
----- ----- ------ -----
Total current liabilities 40,700 19,985 (9,090) 51,595
------ ------ ------- ------
Term loan facilities 137,800 137,800
Senior Subordinated Notes due 2007, net 149,245 149,245
Other long-term debt, less current
maturities 105,279 20,878 (89,245) 36,912
Other liabilities 10,729 2,330 (341) 12,718
------- ------- ------- -------
Total liabilities 443,753 43,193 (98,676) 388,270
------- ------- ------- -------
Minority interest 2,315 2,315
Commitments and contingencies
Stockholders' equity (deficiency):
Series E Special Stock 13,732 13,732
Common Stock 3,212 17,832 (17,832) 3,212
Additional paid-in capital 122,980 68,700 (68,700) 122,980
Cumulative translation adjustment (13,946) (14,140) 14,140 (13,946)
Retained earnings (accumulated deficit) (149,752) 31,827 (31,801) (149,726)
-------- ------ ------- --------
Total stockholders' equity (deficiency) (23,774) 104,219 (104,193) (23,748)
-------- ------- ------- -------
$422,294 $147,412 $(202,869) $366,837
======== ======== ========= ========
</TABLE>
See accompanying unaudited note.
CONSOLIDATING BALANCE SHEETS
September 30, 1998
(In 000's)
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,643 $ 12,273 $ $ 26,916
Accounts and notes receivable, net 38,881 53,028 (4,399) 88,510
Inventories, net 31,630 16,294 (529) 47,395
Other current assets 7,157 2,022 9,179
------ ------ ------ -------
Total current assets 92,311 83,617 (4,928) 171,000
------- ------ ------ -------
Long-term notes receivable, net 95,943 2,447 (90,949) 7,441
Leased equipment, net 7,229 7,229
Property, plant and equipment, net 46,032 33,107 79,139
Excess of costs over net assets of
acquired businesses, net 39,699 21,241 60,940
Intangible assets, net 27,399 469 27,868
Investment in subsidiaries 96,414 (96,414) -
Other assets, net 23,088 (8,639) 1,027 15,476
------- ------- ------- -------
$420,886 $139,471 $(191,264) $369,093
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 10,603 $ 2,323 $ $ 12,926
Accrued liabilities 16,475 13,810 (743) 29,542
Current maturities of long-term debt 1,528 3,216 (2,628) 2,116
------ ------ ------- ------
Total current liabilities 28,606 19,349 (3,371) 44,584
------- ------- ------- -------
Term loan facilities 137,450 137,450
Senior Subordinated Notes due 2007, net 149,258 149,258
Other long-term debt, less current
maturities 108,418 21,085 (90,894) 38,609
Other liabilities 10,646 2,330 (318) 12,658
------- ------- ------- -------
Total liabilities 434,378 42,764 (94,583) 382,559
------- ------ ------- -------
Minority interest 1,956 1,956
Commitments and contingencies
Stockholders' equity (deficiency):
Series E Special Stock 14,127 14,127
Common Stock 3,426 17,832 (17,832) 3,426
Additional paid-in capital 127,609 68,700 (68,700) 127,609
Cumulative translation adjustment (8,176) (8,375) 8,375 (8,176)
Retained earnings (accumulated deficit) (152,434) 18,550 (18,524) (152,408)
-------- ------- ------- --------
Total stockholders' equity (deficiency) (15,448) 96,707 (96,681) (15,422)
-------- ------- ------- -------
$420,886 $139,471 $(190,264) $369,093
======== ======== ========= ========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1997
(In 000's)
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C>
Revenues:
Gaming equipment and systems $26,523 $ 2,747 $(2,103) $27,167
Wall machines and amusement games 21,061 21,061
Route operations 30,765 4,890 35,655
Casino operations 3,289 10,799 14,088
------- -------- ------ -------
60,577 39,497 (2,103) 97,971
------- ------- ------ -------
Costs and expenses:
Cost of gaming equipment and systems 16,280 2,043 (2,087) 16,236
Cost of wall machines and amusement games 11,568 11,568
Cost of route operations 24,052 3,136 27,188
Cost of casino operations 2,098 4,162 6,260
Selling, general and administrative 11,202 10,201 21,403
Research and development 2,152 717 2,869
Depreciation and amortization 2,927 2,076 5,003
------- ------- ------ -------
58,711 33,903 (2,087) 90,527
------- ------- ------ -------
Operating income 1,866 5,594 (16) 7,444
Earnings in consolidated subsidiaries 3,197 (3,197)
Other income (expense):
Interest income 292 111 (172) 231
Interest expense (5,802) (439) 172 (6,069)
Rainbow royalty 680 (1,267) (587)
Rainbow royalty buyout (19,000) (19,000)
Minority interest (390) (390)
Other, net 64 (76) (12)
------ ----- ------ ------
Income (loss) before income taxes (19,093) 3,923 (3,213) (18,383)
Income tax benefit (provision) 233 (726) (493)
------ ------- ------ ------
