UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-4281
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0104066
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6601 S. Bermuda Rd.
Las Vegas, Nevada 89119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (702) 270-7600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The number of shares of Common Stock, $0.10 par value, outstanding as of
February 1, 1999 according to the records of the registrant's registrar and
transfer agent was 9,790,597.
<PAGE>
ALLIANCE GAMING CORPORATION
FORM 10-Q
For the Quarter Ended December 31, 1998
I N D E X
PART I. FINANCIAL INFORMATION Page
Item 1. Unaudited Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1998 3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended December 31, 1997 and 1998 4
Unaudited Condensed Consolidated Statements of Operations
for the six months ended December 31, 1997 and 1998 5
Unaudited Condensed Consolidated Statements of Stockholders'
Deficiency for the six months ended December 31, 1998 6
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 1997 and 1998 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
<PAGE>
PART I
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In 000's, except share data)
June 30, Dec. 31,
1998 1998
ASSETS
Current assets:
Cash and cash equivalents $ 23,487 $20,518
Accounts and notes receivable, net of allowance for
doubtful accounts of $11,932 and $11,756 93,459 83,232
Inventories, net of reserves of $6,797 and $5,997 42,418 47,262
Other current assets 11,711 7,733
-------- --------
Total current assets 171,075 158,745
------- -------
Long-term notes receivable, net of allowance for doubtful
accounts of $1,109 and $996 7,931 7,528
Leased equipment, net of accumulated depreciation of
$4,020 and $3,758 7,325 7,813
Property, plant and equipment, net of accumulated
depreciation of $46,090 and $52,815 77,905 78,979
Excess of costs over net assets of acquired businesses,
net of accumulated amortization of $3,199 and $4,223 59,952 60,619
Intangible assets, net of accumulated amortization of
$13,358 and $15,611 26,732 27,158
Other assets, net 15,917 14,515
------- -------
Total assets $366,837 $355,357
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 10,477 $ 13,295
Accrued liabilities 39,122 34,927
Current maturities of long-term debt 1,996 1,989
------ ------
Total current liabilities 51,595 50,211
------- -------
Term loan facilities 137,800 134,600
Senior Subordinated Notes due 2007, net 149,245 149,272
Other long-term debt, less current maturities 36,912 31,499
Other liabilities 12,718 12,590
------ ------
Total liabilities 388,270 378,172
Minority interest 2,315 1,978
Commitments and contingencies Stockholders' deficiency:
Special Stock, 10,000,000 shares authorized:
Series E, $100 liquidation value; 137,317 shares
and 145,326 shares issued and outstanding 13,732 14,532
Common Stock, $.10 par value; 50,000,000 shares
authorized; 9,178,000 shares and 9,790,000 shares
issued and outstanding 3,212 3,426
Additional paid-in capital 122,980 127,544
Accumulated other comprehensive loss (13,946) (7,712)
Accumulated deficit (149,726) (162,583)
-------- -------
Total stockholders' deficiency (23,748) (24,793)
------- -------
Total liabilities and stockholders' deficiency $366,837 $355,357
======== ========
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except per share data)
Three Months Ended December 31,
1997 1998
Revenues:
Gaming equipment and systems $ 27,455 $ 22,499
Wall machines and amusement games 27,731 23,769
Route operations 37,040 42,750
Casino operations 14,488 14,892
------- -------
106,714 103,910
Costs and expenses:
Cost of gaming equipment and systems 15,333 13,394
Cost of wall machines and amusement games 15,165 14,674
Cost of route operations 28,635 33,516
Cost of casino operations 6,271 6,504
Selling, general and administrative 23,158 27,866
Research and development 3,446 3,976
Depreciation and amortization 5,809 5,757
Unusual items (2,545) -
------ -------
95,272 105,687
Operating income (loss) 11,442 (1,777)
Other income (expense):
Interest income 210 141
Interest expense (7,497) (7,502)
Minority interest (446) (509)
Other, net 64 (355)
----- -------
Income (loss) before income taxes 3,773 (10,002)
Income tax (provision) benefit (427) 245
------ ------
Net income (loss) 3,346 (9,757)
Special Stock dividends (373) (418)
------ -------
Net income (loss) applicable to common shares $2,973 $(10,175)
====== =========
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share $ 0.33 $(1.04)
====== =======
Diluted earnings (loss) per share $ 0.31 $(1.04)
====== =======
Weighted average common shares outstanding 9,135 9,789
Weighted average common and common share equivalents
outstanding 9,731 9,789
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except share data)
Six Months Ended December 31,
1997 1998
Revenues:
Gaming equipment and systems $ 54,622 $44,441
Wall machines and amusement games 48,792 44,380
Route operations 72,695 82,754
Casino operations 28,576 31,106
------- -------
204,685 202,681
Costs and expenses:
Cost of gaming equipment and systems 31,569 25,234
Cost of wall machines and amusement games 26,733 26,742
Cost of route operations 55,823 64,645
Cost of casino operations 12,531 13,320
Selling, general and administrative 44,562 48,903
Research and development 6,314 8,145
Depreciation and amortization 10,812 11,159
Unusual items (2,545) -
------- -------
185,799 198,148
Operating income 18,886 4,533
Other income (expense):
Interest income 441 373
Interest expense (13,566) (15,405)
Rainbow royalty (587) -
Rainbow royalty buyout (19,000) -
Minority interest (836) (1,048)
Other, net 52 (547)
------- -------
Loss before income taxes (14,610) (12,094)
Income tax (provision) benefit (920) 61
------ -------
Loss before extraordinary item (15,530) (12,033)
Extraordinary loss, without tax benefit (note 2) (42,033) -
-------- -------
Net loss (57,563) (12,033)
Special Stock dividends (note 2) (2,773) (824)
Premium on repurchase/redemption of Series B Special
Stock (16,553) -
Net loss applicable to common shares $(76,889) $(12,857)
Basic and diluted loss per share:
Loss before extraordinary item $(3.82) $(1.34)
Extraordinary loss (4.61) -
----- -----
Net loss $(8.43) $(1.34)
======= =======
Weighted average common shares outstanding 9,118 9,607
Weighted average common and common share equivalents
outstanding 9,118 9,607
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Six Months Ended December 31, 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 (Loss) Deficit Deficiency
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 137 $ 13,732 9,178 $ 3,212 $122,980 $(13,946) $(149,726) $(23,748)
Net loss -- -- -- -- -- -- (12,033) (12,033)
Shares issued upon exercise of
options and warrants -- -- 612 214 4,564 -- -- 4,778
Special Stock dividends 8 800 -- -- -- -- (824) (24)
Foreign currency translation
adjustment -- -- -- -- -- 6,234 -- 6,234
--- ------ ----- ----- ------- ------ -------- -------
Balances at December 31, 1998 145 $ 14,532 9,790 $ 3,426 $127,544 $ (7,712) $(162,583) $(24,793)
=== ======== ===== ======= ======== ========= ========== =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
Six Months Ended December 31,
1997 1998
Cash flows from operating activities:
Net loss $(57,563) $(12,033)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,812 11,159
Amortization of debt discounts 19 26
Extraordinary item 42,033 -
Write down of other assets 2,776 523
Gain on sale of assets (45) (25)
Provision for losses on (recovery of) doubtful
receivables (6,886) 922
Other 572 1,293
Net change in operating assets and liabilities:
Accounts and notes receivable 8,026 13,949
Inventories (754) (6,551)
Other current assets (347) 3,394
Accounts payable (6,994) 2,603
Accrued liabilities (3,803) (4,422)
------ ------
Net cash provided by (used in) operating activities (12,154) 10,838
Cash flows from investing activities:
Additions to property, plant and equipment (6,574) (5,476)
Proceeds from disposal of property and equipment 224 83
Additions to other long term assets (1,974) (3,216)
------ ------
Net cash used in investing activities (8,324) (8,609)
Cash flows from financing activities:
Refinancing fees and expenses (32,752) -
Capitalized debt issuance costs (11,456) -
Proceeds from issuance of long-term debt 303,734 -
Repayments of long-term debt (178,355) (4,099)
Net change in lines of credit 14,674 (6,200)
Repurchase/redemption of Series B Special Stock (77,568) -
Proceeds from exercise of stock options and warrants 473 4,778
------- ------
Net cash provided by (used in) financing activities 18,750 (5,521)
Effect of exchange rate changes on cash (149) 323
----- -----
Cash and cash equivalents:
Decrease for period (1,877) (2,969)
Balance, beginning of period 28,924 23,487
------ ------
Balance, end of period $27,047 $20,518
======= =======
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended December 31, 1997 and 1998
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring
adjustments, which management believes are necessary to present fairly the
financial position, results of operations and cash flows of Alliance Gaming
Corporation ("Alliance" or the "Company") for the respective periods
presented. The results of operations for an interim period are not
necessarily indicative of the results which may be expected for any other
interim period or for the year as a whole. The accompanying unaudited
interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes in the
Company's annual report on Form 10-K as amended for the year ended June 30,
1998. All intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying condensed consolidated financial statements at June 30,
1998 were derived from the audited consolidated financial statements, but do
not include all disclosures required under generally accepted accounting
principles. Certain reclassifications have been made to prior period
financial statements to conform with current period presentation.
2. DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION
Long-term debt at June 30, 1998 and December 31, 1998 consists of the
following:
June 30, Dec. 31,
1998 1998
(in 000's)
10% Senior Subordinated Notes due 2007, net of
unamortized discount of $755 and $728 $149,245 $149,272
Term loan facilities:
Tranche B Term Loan 74,438 72,642
Tranche C Term Loan 39,700 38,899
Delayed Draw Term Facility 25,000 24,459
Revolving Credit Facility 34,971 29,799
Other, secured by related equipment 2,599 2,289
------ ------
325,953 317,360
Less current maturities 1,996 1,989
------ ------
Long-term debt, less current maturities $323,957 $315,371
======== ========
In August 1997 the Company completed a refinancing transaction whereby the
Company repaid its 12 7/8% Senior Notes, repurchased its 15% Series B
Special Stock, and issued $150 million of Senior Subordinated Notes and
entered into bank financing of $230 million. The bank financing provides for
(i) term loans in the aggregate amount of up to $140 million, comprised of a
$75 million tranche with a 7 1/2-year term (the "Tranche B Term Loan"), a
$40 million tranche with an 8-year term (the "Tranche C Term Loan"), and a
$25 million tranche with a 7 1/2-year term (the "Delayed Draw Term Facility"
and together with the Tranche B Term Loan and the Tranche C Term Loan, the
"Term Loan Facilities"); and (ii) a $90 million revolving credit facility
(the "Revolving Credit Facility") with a 6-year term. Each of these credit
facilities are variable rate borrowings in accordance with a credit grid as
amended. The interest rates which are currently at the highest level of the
credit grid as amended and maturity dates are as follows:
<PAGE>
ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Six Months Ended December 31, 1997 and 1998
Interest Maturity
Rates Date
Tranche B Term Loan LIBOR + 3.25% January 31, 2005
Tranche C Term Loan LIBOR + 3.50% July 31, 2005
Delayed Draw Term Facility LIBOR + 3.25% January 31, 2005
Revolving Credit Facility LIBOR + 2.75% July 31, 2003
The Revolving Credit Facility also allows for German Deutschemark borrowings
at the euro deutschmark rate plus 2.75% (or 5.8% at December 31, 1998).
The bank facility is collateralized by substantially all domestic property
and is guaranteed by each domestic subsidiary of the U.S. Borrower and
German Subsidiaries (both as defined), other than the entity which holds the
Company's interest in its Louisiana operations and other non-material
subsidiaries (as defined), and secured by both a U.S. and German Pledge
Agreement (both as defined). The bank facility contains a number of
maintenance covenants and it and the Indenture have other significant
covenants that, among other things, restrict the ability of the Company and
certain of its subsidiaries to dispose of assets, incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, enter into certain acquisitions, repurchase equity interests
(as defined) or subordinated indebtedness, issue or sell equity interests of
the Company's subsidiaries (as defined), engage in mergers or acquisitions,
or engage in certain transactions with subsidiaries and affiliates, and that
otherwise restrict corporate activities. Due to the low amount of EBITDA
earned by the Company in the December 1998 quarter, the Company did not meet
the original financial covenants in the bank facility. The Company and the
banks have amended the current and future financial maintenance covenants in
the bank facility effective December 31, 1998 such that the Company is in
compliance with such covenants.
The Senior Subordinated Notes bear interest at 10%, are due in 2007, and are
general unsecured obligations of the Company, ranking subordinate in right
of payment to all Senior Debt (as defined) of the Company, including
indebtedness under the bank facility. The Senior Subordinated Notes will be
fully and unconditionally guaranteed on a joint and several senior
subordinated basis by all existing and future domestic Restricted
Subsidiaries (as defined) of the Company, subject to certain exceptions
including the partially-owned entities through which its Mississippi casino
and Louisiana route operations are conducted. The Subsidiary Guarantees (as
defined) are general unsecured obligations of the Guarantors, ranking
subordinate in right of payment to all Senior Debt of the Guarantors. The
Company will be able to designate other current or future subsidiaries as
Unrestricted Subsidiaries (as defined) under certain circumstances.
Unrestricted Subsidiaries will not be required to issue a Subsidiary
Guarantee and will not be subject to many of the restrictive covenants set
forth in the Indenture pursuant to which the Senior Subordinated Notes were
issued. The Indenture for the Company's Senior Subordinated Notes contains
various covenants, including limitations on incurrence of additional
indebtedness, on restricted payments and on dividend and payment
restrictions on subsidiaries. The Senior Subordinated Notes may not be
redeemed for the first five years. Upon the occurrence of a Change of
Control (as defined), the holders of the Senior Subordinated Notes will have
the right to require the Company to purchase their notes at a price equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
The refinancing transaction was completed in September 1997, and as a
result, the Company recorded an extraordinary loss of $42.0 million
consisting of the $27.7 million premium paid to repurchase the Senior
Secured Notes, the payment of related transaction fees and expenses, and the
charge-off of the unamortized debt discount and deferred financing fees.
There was no tax benefit recognized for the extraordinary item as a
valuation allowance was recorded to fully reserve the net operating losses
created. The Company also recorded a $19.0 million charge for the cost of
the Rainbow Royalty Buyout. Additionally, the Company recorded a $16.6
million charge to equity and a corresponding increase in the net loss
applicable to common shares for the difference between the carrying value
and the liquidation value of the Series B Special Stock, all of which was
redeemed on September 8, 1997 at the liquidation price of $100 per share,
plus accrued dividends.
3. INCOME TAXES
The Company's effective tax rate for the three and six months ended December
31, 1997 and 1998 differs from the statutory rate of 35% due to state income
taxes and the impact of taxes applicable to earnings of Bally Wulff. In
addition, losses at the Company's domestic subsidiaries add to the net
operating loss carryforwards for which, no benefit is recorded in the income
statement.
4. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is related to the unaudited condensed
consolidated statements of cash flows. For the six months ended December 31,
1997 and 1998, the Company recorded the following significant non-cash
items:
Six months ended December 31,
1997 1998
(In 000's)
Reclassify other assets to property, plant and
equipment $ 154 $ 242
Dividends for Series E and , for the 1997 period,
Series B Special Stock 2,773 824
Reclassify inventory to equipment 3,101 2,842
Translation rate adjustment 2,352 5,911
Reclassify other current assets to accrued liabilities - 672
5. LEGAL PROCEEDINGS
Litigation
On September 25, 1995, Bally Gaming International, Inc. ("BGII") was named
as a defendant in a class action lawsuit filed in Federal District Court in
Nevada, by Larry Schreirer on behalf of himself and all others similarly
situated. The plaintiffs filed suit against BGII and approximately 45 other
defendants. Each defendant is involved in the gaming business as a gaming
machine manufacturer, distributor, or casino operator. The class action
lawsuit arises out of alleged fraudulent marketing and operation of casino
video poker machines and electronic slot machines. The plaintiffs allege
that the defendants have engaged in a course of fraudulent and misleading
conduct intended to induce people into playing their gaming machines based
on a false belief concerning how those machines actually operate as well as
the extent to which there is actually an opportunity to win on any given
play. The plaintiffs allege that the defendants' actions constitute
violations of the Racketeer Influenced and Corrupt Organizations Act (RICO)
and give rise to claims of common law fraud and unjust enrichment. The
plaintiffs are seeking monetary damages in excess of $1.0 billion, and are
asking that any damage awards be trebled under applicable Federal law. The
case is in the discovery and motions stage. A trial date has not been set.
Management believes the plaintiffs' lawsuit to be without merit. The Company
intends to vigorously pursue all legal defenses available to it.
The Company is also a party to various lawsuits relating to routine matters
incidental to its business. Management does not believe that the outcome of
such litigation, including the matters above, in the aggregate, will have a
material adverse effect on the Company.
6. UNUSUAL ITEMS
In December 1997 the Company, Alpha Hospitality and General Electric Credit
Corporation settled certain customer notes receivable on which the Company
had certain recourse obligations. The Company contributed $2.5 million to
the final settlement with the holder of the notes, and reversed $6.0 million
of reserves previously established for these recourse obligations. In
addition, as part of the settlement the Company became the sole owner of
approximately 566,000 shares of Alpha Hospitality common stock which trades
on the NASDAQ Small Cap market. The Company is selling this stock within the
limitations provided for in the settlement agreement.