Net income (loss) before extraordinary item (18,860) 3,197 (3,213) (18,876)
Extraordinary loss, without tax benefit (42,033) (42,033)
------- ------- ------ -------
Net income (loss) (60,893) 3,197 (3,213) (60,909)
Special Stock dividends and redemption
premium (18,953) (18,953)
------- ------- ------ --------
Net loss applicable to common shares $(79,846) $ 3,197 $(3,213) $(79,862)
======== ======= ======= ========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1998
(In 000's)
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C>
Revenues:
Gaming equipment and systems $20,171 $ 3,072 $(1,301) $21,942
Wall machines and amusement games 20,622 (11) 20,611
Route operations 34,889 5,115 40,004
Casino operations 3,307 12,907 16,214
----- ------- ------- -------
58,367 41,716 (1,312) 98,771
Costs and expenses:
Cost of gaming equipment and systems 10,791 2,350 (1,301) 11,840
Cost of wall machines and amusement
games 12,079 (11) 12,068
Cost of route operations 27,816 3,313 31,129
Cost of casino operations 2,039 4,777 6,816
Selling, general and administrative 11,837 9,175 21,012
Research and development 3,436 758 4,194
Depreciation and amortization 3,672 1,730 5,402
----- ------- ------ ------
59,591 34,182 (1,312) 92,461
Operating income (1,224) 7,534 6,310
Earnings in consolidated subsidiaries 5,102 (5,102)
Other income (expense):
Interest income 315 104 (187) 232
Interest expense (7,701) (389) 187 (7,903)
Rainbow royalty 1,507 (1,507)
Minority interest (539) (539)
Other, net (13) (179) (192)
------ ------ ------ ------
Income (loss) before income taxes (2,553) 5,563 (5,102) (2,092)
Income tax benefit (provision) 277 (461) (184)
----- ------ ------- ------
Net income (loss) (2,276) 5,102 (5,102) (2,276)
----- ----- ------ ------
Special Stock dividends (406) (406)
------ ------ ------- -----
Net loss applicable to common shares $(2,682) $5,102 $(5,102) $(2,682)
======== ======= ======= =======
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1997
(In 000's)
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities (23,015) 7,968 6,940 (8,107)
------- ------ ------ ------
Cash flows from investing activities:
Additions to property and equipment (2,288) (761) (3,049)
Proceeds from disposal of property and
equipment 62 69 131
Additions to other long term asets (710) (152) (862)
------ ----- ------ ------
Net cash used in investing activities (2,936) (844) (3,780)
------ ----- ------ ------
Cash flows from financing activities:
Refinancing fees and expenses (32,752) (32,752)
Capitalized new debt fees (11,456) (11,456)
Proceeds from issuance of long-term
debt, net of expenses 303,734 7,279 (7,279) 303,734
Reduction of long-term debt (170,294) (7,939) 339 (177,894)
Net change in lines of credit 1,840 1,232 3,072
Repurchase of Series B Special Stock (77,568) (77,568)
Dividends received (paid) 5,374 (5,374) -
------- ------ ------ -------
Net cash provided by (used in)
financing activities 18,878 (4,802) (6,940) 7,136
------- ------ ------ -------
Effect of exchange rate changes on cash (120) (120)
Cash and cash equivalents:
Increase (decrease) for period (7,073) 2,202 (4,871)
Balance, beginning of period 16,462 12,462 28,924
------- ------- -------
Balance, end of period $ 9,389 $14,664 $ -- $24,053
======= ======= ======== =======
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1998
(In 000's)
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities (6,904) 11,558 (623) 4,031
------ ------- ----- ------
Cash flows from investing activities:
Additions to property and equipment (2,732) (751) (3,483)
Proceeds from disposal of property and
equipment 28 8 36
Additions to other long term assets (2,008) (2,008)
------ ------- ------ ------
Net cash used in investing activities (4,712) (743) (5,455)
------ ------- ------ ------
Cash flows from financing activities:
Reduction of long-term debt (355) (735) 623 (467)
Net change in lines of credit 300 300
Proceeds from exercise of stock options
and warrants 4,843 4,843
Dividends received (paid) 12,862 (12,862) -
------- ------- ------ ------
Net cash provided by (used in)
financing activities 17,650 (13,597) 623 4,676
------- ------- ------ ------
Effect of exchange rate changes on cash 177 177
Cash and cash equivalents:
Increase (decrease) for period 6,034 (2,605) 3,429
Balance, beginning of period 8,609 14,878 23,487
------ ------- ------
Balance, end of period $ 14,643 $12,273 $ -- $26,916
======== ======= ====== =======
</TABLE>
See accompanying unaudited note.
<PAGE>
Debt and Lines of Credit
Long-term debt and lines of credit at September 30, 1998 consist of the
following:
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
(in 000's)
<S> <C> <C> <C> <C>
10% Senior Subordinated Notes due
2007, net of unamortized discount $149,258 $149,258
Term loan facilities:
Tranche B Term Loan 74,250 74,250
Tranche C Term Loan 39,600 39,600
Delayed Draw Term Facility 25,000 25,000
Revolving Credit Facility 23,000 13,253 36,253
Intercompany notes payable 84,904 8,618 (93,522) -
Other 642 2,430 3,072
------- ----- ------- -------
396,654 24,301 (93,522) 327,433
Less current maturities 1,528 3,216 (2,628) 2,116
------- ------- ------- -------
Long-term debt, less current
maturities $395,126 $21,085 $(90,894) $325,317
======== ======= ======== ========
</TABLE>
<PAGE>
ALLIANCE GAMING CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
In August 1997 the Company completed a series of related transactions as
described below ("the Refinancing") which consisted of the private placement of
$150.0 million of Senior Subordinated Notes and the closing of $230.0 million of
bank financing. The bank financing provides for (i) term loans in the aggregate
amount of up to $140.0 million, comprised of a $75.0 million tranche with a 7
1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche with an
8-year term (the "Tranche C Term Loan"), and a $25.0 million tranche with a 7
1/2-year term (the "Delayed Draw Term Facility" and together with the Tranche B
Term Loan and the Tranche C Term Loan, the "Term Loan Facilities") and (ii) a
$90.0 million revolving credit facility with a 6-year term (the "Revolving
Credit Facility").
At September 30, 1998, based on the terms of the new $90.0 million Revolving
Credit Facility, the Company would have been able to borrow $69.4 million, of
which the Company had borrowings of approximately $36.3 million outstanding. The
borrowing base for the revolving credit facility consists of eligible
receivables and inventory, as defined in the credit agreement.
At September 30, 1998, the Company had $26.9 million in cash and cash
equivalents and $33.1 million in unborrowed availability on its revolving credit
facility pursuant to the borrowing base limitations contained in the credit
agreement. In addition, the Company had working capital of approximately $126.4
million, an increase of approximately $6.9 million from June 30, 1998, which is
explained below. Consolidated cash and cash equivalents at September 30, 1998
includes approximately $12.1 million of cash which is utilized in Casino and
Route Operations which is held in vaults, cages or change banks.
The Company is in compliance with the financial and operational covenants under
both the bank credit agreement and the Indenture for the Senior Subordinated
Notes.
Management believes that cash flow from operating activities, cash and cash
equivalents held and the availability under the revolving credit facility will
provide the Company with sufficient capital resources and liquidity. At
September 30, 1998, the Company did not have any significant commitments for
capital expenditures.
Working Capital
During the three months ended September 30, 1998, working capital increased $6.9
million to $126.4 million. The primary fluctuations in working capital were: (i)
a decrease in accounts receivable resulting from cash collections and lower
revenues, (ii) an increase in inventory due to new product sales expected in
fiscal year 1999, (iii) a decrease in accrued liabilities due to payments of
accrued interest payable and a final payment in settlement of litigation related
to the acquisition of BGII, (iv) the impact of foreign exchange fluctuations
between the dollar and the deutschemark on all working capital categories, (v)
increases in accounts payable based on timing of payments, and (vi) the
corresponding impact of the above listed items on cash and cash equivalents.
Cash Flow
During the three months ended September 30, 1998, $4.0 million was provided from
operating activities resulting from a net decrease in accounts receivable, a
decrease in other current assets, an increase in depreciation and amortization,
partially offset by a net loss, an increase in inventories primarily at Bally
Gaming and Systems, and a decrease in accrued expenses.