As a result of settling a dispute over the exclusive use of certain
technologies and changes in gaming regulations, the Company evaluated the
cash flow of certain of its technology assets, in accordance with the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-lived Assets to
be Disposed of," and determined certain items met the definition of having
become impaired. In December 1997 the Company recorded write-downs totaling
$2.8 million for these items, which amount is included in unusual items.
Additionally, the Company accrued $0.7 million for the present value of
contractual payments due to a former member of the board of directors who
was not re-elected to the board at the December 1997 annual shareholders
meeting.
7. COMPREHENSIVE INCOME (LOSS)
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting of comprehensive income (loss) and
its components; however, the adoption of SFAS had no impact on the Company's
net income (loss) or stockholders' deficiency. SFAS 130 requires the changes
in the cumulative translation adjustment account (which is a component of
stockholders' deficiency) to be included as a component of other
comprehensive income (loss).
During the six months ended December 31, 1997 and 1998, total accumulated
comprehensive income (loss) amounted to $(2.5) million and $6.2 million,
respectively.
8. REVERSE STOCK SPLIT
On January 14, 1999 the Company's Board of Directors announced a one-for-3.5
reverse stock split of its Common Stock effective February 1, 1999 in order
to maintain the listing of the Company's Common Stock on the NASDAQ National
Market System. The effects of the reverse split were to reduce the
authorized number of common shares from 175.0 million to 50.0 million and to
decrease the number of shares of Common Stock outstanding from 34.3 million
to 9.8 million. In connection with the reverse split, the share number,
exercise price and the trigger prices, as applicable, for the Company's
stock options and warrants were proportionately adjusted. In lieu of
fractional shares resulting from the reverse split, stockholders will
receive a cash payment from the sale of the aggregate fractional shares on
the open market. The reverse split also impacted the conversion ratio on the
Company's Series E Special Stock. Each share of Series E Special Stock is
now convertible into 4.859 shares of Common Stock instead of 17.007 shares.
All share and per share data included in this report have been restated to
reflect the reverse split.
<PAGE>
9. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS
The following unaudited condensed consolidating financial statements are
presented to provide certain financial information regarding guaranteeing
and non-guaranteeing subsidiaries in relation to the Company's Senior
Subordinated Notes which were issued in the refinancing transaction (see
note 2). The financial information presented includes Alliance Gaming
Corporation (the "Parent") and its wholly-owned guaranteeing subsidiaries
(together the "Parent and Guaranteeing Subsidiaries"), and the
non-guaranteeing subsidiaries Video Services, Inc., United Gaming Rainbow,
BGI Australia Pty. Limited, Bally Gaming de Puerto Rico, Inc., and Alliance
Automaten GmbH & Co. KG (the subsidiary that holds the Company's German
interests) (together the "Non-Guaranteeing Subsidiaries"). The notes to
consolidating financial statements should be read in conjunction with these
consolidating financial statements.
<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, net 149,245 149,245
Other long-term debt, less current
maturities 105,279 20,878 (89,245) 36,912
Other liabilities 10,729 2,330 (341) 12,718
------- ------ ------ ------
Total liabilities 443,753 43,193 (98,676) 388,270
------- ------ ------- -------
Minority interest 2,315 2,315
Commitments and contingencies Stockholders'
equity (deficiency):
Series E Special Stock 13,732 13,732
Common Stock 3,212 17,832 (17,832) 3,212
Additional paid-in capital 122,980 68,700 (68,700) 122,980
Accumulated other comprehensive loss (13,946) (14,140) 14,140 (13,946)
Retained earnings
(accumulated deficit) (149,752) 31,827 (31,801) (149,726)
-------- ------ ------- --------
Total stockholders' equity
(deficiency) (23,774) 104,219 (104,193) (23,748)
------- ------- -------- -------
$422,294 $147,412 $(202,869) $366,837
======== ======== ========= ========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING BALANCE SHEETS
December 31, 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 $ 7,002 $ 13,516 $ $ 20,518
Accounts and notes receivable, net 34,423 52,470 (3,661) 83,232
Inventories, net 32,392 15,399 (529) 47,262
Other current assets 6,222 1,511 7,733
------ ------- ------ -------
Total current assets 80,039 82,896 (4,190) 158,745
------- ------- ------ -------
Long-term notes receivable, net 97,848 1,883 (92,203) 7,528
Leased equipment, net 7,813 7,813
Property, plant and equipment, net 46,363 32,616 78,979
Excess of costs over net assets of
acquired businesses, net 39,434 21,185 60,619
Intangible assets, net 26,652 506 27,158
Investment in subsidiaries 93,134 (93,134) -
Other assets, net 25,375 (10,362) (498) 14,515
------- ------- ------- -------
$408,845 $136,537 $(190,025) $355,357
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 10,276 $ 3,019 $ $ 13,295
Accrued liabilities 21,682 14,049 (804) 34,927
Current maturities of long-term debt 1,413 3,252 (2,676) 1,989
------ ------ ------ ------
Total current liabilities 33,371 20,320 (3,480) 50,211
------- ------- ------- -------
Term loan facilities 134,600 134,600
Senior Subordinated Notes, net 149,272 149,272
Other long-term debt, less current
maturities 103,866 20,303 (92,670) 31,499
Other liabilities 10,577 2,331 (318) 12,590
------- ------- ------- -------
Total liabilities 431,686 42,954 (96,468) 378,172
------- ------ ------- -------
Minority interest 1,978 1,978
Commitments and contingencies Stockholders' equity (deficiency):
Series E Special Stock 14,532 14,532
Common Stock 3,426 17,832 (17,832) 3,426
Additional paid-in capital 127,544 68,700 (68,700) 127,544
Accumulated other comprehensive loss (7,712) (7,910) 7,910 (7,712)
Retained earnings (accumulated
deficit) (162,609) 14,961 (14,935) (162,583)
-------- ------- ------- --------
Total stockholders' equity
(deficiency) (24,819) 93,583 (93,557) (24,793)
------- ------- -------- -------
$408,845 $136,537 $(190,025) $355,357
======== ======== ========= ========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 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 $26,611 $ 2,293 $(1,449) $ 27,455
Wall machines and amusement games 27,731 27,731
Route operations 31,950 5,090 37,040
Casino operations 3,439 11,049 14,488
------ ------ ------ ------
62,000 46,163 (1,449) 106,714
------ ------ ------ -------
Costs and expenses:
Cost of gaming equipment and systems 15,268 1,588 (1,523) 15,333
Cost of wall machines and amusement
games 15,165 15,165
Cost of route operations 25,324 3,311 28,635
Cost of casino operations 2,069 4,202 6,271
Selling, general and administrative 12,582 10,576 23,158
Research and development 2,691 755 3,446
Depreciation and amortization 3,459 2,350 5,809
Unusual items (2,545) (2,545)
------ ------ ------ ------
58,848 37,947 (1,523) 95,272
------ ------ ------ ------
Operating income 3,152 8,216 74 11,442
Earnings in consolidated subsidiaries 5,929 (5,929)
Other income (expense):
Interest income 340 96 (226) 210
Interest expense (7,265) (458) 226 (7,497)
Rainbow royalty 1,296 (1,296)
Minority interest (446) (446)
Other, net (33) 97 64
------ ------ ------ ------
Income before income taxes 2,973 6,655 (5,855) 3,773
Income tax benefit (provision) 298 (725) (427)
------ ------ ------ ------
Net income 3,271 5,930 (5,855) 3,346
Special Stock dividends (373) (373)
------ ------ ------ ------
Net income applicable to common shares $ 2,898 $ 5,930 $(5,855) $ 2,973
======= ======= ======== =======
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 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 $22,287 $ 3,005 $(2,793) $22,499
Wall machines and amusement games 23,769 23,769
Route operations 37,370 5,380 42,750
Casino operations 3,553 11,339 14,892
------ ------ ------ -------
63,210 43,493 (2,793) 103,910
Costs and expenses:
Cost of gaming equipment and systems 13,822 2,365 (2,793) 13,394
Cost of wall machines and amusement
games 14,674 14,674
Cost of route operations 29,894 3,622 33,516
Cost of casino operations 2,123 4,381 6,504
Selling, general and administrative 16,107 11,759 27,866
Research and development 3,178 798 3,976
Depreciation and amortization 3,743 2,014 5,757
------ ------ ------ -------
68,867 39,613 (2,793) 105,687
------ ------ ------ -------
Operating income (loss) (5,657) 3,880 (1,777)
Earnings in consolidated subsidiaries 2,149 (2,149)
Other income (expense):
Interest income 228 104 (191) 141
Interest expense (7,268) (425) 191 (7,502)
Rainbow royalty 1,333 (1,333)
Minority interest (509) (509)
Other, net (177) (178) (355)
------ ------ ------ ------
Income (loss) before income taxes (9,901) 2,048 (2,149) (10,002)
Income tax benefit 144 101 245
----- ------ ------ ------
Net income (loss) (9,757) 2,149 (2,149) (9,757)
Special Stock dividends (418) (418)
----- ------ ------ ------
Net income (loss) applicable to common
shares $(10,175) $2,149 $(2,149) $(10,175)
========= ====== ======== =========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 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 $53,134 $ 5,040 $ (3,552) $54,622
Wall machines and amusement games 48,792 48,792
Route operations 62,715 9,980 72,695
Casino operations 6,728 21,848 28,576
------ ------ ------ -------
122,577 85,660 (3,552) 204,685
------- ------- ------- --------
Costs and expenses:
Cost of gaming equipment and systems 31,548 3,631 (3,610) 31,569
Cost of wall machines and amusement
games 26,733 26,733
Cost of route operations 49,376 6,447 55,823
Cost of casino operations 4,167 8,364 12,531
Selling, general and administrative 23,785 20,777 44,562
Research and development 4,842 1,472 6,314
Depreciation and amortization 6,385 4,427 10,812
Unusual items (2,545) (2,545)
------- ------ ------ -------
117,558 71,851 (3,610) 185,799
------- ------- ------- -------
Operating income 5,019 13,809 58 18,886
Earnings in consolidated subsidiaries 9,127 (9,127)
Other income (expense):
Interest income 632 207 (398) 441
Interest expense (13,068) (896) 398 (13,566)
Rainbow royalty 1,976 (2,563) (587)
Rainbow royalty buyout (19,000) (19,000)
Minority interest (836) (836)
Other, net 31 21 52
------ ------ ------ -------
Income (loss) before income taxes (16,119) 10,578 (9,069) (14,610)
Income tax benefit (provision) 531 (1,451) (920)
------- ------- ------- -------
Net income (loss) before extraordinary
item (15,588) 9,127 (9,069) (15,530)
Extraordinary loss, without tax benefit(42,033) (42,033)
------- ------ ------ -------
Net income (loss) (57,621) 9,127 (9,069) (57,563)
Special Stock dividends (2,773) (2,773)
Premium on redemption of Series B
Special Stock (16,553) (16,553)
------- ------ ------ -------
Net income (loss) applicable to common
shares $(76,947) $ 9,127 $(9,069) $(76,889)
========= ======= ======== =========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 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 $42,458 $ 6,077 $ (4,094) $44,441
Wall machines and amusement games 44,391 (11) 44,380
Route operations 72,259 10,495 82,754
Casino operations 6,860 24,246 31,106
------ -------- ------- -------
121,577 85,209 (4,105) 202,681
------- -------- ------- --------
Costs and expenses:
Cost of gaming equipment and systems 24,613 4,715 (4,094) 25,234
Cost of wall machines and amusement
games 26,753 (11) 26,742
Cost of route operations 57,710 6,935 64,645
Cost of casino operations 4,162 9,158 13,320
Selling, general and administrative 27,969 20,934 48,903
Research and development 6,589 1,556 8,145
Depreciation and amortization 7,415 3,744 11,159
------ -------- ------- -------
128,458 73,795 (4,105) 198,148
-------- ------- ------- --------
Operating income (loss) (6,881) 11,414 4,533
Earnings in consolidated subsidiaries 7,251 (7,251)
Other income (expense):
Interest income 543 208 (378) 373
Interest expense (14,969) (814) 378 (15,405)
Rainbow royalty 2,840 (2,840)
Minority interest (1,048) (1,048)
Other, net (190) (357) (547)
------ ------ ------- ------
Income (loss) before income taxes (12,454) 7,611 (7,251) (12,094)
Income tax benefit (provision) 421 (360) 61
------ ------ ------- ------
Net income (loss) (12,033) 7,251 (7,251) (12,033)
Special Stock dividends (824) (824)
------ ------- ------- ------
Net income (loss) applicable to common
shares $(12,857) $ 7,251 $(7,251) $(12,857)
======= ===== ====== =======
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 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 $(26,736) $ 8,231 $ 6,351 $(12,154)
------- ------ ------ -------
Cash flows from investing activities:
Additions to property and equipment (4,415) (2,159) (6,574)
Proceeds from disposal of property and equipment 3 221 224
Other (1,827) (147) (1,974)
----- ---- ----- ------
Net cash used in investing activities (6,239) (2,085) (8,324)
------ ------ ----- ------
Cash flows from financing activities:
Refinancing fees and expenses (32,752) (32,752)
Capitalized new debt issue costs (11,456) (11,456)
Proceeds from long-term debt 303,734 7,279 (7,279) 303,734
Repayments of long-term debt (170,728) (8,555) 928 (178,355)
Net change in lines of credit 8,631 6,043 14,674
Redemption of Series B Special Stock (77,568) (77,568)
Proceeds from exercise of stock options 473 473
Dividends received (paid) 7,084 (7,084)
------- -------- -------- -------
Net cash provided by (used in) financing
activities 27,418 (2,317) (6,351) 18,750
------- -------- -------- -------
Effect of exchange rate changes on cash (149) (149)
------- -------- -------- -------
Cash and cash equivalents:
Increase (decrease) for period (5,557) 3,680 (1,877)
Balance, beginning of period 16,462 12,462 28,924
------- ------- ------- -------
Balance, end of period $10,905 $16,142 $ -- $27,047
======= ======= ======== =======
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 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 $(7,619) $19,743 $(1,286) $10,838
------ ------ ------ -------
Cash flows from investing activities:
Additions to property and equipment (4,227) (1,249) (5,476)
Proceeds from disposal of property and equipment 54 29 83
Additions to other long term assets (3,135) (81) (3,216)
------ ------ ------ ------
Net cash used in investing activities (7,308) (1,301) (8,609)
------- ------ ------ ------
Cash flows from financing activities:
Repayments of long-term debt (3,858) (1,527) 1,286 (4,099)
Net change in lines of credit (6,200) (6,200)
Proceeds from exercise of stock options and warrants 4,778 4,778
Dividends received (paid) 18,600 (18,600) -
------- ------- ------- -------
Net cash provided by (used in) financing
activities 13,320 (20,127) 1,286 (5,521)
------- ------- ------ -------
Effect of exchange rate changes on cash 323 323
------- ------- ------- -------
Cash and cash equivalents:
Decrease for period (1,607) (1,362) (2,969)
Balance, beginning of period 8,609 14,878 23,487
------ ------- -------
Balance, end of period $7,002 $13,516 $ -- $20,518
====== ======= ======== =======
</TABLE>
See accompanying unaudited note.
<PAGE>
Debt and Lines of Credit
Long-term debt and lines of credit at December 31, 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 $149,272 $149,272
Term loan facilities:
Tranche B Term Loan 72,642 72,642
Tranche C Term Loan 38,899 38,899
Delayed Draw Term Facility 24,459 24,459
Revolving Credit Facility 16,500 13,299 29,799
Intercompany notes payable 87,365 7,980 (95,345) -
Other 13 2,276 2,289
-------- ------- --------- -------
389,150 23,555 (95,345) 317,360
Less current maturities 1,413 3,252 (2,676) 1,989
------- ------- ------ -------
Long-term debt, less current
maturities $387,737 $20,303 $(92,669) $315,371
======== ======= ======== ========
</TABLE>
<PAGE>
ALLIANCE GAMING CORPORATION
FORM 10-Q
For the Quarter Ended December 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1998, based on the terms of the $90.0 million Revolving Credit
Facility, the Company would have been able to borrow $61.4 million, of which the
Company had borrowings of approximately $29.8 million outstanding. The borrowing
base for the revolving credit facility consists of eligible receivables and
inventory, as defined in the credit agreement.
At December 31, 1998, the Company had $20.5 million in cash and cash equivalents
and $31.6 million in unborrowed availability on its revolving credit facility
pursuant to the borrowing base limitations contained in the credit agreement. In
addition, the Company had working capital of approximately $108.5 million, a
decrease of approximately $11.0 million from June 30, 1998, which is explained
below. Consolidated cash and cash equivalents at December 31, 1998 includes
approximately $15.9 million of cash which is utilized in Casino and Route
Operations which is held in vaults, cages or change banks.
The Company is in compliance with the financial and operational covenants under
both the bank credit agreement as amended and the Indenture for the Senior
Subordinated Notes.
Management believes that cash flow from operating activities, cash and cash
equivalents held and the availability under the revolving credit facility will
provide the Company with sufficient capital resources and liquidity. At December
31, 1998, the Company did not have any significant commitments for capital
expenditures.