During the three months ended September 30, 1998 the Company used $5.5 million
of cash in investing activities primarily resulting from $3.5 million in capital
expenditures and $2.0 million of payments made in acquiring the rights to
manufacture and distribute several gaming products.
During the three months ended September 30, 1998, $4.7 million was provided by
financing activities primarily resulting from the cash proceeds from the
exercise of certain stock purchase warrants.
The following is a summary of the Company's earnings before interest, taxes,
depreciation and amortization (EBITDA) by business unit:
Three Months Ending September 30,
1997 1998
(In $000's)
Bally Gaming and Systems $ 3,146 $ 960
Wall Machines and Amusement Games 2,601 3,145
Route Operations 6,334 5,678
Casino Operations 4,257 5,442
Corporate Administrative Expenses (3,891) (3,513)
------- -------
EBITDA $12,447 $11,712
======= =======
The Company believes that the analysis of EBITDA is a useful adjunct to net
income, cash flow and other GAAP measurements. However, this information should
not be construed as an alternative to net income or any other GAAP measure of
performance as an indicator of the Company's performance or to GAAP-defined cash
flows generated by operating, investing and financing activities as an indicator
of cash flows or a measure of liquidity.
The bank facility is collateralized by substantially all domestic property and
is guaranteed by each domestic subsidiary of the U.S. Borrower and German
Subsidiaries (both as defined), other than the entity which holds the Company's
interest in its Louisiana operations and other non-material subsidiaries (as
defined), and secured by both a U.S. and German Pledge Agreement (both as
defined). The bank facility contains a number of maintenance covenants and it
and the indenture have other significant covenants that, among other things,
restrict the ability of the Company and certain of its subsidiaries to dispose
of assets, incur additional indebtedness, issue preferred stock, pay dividends
or make other distributions, enter into certain acquisitions, repurchase equity
interests (as defined) or subordinated indebtedness, issue or sell equity
interests of the Company's subsidiaries (as defined), engage in mergers or
acquisitions, or engage in certain transactions with subsidiaries and
affiliates, and that otherwise restrict corporate activities.
<PAGE>
Customer Financing
Management believes that customer financing terms and leasing have become an
increasingly important competitive factor for the Gaming Equipment and Systems
and Wall Machine and Amusement Games business units, respectively. Competitive
conditions sometimes require Gaming Equipment and Systems to grant extended
payment terms on gaming machines, systems and other gaming equipment, especially
for sales in emerging markets. While these financings are normally
collateralized by such equipment, the resale value of the collateral in the
event of default may be less than the amount financed. Accordingly, the Company
will have greater exposure to the financial condition of its customers in
emerging markets than has historically been the case in established markets like
Nevada and Atlantic City. Bally Wulff provides customer financing for
approximately 15% of its sales and also provides lease financing to its
customers. Lease terms are generally for six months, but are also available for
12 and 43 month terms.
Year 2000
The Year 2000 readiness issue, which is common to most businesses, arises from
the inability of information systems, and other time and date sensitive products
and systems, to properly recognize and process date-sensitive information on and
beyond January 1, 2000. The result could create errors in information or system
failures. Assessments of the potential cost and effects of Year 2000 issues vary
significantly among businesses, and it is extremely difficult to predict the
actual impact. Recognizing this uncertainty, management has and is continuing to
actively analyze, assess and plan for various Year 2000 issues across its
businesses.
The Year 2000 issue has an impact on both information technology ("IT") systems
and non-IT systems, such as its manufacturing systems and physical facilities
including, but not limited to, security systems and utilities. Although
management believes that a majority of the Company's IT systems are Year 2000
ready, such systems still have to be tested for Year 2000 readiness. The Company
plans to replace or upgrade those systems that are identified as non-Year 2000
ready during calendar 1999. Certain IT systems previously identified as non-Year
2000 compliant are being upgraded or replaced which should be complete by June
30, 1999. Non-IT system issues are more difficult to identify and resolve. The
Company is actively identifying non-IT Year 2000 issues concerning its products
and services, as well as its physical facility locations. As non-IT areas are
identified, management formulates the necessary actions to ensure minimal
disruption to its business processes. Management has engaged outside consultants
to assist and advise management in this assessment process and the consultant's
final report and recommendation is forthcoming. Although management believes
that its efforts will be successful and the costs will be immaterial to its
consolidated financial position and results of operations, it also recognizes
that any failure or delay could cause a disruption in its business and have a
significant financial impact. To minimize this potential impact, the Company is
actively planning and designing a contingency plan to support critical business
processes.
The Company has also initiated efforts to ensure the Year 2000 readiness of its
products and services. The Company is actively evaluating its strategy and legal
obligations for any communication to its customers. As part of its assessment of
current products and services, the Company is currently upgrading all Bally
Systems SDS customers to version 7.0 software, for which the Company has
developed a Year 2000 compliance "patch" which is currently being distributed.
The Company plans to have all customers upgraded to version 7.0 by December
1998, and have the patch installed by July 1999. The Company is currently
shipping version 7.1 of the software, which is also Year 2000 compliant.
Customers are also being advised that the IBM or Unix operating systems they are
using must also be upgraded to versions that are Year 2000 compliant. Bally
Systems has obtained the operating system upgrades from the vendors and has
offered to assist users in installing the upgrade. The Company has also tested
most of the products manufactured in the United States and Germany in recent
years to determine compliance with Year 2000 and plans to advise customers what,
if any, non-compliance issues exist before December 31, 1998.
Based upon the results of research and investigation, management will formulate
further plans as necessary. The Year 2000 readiness of its customers varies, and
the Company is encouraging its customers to evaluate and prepare their own
systems. These efforts by customers to address Year 2000 issues may affect the
demand for certain products and services; however, the impact to the revenue or
any change in revenue patterns is highly uncertain.
The Company has also initiated efforts to assess the Year 2000 readiness of its
key suppliers and business partners. The Company's direction in this effort is
to ensure the adequacy of resources and supplies to minimize any potential
business interruptions. Management plans to complete this part of its Year 2000
readiness plan in the earlier part of calendar 1999. As part of the Company's
contingency plans, management will begin to identify and solidify relationships
with and access to alternative suppliers and resources to ensure the support and
continuation of its critical business operations.
The Year 2000 issue presents a number of other risks and uncertainties that
could impact the Company, such as public utility failures, potential claims
against it for damages arising from products and services that are not Year 2000
compliant, and the response ability of certain government and gaming commissions
of the various jurisdictions where the Company conducts business. While the
Company continues to believe the Year 2000 issues described above will not
materially affect its consolidated financial position or results of operations,
it remains uncertain as to what extent, if any, the Company may be impacted.
Euro Currency Conversion
The Company's Bally Wulff subsidiary uses the German duetschmark as its
functional currency. The new Euro currency will replace the duetschmark as well
as most other European currencies after a phase in period which begins January
1, 1999. As most of Bally Wulff's transactions are within Germany, the switch to
the Euro is not expected to have a material impact on revenues, expenses or
income. The Company's products can be brought into Euro compliance by moving a
switch inside the wall machine. The cost of the new front glass showing Euro
denominations will be borne be the customers.
The Company currently has borrowings outstanding on its line of credit facility,
a portion of which has a floating rate of interest tied to the Euro duetschmark
rate. Upon the full implementation of the Euro, as of January 1, 2002, the
interest rate will be tied to this new index. The impact of the change in this
index, if any, is not known and can not be quantified at this time.
<PAGE>
Results of Operations:
Three Months Ended September 30, 1997 and 1998
General
The Company operates through four business units: (i) gaming equipment and
systems, (ii) wall machines and amusement games (consisting of the manufacture
and distribution of wall-mounted gaming machines and distribution of other
recreational and amusement machines), (iii) route operations and (iv) casino
operations.
The following tables set forth the combined revenues and operating income (loss)
for the four business units for the three months ended September 30, 1997 and
1998:
1997 1998
(In 000's)
Revenues:
Bally Gaming and Systems $ 27,167 $ 21,942
Wall Machines and Amusement Games 21,061 20,611
Route Operations 35,655 40,004
Casino Operations 14,088 16,214
------- -------
Total Revenues $ 97,971 $ 98,771
======== ========
Operating income (loss):
Bally Gaming and Systems $ 1,871 $ 147
Wall Machines and Amusement Games 1,444 2,157
Route Operations 4,388 3,076
Casino Operations 3,754 4,862
Corporate and Other (4,013) (3,932)
------ ------
Total operating income: $ 7,444 $ 6,310
======= =======
Bally Gaming and Systems
For the quarter ended September 30, 1998, Bally Gaming and Systems business unit
reported revenues of $21.9 million, a decrease of 19% compared to revenues of
$27.2 million in the prior year quarter. Bally Gaming reported unit sales of
approximately 2,100 new gaming machines, a decrease of 50% compared to unit
sales of approximately 4,200 in the prior year quarter. By market segment, Bally
Gaming's unit sales for the quarter consisted of approximately 900 units to the
Nevada and Atlantic City markets, 1,100 units to international markets and 100
units to riverboats, Native American and other domestic markets. The decrease in
number of units shipped resulted from fewer new casino openings and lower
replacement demand from existing casinos. Bally Gaming reported revenues from
the sale of new gaming machines of $11.4 million, a decrease of 44% compared to
$20.5 million in the prior year quarter due to lower unit volume, partially
offset by a 13% increase in average selling prices over the prior year quarter.