Working Capital
During the six months ended December 31, 1998, working capital decreased $11.0
million to $108.5 million. The primary fluctuations in working capital were: (i)
a decrease in accounts receivable resulting from cash collections and lower
revenues, (ii) an increase in inventory due to customer imposed delays in
shipping product and inventory manufactured in anticipation of new product sales
expected in the March 1999 quarter, (iii) a decrease in other current assets
resulting from amortizing prepaid expenses, (iv) a decrease in accrued
liabilities due to payments of accrued interest payable and a final payment in
settlement of litigation, (v) the impact of foreign exchange fluctuations
between the dollar and the deutschemark on all working capital categories, (vi)
increases in accounts payable based on the increase in inventory levels and
timing of payments, and (vii) the corresponding impact of the above listed items
on cash and cash equivalents.
Cash Flow
During the six months ended December 31, 1998, $10.8 million was provided from
operating activities resulting from a net decrease in accounts receivable, a
decrease in other current assets, an increase in accounts payable and increased
depreciation and amortization, partially offset by a net loss, an increase in
inventories primarily at Bally Gaming and Systems, and a decrease in accrued
expenses based on timing of interest payments.
During the six months ended December 31, 1998 the Company used $8.6 million of
cash in investing activities primarily resulting from $5.5 million in capital
expenditures, $2.0 million of payments made in acquiring the rights to
manufacture and distribute several gaming products, and $0.9 million of payments
in acquiring gaming rights of route locations.
During the six months ended December 31, 1998, $5.5 million was used by
financing activities primarily resulting from $10.3 million used to reduce the
Company's long-term debt, partially offset by the cash proceeds from the
exercise of certain warrants to purchase common stock.
The following is a summary of the Company's earnings before interest, taxes,
depreciation and amortization (EBITDA) by business unit:
Three Months Ending Six Months Ending
December 31, December 31,
1997 1998 1997 1998
(In $000's)
EBITDA by Business Unit:
Bally Gaming and Systems $ 2,781 $ (3,532) $ 5,927 $ (2,572)
Wall Machines and Amusement Games 5,210 1,287 7,811 4,432
Route Operations 6,048 6,035 12,382 11,713
Casino Operations 4,956 4,605 9,213 10,047
Corporate Administrative Expenses (4,289) (4,415) (8,180) (7,928)
Unusual Items 2,545 - 2,545 -
------- ------- ------- --------
EBITDA $17,251 $ 3,980 $29,698 $15,692
======= ======= ======= ========
The Company believes that the analysis of EBITDA is a useful adjunct to net
income, cash flow and other GAAP measurements. However, this information should
not be construed as an alternative to net income or any other GAAP measure of
performance as an indicator of the Company's performance or to GAAP-defined cash
flows generated by operating, investing and financing activities as an indicator
of cash flows or a measure of liquidity.
The bank credit facility is collateralized by substantially all domestic
property and is guaranteed by each domestic subsidiary of the U.S. Borrower and
German Subsidiaries (both as defined), other than the entity which holds the
Company's interest in its Louisiana operations and other non-material
subsidiaries (as defined), and secured by both a U.S. and German Pledge
Agreement (both as defined). The bank facility contains a number of maintenance
covenants and it and the indenture have other significant covenants that, among
other things, restrict the ability of the Company and certain of its
subsidiaries to dispose of assets, incur additional indebtedness, issue
preferred stock, pay dividends or make other distributions, enter into certain
acquisitions, repurchase equity interests (as defined) or subordinated
indebtedness, issue or sell equity interests of the Company's subsidiaries (as
defined), engage in mergers or acquisitions, or engage in certain transactions
with subsidiaries and affiliates, and that otherwise restrict corporate
activities. Due to the low amount of EBITDA earned by the Company in the
December 1998 quarter, the Company did not meet the financial covenants in the
Bank Credit Facility. The Company and the banks have amended the current and
future financial maintenance covenants in the bank facility effective December
31, 1998 such that the Company is in compliance with such covenants.
Customer Financing
Management believes that customer financing terms and leasing have become an
increasingly important competitive factor for the Bally Gaming and Systems and
Wall Machine and Amusement Games business units, respectively. Competitive
conditions sometimes require Gaming Equipment and Systems to grant extended
payment terms on gaming machines, systems and other gaming equipment, especially
for sales in emerging markets. While these financings are normally
collateralized by such equipment, the resale value of the collateral in the
event of default may be less than the amount financed. Accordingly, the Company
will have greater exposure to the financial condition of its customers in
emerging markets than has historically been the case in established markets like
Nevada and Atlantic City. Bally Wulff provides customer financing for
approximately 15% of its sales and also provides lease financing to its
customers. Lease terms are generally for six months, but are also available for
12 and 43 month terms.
Year 2000
The Year 2000 readiness issue, which is common to most businesses, arises from
the inability of information systems, and other time and date sensitive products
and systems, to properly recognize and process date-sensitive information on and
beyond January 1, 2000. The result could create errors in information or system
failures. Assessments of the potential cost and effects of Year 2000 issues vary
significantly among businesses, and it is extremely difficult to predict the
actual impact. Recognizing this uncertainty, management has and is continuing to
actively analyze, assess and plan for various Year 2000 issues across its
businesses.
The Year 2000 issue has an impact on both information technology ("IT") systems
and non-IT systems, such as its manufacturing systems and physical facilities
including, but not limited to, security systems and utilities. Although
management believes that a majority of the Company's IT systems are Year 2000
ready, such systems still have to be tested for Year 2000 readiness. The Company
plans to replace or upgrade those systems that are identified as non-Year 2000
ready during calendar 1999. Certain IT systems previously identified as non-Year
2000 compliant are being upgraded or replaced which should be complete by June
30, 1999. Non-IT system issues are more difficult to identify and resolve. The
Company is actively identifying non-IT Year 2000 issues concerning its products
and services, as well as its physical facility locations. As non-IT areas are
identified, management formulates the necessary actions to ensure minimal
disruption to its business processes. Management engaged outside consultants to
assist and advise management in its assessment process and received the
consultant's final report. The Company has already started to implement their
recommendations, such as establishing a centralized project management
organization to lead the Company through its Year 2000 efforts. This
organization will include dedicated outside resources and internal business
representatives. Although management believes that its efforts will be
successful and the costs will be immaterial to its consolidated financial
position and results of operations, it also recognizes that any failure or delay
could cause a disruption in its business and have a significant financial
impact. To minimize this potential impact, the Company is actively planning and
designing a contingency plan to support critical business processes.
The Company has also initiated efforts to ensure the Year 2000 readiness of its
products and services. As part of its assessment of current products and
services, the Company is currently upgrading all current Bally Systems SDS
customers to version 7.0 software, for which the Company has developed a Year
2000 compliance "patch" which is currently being distributed. The Company plans
to have all customers upgraded to version 7.0 with the patch by July 1999. The
Company is in the final stages of testing version 7.1 of the software, which
will be Year 2000 compliant. The Company expects to begin shipping and
distributing version 7.1 by March 1999. Customers are also being advised that
the IBM or Unix operating systems they are using must also be upgraded to
versions that are Year 2000 compliant. Bally Systems has obtained the operating
system upgrades from the vendors and has offered to assist users in installing
the upgrade. The Company has also tested most of the current products
manufactured in the United States and Germany in recent years to determine
compliance with Year 2000. The Company is actively evaluating its strategy and
legal obligations for any communication to its customers.
Management continues to formulate new plans and update existing plans as it
progresses in its research and investigation. The Year 2000 readiness of its
customers varies, and the Company is encouraging its customers to evaluate and
prepare their own systems. These efforts by customers to address Year 2000
issues may affect the demand for certain products and services; however, the
impact to the revenue or any change in revenue patterns is highly uncertain.
The Company has also initiated efforts to assess the Year 2000 readiness of its
key suppliers and business partners. The Company's direction in this effort is
to ensure the adequacy of resources and supplies to minimize any potential
business interruptions. Management plans to complete this part of its Year 2000
readiness plan in the early part of calendar 1999. As part of the Company's
contingency plans, management will begin to identify and solidify relationships
with and access to alternative suppliers and resources to ensure the support and
continuation of its critical business operations.
The Year 2000 issue presents a number of other risks and uncertainties that
could impact the Company, such as public utility failures, potential claims
against it for damages arising from products and services that are not Year 2000
compliant, and the responsibility of certain government and gaming commissions
of the various jurisdictions where the Company conducts business. While the
Company continues to believe the Year 2000 issues described above will not
materially affect its consolidated financial position or results of operations,
it remains uncertain as to what extent, if any, the Company may be impacted.