Bally Systems reported revenues of $4.7 million, an increase of 41% compared to
revenues of $3.3 million in the prior year quarter.
For the quarter ended September 30, 1998, gross profit margins improved to 46%
from 40% in the prior year quarter. The gross margin improvement resulted
primarily from a change in the mix of product sales to higher margin products, a
greater percentage of higher margin Systems revenues and lower provisions for
inventory obsolescence in the current year quarter. Bally Gaming and Systems
reported operating income of $0.1 million compared to operating income of $1.9
million in the prior year quarter. The decrease in operating income resulted
primarily from lower revenues, higher selling, general and administrative
expenses and a $1.3 million increase in research and development costs resulting
from the Company's ongoing efforts to expand its new and existing product
offerings, partially offset by improved gross margins and a lower provision for
doubtful receivables.
Wall Machines and Amusement Games
For the quarter ended September 30, 1998, the Wall Machines and Amusement Games
business unit reported revenues of $20.6 million, a decrease of 2% compared to
revenues of $21.1 million in the prior year quarter. The revenue decrease
resulted primarily from a 12% decrease in unit shipments of new wall machines
and a 21% decrease in amusement game distribution revenues, partially offset by
a 51% increase in used wall machine revenues and a 4% increase in leased wall
machine revenues. The foreign currency fluctuation of the German mark versus the
U.S. dollar increased revenues and EBITDA by $0.5 million and $0.1 million,
respectively, during the 1998 quarter. The Company believes that the general
slowdown in the German economy has resulted in customers acquiring only enough
units to replace those units whose licenses are expiring, and deferring
purchases of other equipment.
Wall Machines and Amusement Games continued to expand its leasing program
whereby new wall machines are leased to customers pursuant to operating leases.
These leases provide Wall Machines and Amusement Games with a stream of revenues
and cash flow over the life of the leases, which range from six months to three
and one half years. Wall Machines and Amusement Games experienced a 17% increase
in new units leased compared to the prior year quarter and a total of 4,500
machines are currently out on lease.
For the quarter ended September 30, 1998, gross profit margin decreased to 41%
from 45% in the prior year quarter This decrease was due to the unfavorable
impact of lower production at the manufacturing facility, partially offset by
the increase in higher margin lease revenues and a 1 percent increase in the
average selling price of new wall machines. Wall Machines and Amusement Games
reported operating income of $2.2 million, an increase of 49% compared to $1.4
million in the prior year quarter. The improvement resulted primarily from lower
selling, general and administrative expenses as the prior year quarter included
additional expenses for a trade show, a lower provision for doubtful receivables
resulting from an overall reduction in receivable balances and lower
depreciation expense, partially offset by the decrease in revenues and lower
gross margins.
Route Operations
For the quarter ended September 30, 1998, the Route Operations business unit
reported revenues of $40.0 million, an increase of 12% compared to revenues of
$35.7 million in the prior year quarter. Revenues for the Nevada operations
increased 13% as net win per gaming machine per day increased to $52.60 from
$52.40 in the prior year quarter, while the average number of gaming machines
increased to 7,140 from 6,340 in the prior year quarter primarily resulting from
the additional machines added as a result of taking over the contracts to
operate locations previously served by competitors. Industry-wide gaming
revenues in Northern Nevada have declined from the prior year period and except
for Gamblers Bonus locations, this has caused the Company to experience a
decrease in the net operating margins in this area of the state. Revenues and
net operating margins continue to be strong in Southern Nevada, particularly in
Gamblers Bonus locations. As of September 30, 1998, the Gamblers Bonus product
was installed in approximately 2,160 gaming machines at over 180 locations
statewide or 30% of its installed base of gaming machines. Revenues for the
Louisiana operations increased 5% as net win per gaming machine per day
increased to $77.00 from $74.80 in the prior year quarter and an increase in the
average number of gaming machines to 720 from 710 in the prior year quarter
For the quarter ended September 30, 1998, cost of revenues increased 14% to
$31.1 million compared to $27.2 million in the prior year quarter. As a
percentage of revenues, cost of revenues increased to 78% from 76% in the prior
year quarter. Nevada operations cost of revenues increased 16%, and as a
percentage of revenues increased to 80% from 78% in the prior year quarter
primarily due to the lower margins in the Northern Nevada route. Louisiana
operations cost of revenues increased 6%, and as a percentage of revenues
increased slightly to 65% from 64% in the prior year quarter, due to an increase
in direct costs. The Route Operations business unit reported operating income of
$3.1 million, a decrease of 30% compared to operating income of $4.4 million in
the prior year quarter. The decrease in operating income resulted primarily due
to higher direct costs, higher selling, general and administrative expenses and
an increase in depreciation from an increase in the number of gaming machines
deployed, partially offset by higher revenues.