Euro Currency Conversion
The Company's Bally Wulff subsidiary uses the German deutschmark as its
functional currency. The new Euro currency will replace the deutschmark as well
as most other European currencies after a phase in period which began January 1,
1999. As most of Bally Wulff's transactions are within Germany, the switch to
the Euro is not expected to have a material impact on revenues, expenses or
income. The Company's products can be brought into Euro compliance by moving a
switch inside the wall machine. The cost of the new front glass showing Euro
denominations will be borne by the customers.
The Company currently has borrowings outstanding on its line of credit facility,
a portion of which has a floating rate of interest tied to the Euro deutschmark
rate. Upon the full implementation of the Euro, as of January 1, 2002, the
interest rate will be tied to this new index. The impact of the change in this
index, if any, is not known and can not be quantified at this time.
<PAGE>
Results of Operations:
General
The Company operates through four business units: (i) gaming equipment and
systems, (ii) wall machines and amusement games (consisting of the manufacture
and distribution of wall-mounted gaming machines and distribution of other
recreational and amusement machines), (iii) route operations and (iv) casino
operations.
The following tables set forth the combined revenues and operating income (loss)
for the four business units for the three months and six months ended December
31, 1997 and 1998:
Three Months Ending Six Months Ending
December 31, December 31,
1997 1998 1997 1998
(In $000's)
Revenues:
Bally Gaming and Systems $ 27,455 $ 22,499 $ 54,622 $ 44,441
Wall Machines and Amusement Games 27,731 23,769 48,792 44,380
Route Operations 37,040 42,750 72,695 82,754
Casino Operations 14,488 14,892 28,576 31,106
------- ------- ------- -------
Total Revenues $106,714 $103,910 $204,685 $202,681
======== ======== ======== ========
Operating Income (Loss):
Bally Gaming and Systems $ 1,655 $(4,454) $ 3,527 $ (4,307)
Wall Machines and Amusement Games 3,423 122 4,867 2,279
Route Operations 4,053 3,361 8,442 6,437
Casino Operations 4,447 4,023 8,199 8,885
Corporate Administrative Expenses (4,681) (4,829) (8,694) (8,761)
Unusual Items 2,545 - 2,545 -
------- ------- ------- -------
Total Operating Income (Loss) $11,442 $ (1,777) $18,886 $ 4,533
======= ========= ======= =======
Three Months Ended December 31, 1997 and 1998
Bally Gaming and Systems
For the quarter ended December 31, 1998, Bally Gaming and Systems business unit
reported revenues of $22.5 million, a decrease of 18% compared to revenues of
$27.5 million in the prior year quarter. Bally Gaming reported unit sales of
approximately 1,800 new gaming machines, a decrease of 47% compared to unit
sales of approximately 3,400 in the prior year quarter. By market segment, Bally
Gaming's unit sales for the quarter consisted of approximately 200 units to the
Nevada and Atlantic City markets, 1,200 units to international markets and 400
units to riverboats, Native American and other domestic markets. The decrease in
number of units shipped resulted from several customers delaying their delivery
requirements until the March 1999 quarter and a slowdown in replacement demand.
Bally Gaming reported revenues from the sale of new gaming machines of $8.9
million, a decrease of 49% compared to $17.5 million in the prior year quarter
due to lower unit volume and a 3% decrease in average selling prices over the
prior year quarter. Bally Systems reported revenues of $6.5 million, an increase
of 18% compared to revenues of $5.5 million in the prior year quarter.
For the quarter ended December 31, 1998, gross profit margins decreased to 41%
from 44% in the prior year quarter. The decrease was due principally to the
increase in international sales which traditionally have lower margins, and the
impact of lower utilization at the manufacturing facility, partially offset by a
greater percentage of higher margin Systems revenues. Bally Gaming and Systems
reported an operating loss of $4.5 million compared to operating income of $1.7
million in the prior year quarter. The decrease resulted from lower revenues, a
lower gross margin percentage, higher selling, general and administrative costs,
and higher research and development costs. Research and development costs
totaled $3.2 million, an increase of 18 percent over the prior year quarter,
resulting from the Company's ongoing efforts to expand its new and existing
product offerings. Selling, general and administrative expenses increased due to
higher marketing costs related to new product launches and the implementation of
a product management organization focus.
Wall Machines and Amusement Games
For the quarter ended December 31, 1998, the Wall Machines and Amusement Games
business unit reported revenues of $23.8 million, a decrease of 14% compared to
revenues of $27.7 million in the prior year quarter. The revenue decrease
resulted primarily from a 29% decrease in unit shipments of new wall machines
due to lower market demand, a 3% percent decrease in the average selling price
of new wall machines due to competitive pricing pressures, a 15% decrease in
amusement game distribution revenues and a 18% decrease in leased wall machine
revenues as discussed below. The foreign currency fluctuation of the German mark
versus the U.S. dollar increased revenues and EBITDA by $1.2 million and less
than $0.1 million, respectively, during the 1998 quarter.
Wall Machines and Amusement Games continued to develop its leasing program
whereby new and used wall machines and new and used amusement games are leased
to customers pursuant to operating leases. These leases provide Wall Machines
and Amusement Games with a stream of revenues and cash flow over the life of the
leases, which range from six months to three and one half years. Lease revenues
decreased as the total number of machines out on lease decreased by 15% between
quarters and the average monthly lease rate decreased by 13% due to competitive
pricing pressures.
For the quarter ended December 31, 1998, gross profit margin decreased to 38%
from 45% in the prior year quarter This decrease was due to the unfavorable
impact of lower average selling prices for new wall machines, higher volume of
trade-ins of used equipment on the sales of new wall machines and lower
utilization of the manufacturing facility. Wall Machines and Amusement Games
reported operating income of $0.1 million, compared to $3.4 million in the prior
year quarter. The decrease in operating income was primarily due to higher
selling, general and administrative expenses resulting from the costs of a trade
show as the prior year quarter did not include expenses for a trade show, costs
incurred with the change in management brought about by hiring a new president,
decreased revenues and lower gross margins, partially offset by lower
depreciation expense resulting from a lower installed base of leased equipment.
Route Operations
For the quarter ended December 31, 1998, the Route Operations business unit
reported revenues of $42.8 million, an increase of 15% compared to revenues of
$37.0 million in the prior year quarter. Revenues for the Nevada operations
increased 17% as net win per gaming machine per day increased to $55.50 from
$53.60 in the prior year quarter, while the average number of gaming machines
increased to 7,250 from 6,390 in the prior year quarter primarily resulting from
the additional machines added as a result of new locations and taking over the
contracts to operate locations previously served by competitors. Revenues
continue to be strong in Southern Nevada, particularly in Gamblers Bonus
locations. As of December 31, 1998, the Gamblers Bonus product was installed in
approximately 2,300 gaming machines at 200 locations statewide or 32% of its
installed base of gaming machines. Revenues for the Louisiana operations
increased 6% as net win per gaming machine per day increased to $78.90 from
$74.20 in the prior year quarter. The average number of gaming machines
increased slightly to 742 from 740.
For the quarter ended December 31, 1998, cost of revenues increased 17% to $33.5
million compared to $28.6 million in the prior year quarter. As a percentage of
revenues, cost of revenues increased to 78% from 77% in the prior year quarter.
Nevada route operations cost of revenues increased 18%, and as a percentage of
revenues increased to 80% from 79% in the prior year quarter primarily due to
the lower margins in the Northern Nevada route locations. Louisiana operations
cost of revenues increased 9%, and as a percentage of revenues increased
slightly to 67% from 65% in the prior year quarter due to an increase in direct
costs, primarily health insurance costs. The Route Operations business unit
reported operating income of $3.4 million, a decrease of 17% compared to
operating income of $4.1 million in the prior year quarter. The decrease in
operating income resulted primarily from higher direct costs, higher selling,
general and administrative expenses, primarily increased marketing costs and
salaries and wages and an increase in depreciation from an increase in the
number of gaming machines deployed, partially offset by higher revenues.
Casino Operations
For the quarter ended December 31, 1998, the Casino Operations business
unit reported revenues of $14.9 million, an increase of 3% compared to revenues
of $14.5 million in the prior year quarter. This increase was a result of 3%
increases at both the Rainbow Hotel Casino and the Rail City Casino. The
improvement at the Rainbow Hotel Casino was attributable to an increase in the
average gaming machine net win per day of 4% to $147 from $142 in the prior year
quarter coupled with a 3% increase in the average number of gaming machines,
partially offset by a lower number of table games. The number of gaming machines
decreased from the September 1998 quarter as a result of temporarily removing
machines as part of an internal remodeling project which will be completed
during the June 1999 quarter. The revenue improvement at the Rail City Casino
was attributable to an increase in the average gaming machine net win per day of
10% to $65 from $59 in the prior year quarter and a 3% increase in the average
number of gaming machines, partially offset by a lower number of table games and
lower food and beverage revenues.
For the quarter ended December 31, 1998, the cost of revenues for Casino
Operations increased 4% to $6.5 million compared to $6.3 million in the prior
year quarter but, as a percentage of revenues, remained stable at 43% between
quarters as costs increased proportionally with the increase in revenues. The
Casino Operations business unit reported operating income of $4.0 million, a
decrease of 9% compared to operating income of $4.4 million in the prior year
quarter. The decrease in operating income resulted from higher selling, general
and administrative expenses, primarily higher promotional and marketing costs at
the Rainbow Hotel Casino, and an increase in depreciation from an increase in
the number of gaming machines at both casinos, partially offset by the increase
in revenues.
Consolidated
Total revenues for the quarter ended December 31, 1998, were $103.9 million, a
decrease of 3% compared to revenues of $106.7 million in the prior year quarter.
The decrease is primarily due to the aforementioned increases at the Route
Operations and Casino Operations business units, more than offset by decreases
in Bally Gaming and Systems and Wall Machines and Amusement Games business
units.
Cost of revenues for the quarter ended December 31, 1998, were $68.1 million, an
increase of 4% compared to $65.4 million in the prior year quarter. Cost of
revenues as a percentage of total revenues increased to 65% from 61% in the
prior year quarter as increases at the Bally Gaming and Systems, the Wall
Machines and Amusement Games and the Route Operations business units were
partially offset by stable costs as a percentage of revenues at the Casino
Operations business unit.
Selling, general and administrative expenses for the quarter ended December 31,
1998 were approximately $27.9 million, an increase 20% compared to costs of
$23.2 million for the prior year quarter. This increase is due to increases in
expenses at all of the business units, and an increase in Corporate expenses.
Research and development costs for the quarter ended December 31, 1998 were
approximately $4.0 million, an increase of 15% compared to costs of $3.4 million
in the prior year. This increase is due to increases in costs at the Bally
Gaming and Systems and the Wall Machines and Amusement Games business units.
Depreciation and amortization for the quarter ended December 31, 1998 remained
constant at $5.8 million with the prior year quarter as increases at the Route
Operations and Casino Operations business units were offset by decreases at the
Bally Gaming and Systems and the Wall Machines and Amusement Games business
units.
Net Interest Expense and Income Taxes
Net interest expense in the three months ended December 31, 1998 increased to
$7.4 million from $7.3 million in the 1997 quarter. The increase is due
primarily to a higher average amount of working capital borrowings in the
current quarter, partially offset by lower interest rates. During the quarter,
the Company reduced its total indebtedness by $10 million, primarily by
principal repayments and reducing working capital borrowings.
The Company recorded an income tax benefit of $0.2 million in the quarter ended
December 31, 1998 compared to an income tax provision of $0.4 million in the
prior fiscal year quarter. The current quarter benefit is primarily due to tax
losses, which will be carried back for the Bally Wullf entities, partially
offset by various state income tax provisions.
Six Months Ended December 31, 1997 and 1998
Bally Gaming and Systems
For the six months ended December 31, 1998 the Bally Gaming and Systems business
unit reported revenues of $44.4 million, a decrease of 19% compared to revenues
of $54.6 million in the prior year period. Bally Gaming reported unit sales of
approximately 4,000 new gaming machines, a decrease of 48% compared to unit
sales of approximately 7,600 in the prior year period. By market segment, Bally
Gaming's unit sales for the period consisted of approximately 1,000 units to the
Nevada and Atlantic City markets, 2,300 units to international markets and 700
units to riverboats, Native American and other domestic markets. The decrease in
number of units shipped resulted primarily from lower replacement demand from
existing casinos, coupled with several customers delaying their delivery
requirements to the March 1999 quarter. Bally Gaming reported revenues from the
sale of new gaming machines of $20.9 million, a decrease of 45% compared to
$38.0 million in the prior year quarter due to lower unit volume partially
offset by a 5% increase in average selling price of new gaming machines. In
addition, Systems sales increased to $11.2 million compared to $8.8 million in
the prior year period.
For the six months ended December 31, 1998 gross profit margins improved to 43%
from 42% in the prior year period. The increase was due principally to a higher
proportion of higher margin System revenues partially offset by an increase in
lower margin international sales and the impact of lower utilization at the
manufacturing facility in the current year period. Bally Gaming and Systems
reported an operating loss of $4.3 million, compared to operating income of $3.5
million for the prior year period. The decrease in operating income resulted
primarily from lower revenues, higher selling, general and administrative
expenses, primarily higher marketing costs related to new product launches and
the implementation of a product management organization focus and higher
research and development costs, partially offset by improved gross margins.
Wall Machines and Amusement Games
For the six months ended December 31, 1998, the Wall Machines and Amusement
Games business unit reported revenues of $44.4 million, a decrease of 9%
compared to revenues of $48.8 million in the prior year period. The currency
translation impact of the fluctuation of the German mark versus the U.S. dollar
increased revenues by $1.7 million during the current year period. The revenue
decrease resulted primarily from a 22% decrease in unit shipments of new wall
machines due to lower market demand, a 7% decrease in leased wall machine
revenues due to a lower installed base of leased machines and a 15% decrease in
amusement game distribution revenues, partially offset by a 45% increase in used
wall machine revenues as a result of having a higher used machine inventory.
Wall Machines and Amusement Games continued to develop its leasing program
whereby new and used wall machines and new and used amusement games are leased
to customers pursuant to operating leases which provide Wall Machines and
Amusement Games with a stream of revenues and cash flow over the life of the
leases, which range from six months to three and one half years. Wall Machines
and Amusement Games experienced an 8% increase in units leased during the six
months ended December 31, 1998 compared to the prior year period and
approximately 4,800 machines are currently out on lease.
For the six months ended December 31, 1998, gross profit margin decreased to 40%
from 45% in the prior year period. The decrease in gross margin resulted
primarily from higher volume of trade-ins of used equipment on the sale of new
wall machines, higher fixed costs per unit due to lower sales volume and by a
decrease in higher margin lease revenues. Wall Machines and Amusement Games
reported operating income of $2.3 million compared to operating income of $4.9
million in the prior year period. The decrease in operating income resulted
primarily from the aforementioned decrease in revenues and lower gross margins,
partially offset by lower selling, general and administrative expenses.
Route Operations
For the six months ended December 31, 1998, the Route Operations business unit
reported revenues of $82.8 million, an increase of 14% compared to revenues of
$72.7 million in the prior year period. Nevada route operations revenues
increased 15% as net win per gaming machine per day increased 2% to $54.00 from
$53.00 in the prior year period, while the average number of gaming machines
increased 13% to 7,190 from 6,390 in the prior year period. The increase in the
average number of gaming machines in Nevada reflects the additional machines
added for new locations and taking over the contracts to operate locations
previously served by competitors. The improvement in net win per gaming machine
per day in Nevada resulted primarily from the continuing favorable impact of
Gamblers Bonus, a cardless slot player's club and player tracking system.
Louisiana route operations revenues increased 5% as net win per gaming machine
per day increased 5% to $78.00 from $74.50 in the prior year period and the
average number of gaming machines increased 1% to 730 machines.
For the six months ended December 31, 1998, Nevada route operations cost of
revenues increased 17% and, as a percentage of revenues, increased to 80% from
79% in the prior year period primarily due to lower margins in the northern
Nevada route and higher direct costs, primarily increased salaries and wages.
Louisiana route operations cost of revenues increased 8% and as a percentage of
revenues increased to 66% from 65% in the prior year period due to higher direct
costs, primarily increased health insurance costs. Route Operations reported
operating income of $6.4 million, a decrease of 24% compared to operating income
of $8.4 million in the prior year quarter. The decrease in operating income
resulted primarily by the increase in operating costs, an increase in selling,
general and administrative expenses due to increases in advertising and salaries
and wages, and an increase in depreciation expense as a result of the increase
in the number of gaming machines deployed, partially offset by the increase in
revenues.
Casino Operations
For the six months ended December 31, 1998, the Casino Operations business unit
reported revenues of $31.1 million, an increase of 9% compared to revenues of
$28.6 million in the prior year period. This increase reflects an 11% increase
at the Rainbow Hotel Casino and a 2% increase at the Rail City Casino. The
improvement at the Rainbow Hotel Casino was attributable to an increase in the
average gaming machine net win per day of 9% to $152 from $140 in the prior year
quarter coupled with a 6% increase in the average number of gaming machines. The
increase in revenues at the Rail City Casino resulted from an increase in the
average gaming machine net win per day of 8% to $62 from $57 in the prior year
quarter and a 3% increase in the average number of gaming machines, partially
offset by lower food and beverage revenues.