Casino Operations
For the quarter ended September 30, 1998, the Casino Operations business unit
reported revenues of $16.2 million, an increase of 15% compared to revenues of
$14.1 million in the prior year quarter. This increase was driven by a 20%
increase at the Rainbow Hotel Casino. The improvement at the Rainbow Hotel
Casino was attributable to an increase in the average gaming machine net win per
day of 8% to $153 from $142 in the prior year quarter coupled with a 14%
increase in the average number of gaming machines. Revenues remained relatively
flat at the Rail City Casino between periods as an increase in the average
gaming machine net win per day of 7% (to $59 from $55 in the prior year quarter)
and an 7% increase in the average number of gaming machines were mostly offset
by a lower number of table games and a decrease in win per table game position
combined with lower food and beverage revenues.
For the quarter ended September 30, 1998, the cost of revenues for Casino
Operations increased 9% to $6.8 million compared to $6.3 million in the prior
year quarter but, as a percentage of revenues, improved to 42% from 44% in the
prior year quarter due primarily to the achievement of higher revenues without a
corresponding increase in direct gaming costs. The Casino Operations business
unit reported operating income of $4.9 million, an increase of 30% compared to
operating income of $3.8 million in the prior year quarter. The increase in
operating income resulted from the increase in revenues, the improvement in
operating costs as a percentage of revenues and an improvement in selling,
general and administrative expenses as a percentage of revenues, partially
offset by an increase in depreciation from an increase in the number of gaming
machines at both casinos.
Earlier this year, the independently owned and operated hotel adjacent to the
Rainbow Casino changed its name to the Rainbow Hotel. To further enhance the
Company's brand, the casino and hotel are now marketed as the Rainbow Hotel
Casino.
Consolidated
Total revenues for the quarter ended September 30, 1998, were $98.8 million, an
increase of 1% compared to revenues of $98.0 million in the prior year quarter.
The increase is primarily due to the aforementioned increases at the Route
Operations and Casino Operations business units, partially offset by decreases
in Bally Gaming and Systems and Wall Machines and Amusement Games business
units.
Cost of revenues for the quarter ended September 30, 1998, were $61.9 million,
an increase of 1% compared to $61.3 million in the prior year quarter. Cost of
revenues as a percentage of total revenues remained flat at 63% from the prior
year quarter as increases in Wall Machines and Amusement Games and the Route
Operations business units were offset by improvements in costs as a percentage
of revenues at the Bally Gaming and Systems and the Casino Operations business
units.
Selling, general and administrative expenses for the quarter ended September 30,
1998 were approximately $21.0 million, a decrease 2% compared to costs of $21.4
million for the prior year quarter. This decrease is due to a decrease in
expenses at the Wall Machines and Amusement Games business unit, a 10% decrease
in Corporate expenses, partially offset by increases in expenses at the Bally
Gaming and Systems, the Route operations and the Casino Operations business
units.
Research and development costs for the quarter ended September 30, 1998 were
approximately $4.2 million, an increase of 46% compared to costs of $2.9 million
in the prior year. This increase is due to increases in costs at the Bally
Gaming and Systems and the Wall Machines and Amusement Games business units.
Net Interest Expense and Income Taxes
Net interest expense in the three months ended September 30, 1998 increased to
$7.7 million from $5.8 million in the 1997 quarter. The increase is primarily
due to higher interest costs which resulted from the additional debt taken on in
the refinancing transaction which was completed in September 1997 and a higher
average amount of working capital borrowings in the current quarter, partially
offset by the elimination of interest on the 12 7/8% Senior Secured Notes.
The Company recorded an income tax provision of $0.2 million in the quarter
ended September 30, 1998 compared to an income tax provision of $0.5 million in
the prior fiscal year quarter. The provision is primarily due to income taxes
related to the Bally Wulff entities and state income taxes.
* * * * *
The information contained in this Form 10-Q may contain "forward-looking"
statements within the meaning of section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1933, as amended, and is
subject to the safe harbor created thereby. Such information involves important
risks and uncertainties that could significantly affect results in the future
and, accordingly, such results may differ from those expressed in any forward
looking statements herein. Future operating results may be adversely affected as
a result of a number of factors such as the Company's high leverage, its holding
company structure, its operating history and recent losses, competition, risks
of product development, customer financing, sales to non-traditional gaming
markets, foreign operations, dependence on key personnel, strict regulation by
gaming authorities, gaming taxes and value added taxes, uncertain effect of
National Gambling Commission, and other risks including Year 2000 issues, as
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
<PAGE>
PART II
Item 1. Legal Proceedings
See "Notes to Unaudited Condensed Consolidated Financial Statements-5.
Legal Proceedings" for a description of certain legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11 Computation of per share amounts
27 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
ALLIANCE GAMING CORPORATION
(Registrant)
By /s/ Morris Goldstein
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Scott D. Schweinfurth
Sr. Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
EXHIBIT 11
Earnings per share computations (unaudited)
(In 000's except share data)
<TABLE>
<CAPTION>
Restated
Three Months ended
September 30, 1997
Income (Loss) Shares Per share
(Numerator) (Denominator) Amounts
<S> <C> <C> <C>
Net loss before extraordinary item $(18,876)
Less: Special stock dividends and redemption
premium on series B Special Stock (18,953)
Basic EPS
Net loss before extraordinary item $(37,829) 31,853 $(1.19)
Extraordinary loss (42,033) 31,853 (1.32)
Net loss applicable to common shares $(79,862) 31,853 $(2.51)
Effect of Dilutive Securities (a)
Stock options --
Warrants --
Convertible preferred stock dividends --
-------- ------
Dilutive EPS
Net loss applicable to common shares
with assumed conversions $(79,862) 31,853 $(2.51)
======== ====== ======
</TABLE>
Three Months ended
September 30, 1998
Income Shares Per share
(Numerator) (Denominator) Amounts
Basic EPS
Net loss applicable to common shares $(2,682) 32,982 $(0.08)
======
Effect of Dilutive Securities (a)
Stock options --
Warrants --
Convertible preferred stock dividends --
------ ------
Dilutive EPS
Net loss applicable to Common Shares
with assumed conversions $(2,682) 32,982 $(0.08)
======= ====== ======
cont.
(a) The following securities were in-the-money as of the period end but were
not included in the computation of diluted earnings per share because to do
so would have been antidilutive for the periods presented:
For the three months ended
September 30,September 30,
1998 1997
(in 000s)
Stock options 38 3,930
Warrants - 2,000
--- -----
38 5,930
Adjusted for application
of the treasury stock method 38 1,450
=== =====
Under the treasury stock method, the assumed net proceeds from the exercise of
the weighted average number of common stock equivalents outstanding during
the period are assumed to be used to repurchase common stock at its average
market price during the period. Such repurchase of common stock reduces the
dilutive effect of the common stock equivalents.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information excerpted from Form 10-Q
for the three months ended 9/30/98
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 26,916
<SECURITIES> 0
<RECEIVABLES> 99,419
<ALLOWANCES> 11,909
<INVENTORY> 47,395
<CURRENT-ASSETS> 171,000
<PP&E> 139,931
<DEPRECIATION> 53,553
<TOTAL-ASSETS> 369,093
<CURRENT-LIABILITIES> 44,584
<BONDS> 0
0
14,127
<COMMON> 3,426
<OTHER-SE> (32,975)
<TOTAL-LIABILITY-AND-EQUITY> 369,093
<SALES> 42,553
<TOTAL-REVENUES> 98,771
<CGS> 23,908
<TOTAL-COSTS> 61,853
<OTHER-EXPENSES> 30,961
<LOSS-PROVISION> (353)
<INTEREST-EXPENSE> 7,903
<INCOME-PRETAX> (2,092)
<INCOME-TAX> 184
<INCOME-CONTINUING> (2,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,682)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