For the six months ended December 31, 1998, the cost of revenues for Casino
Operations increased 6% to $13.3 million compared to $12.5 million in the prior
year period but, as a percentage of revenues, improved to 43% from 44% in the
prior year period. Casino Operations reported operating income of $8.9 million,
an increase of 8% compared to operating income of $8.2 million in the prior year
period. The operating income improvement resulted from the aforementioned
increase in revenues and a decrease in the percentage of cost of revenues as a
percentage of revenues, partially offset by an increase in selling, general and
administrative expenses primarily due to higher promotion and marketing costs.
Consolidated
Total revenues for the six months ended December 31, 1998, were $202.7 million,
a decrease of 1% compared to revenues of $204.7 million in the prior year period
as the improvements at the Route Operations and Casino Operations business units
and were more than offset by decreases in revenues at the Bally Gaming and
Systems and Wall Machines and Amusement Games business units.
Cost of revenues for the six months ended December 31, 1998, were $129.9
million, an increase of 3% compared to $126.7 million in the prior year period.
Cost of revenues as a percentage of total revenues increased to 64% from 62% in
the prior year period as the improvements at the Bally Gaming and Systems and
Casino Operations business units were more than offset by increases at the Wall
Machines and Amusement Games and Route Operations business units.
Selling, general and administrative expenses for the six months ended December
31, 1998 were approximately $48.9 million, an increase of 10% compared to costs
of $44.6 million for the prior year quarter. This increase is due to an increase
in expenses at the Bally Gaming and Systems, the Route Operations and the Casino
Operations business units, partially offset by a decrease in expenses at the
Wall Machines and Amusement Games business unit and a decrease in Corporate
expenses.
Research and development costs for the six months ended December 31, 1998 were
approximately $8.1 million, an increase of 29% compared to costs of $6.3 million
in the prior year. This increase is due to increases in costs at the Bally
Gaming and Systems and the Wall Machines and Amusement Games business units.
Depreciation and amortization for the six months ended December 31, 1998 was
$11.2 million, a 3% increase compared to depreciation and amortization of $10.8
million in the prior year quarter as increases at the Route Operations and
Casino Operations business units were partially offset by decreases at the Bally
Gaming and Systems and the Wall Machines and Amusement Games business units.
Net Interest Expense and Income Taxes
Net interest expense in the six months ended December 31, 1998 increased to
$15.0 million compared to the net interest expense of $13.1 million in the prior
year period. The increase is due primarily to higher interest costs which
resulted from the additional debt taken on in the Refinancing Transaction
completed in September 1997 and a higher average amount of working capital
borrowings in the current period, partially offset by the elimination of
interest on the 12 7/8% Senior Secured Notes and lower interest rates.
The Company recorded an income tax benefit of $0.1 million in the six months
ended December 31, 1998 compared to a provision of $0.9 million in the prior
year period. The current year benefit is due primarily to tax losses, which will
be carried back for the Bally Wulff entities, partially offset by various state
income tax provisions.
* * * * *
The information contained in this Form 10-Q may contain "forward-looking"
statements within the meaning of section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1933, as amended, and is
subject to the safe harbor created thereby. Such information involves important
risks and uncertainties that could significantly affect results in the future
and, accordingly, such results may differ from those expressed in any forward
looking statements herein. Future operating results may be adversely affected as
a result of a number of factors such as the Company's high leverage, its holding
company structure, its operating history and recent losses, competition, risks
of product development, customer financing, sales to non-traditional gaming
markets, foreign operations, dependence on key personnel, strict regulation by
gaming authorities, gaming taxes and value added taxes, uncertain effect of
National Gambling Commission, and other risks including Year 2000 issues, as
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
<PAGE>
PART II
Item 4. Submission of Matters to a Vote of Security Holders
On December 3, 1998, the Company held its annual shareholders meeting
at which the shareholders were asked to vote on the election of two
directors. Of the 34,261,167 shares of common stock outstanding,
18,990,871 shares were voted for, and 10,450,459 withheld from Mr.
Jacques Andre; 18,990,851 shares were voted for, and 10,450,479
withheld from Mr. Michael Hirschfeld.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
4. (ii) Second Amendment to the Credit Agreement.
11 Computation of per share amounts
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
<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 4.(ii)
Second amendment to credit agreement
SECOND AMENDMENT
SECOND AMENDMENT (this "Amendment"), dated as of January 27, 1999, among
ALLIANCE GAMING CORPORATION, a Nevada corporation (the "U.S. Borrower"), BALLY
WULFF VERTRIEBS GMBH, a company with limited liability organized under the laws
of the Federal Republic of Germany ("Bally Wulff Vertriebs"), BALLY WULFF
AUTOMATEN GMBH, a company with limited liability organized under the laws of the
Federal Republic of Germany ("Bally Wulff Automaten" and, together with Bally
Wulff Vertriebs, the "German Borrowers," and each a "German Borrower" and the
German Borrowers, together with the U.S. Borrower, the "Borrowers," and each a
"Borrower"), the financial institutions party to the Credit Agreement referred
to below (the "Lenders") and CREDIT SUISSE FIRST BOSTON, as Administrative
Agent. Unless otherwise defined herein, all capitalized terms used herein and
defined in the Credit Agreement referred to below are used herein as so defined.
W I T N E S S E T H : WHEREAS, the Borrowers, the Lenders and the Administrative
Agent are parties to a Credit Agreement, dated as of August 8, 1997 (as amended,
modified or supplemented through, but not including, the date hereof the "Credit
Agreement"); WHEREAS, the parties hereto wish to amend the Credit Agreement as
herein provided; NOW, THEREFORE, it is agreed:
1. Section 9.05(xx) of the Credit Agreement is hereby amended by inserting the
following proviso at the end of such Section 9.05(xx):
", provided that from and after the Second Amendment
Effective Date, neither the U.S. Borrower nor any of its Subsidiaries may make
Investments pursuant to this clause (xx) in aggregate amount in excess of
$2,000,000 at any one time outstanding, provided, however, from and after the
last day of any Test Period ending after the Second Amendment Effective Date
when the Leverage Ratio is less than or equal to 5.00:1 the U.S. Borrower and
its Subsidiaries may make Investments pursuant to this clause (xx) in the amount
otherwise permitted in this clause (xx) without giving effect to the preceding
proviso".
2. Section 9.07(a) of the Credit Agreement is hereby amended by
deleting the table appearing therein and inserting the following new text in
lieu thereof:
"Period of Four
Consecutive Quarters
Ended Closest To Amount
June 30, 1998 $18.5 million
each June 30 ended thereafter $14 million;
provided, however, that in the event that the Leverage Ratio is less than or
equal to 5.00:1 on the last day of any Test Period ending after the Second
Amendment Effective Date, then from and after such date, the U.S. Borrower and
its Subsidiaries shall instead be allowed to make Capital Expenditures pursuant
to this clause (a) in an aggregate amount not to exceed, during any period of
four consecutive fiscal quarters (taken as one accounting period) ending on the
last day of a fiscal quarter described below (so long as ended after the last
day of the Test Period referenced above in this proviso), the amount set forth
opposite such fiscal quarter below:
"Period of Four
Consecutive Fiscal
Quarters Ended Amount
Closest to
June 30, 1999 $18.5 million
June 30, 2000 $15 million
June 30, 2001 $15 million
each June 30 ended thereafter $16 million"
3. Section 9.07(b) of the Credit Agreement is hereby amended by adding the
following new sentence immediately at the end thereof:
"For the purposes hereof, Capital Expenditures permitted to be made during any
period of four fiscal quarters shall be the relevant amounts actually permitted
to be spent during the relevant period from which the carry-forward is being
made (whether pursuant to the first or second table appearing in Section
9.07(a))."
4. Section 9.08 of the Credit Agreement is hereby amended by (i) deleting
clauses (x) and (y) contained therein in their entirety and inserting in lieu
thereof the following new clauses (x), (y) and (z):
"(x) in the case of any such Test Period ended on or prior to September 30,
1998, 1.00:1, (y) in the case of any such Test Period ended after September 30,
1998 and on or prior to September 30, 1999, 0.80:1 and (z) in the case of any
Test Period ended after September 30, 1999, 1.05:1".
5. Section 9.09 of the Credit Agreement is hereby amended by deleting the table
appearing therein in its entirety and inserting the following new table in lieu
thereof:
"Test Periods Ending Ratio
After December 1, 1997
and on or prior
to September 30, 1998 1.75:1
After September 30, 1998
and prior to
December 31, 1999 1.25:1
On December 31, 1999
and prior to
June 30, 2000 1.75:1
On June 30, 2000
and prior to
June 30, 2001 2.00:1
Thereafter 2.75:1".
6. Section 9.10 of the Credit Agreement is hereby amended by deleting the table
appearing therein in its entirety and inserting the following new table in lieu
thereof:
"Period Ratio
From and including
December 31, 1997
to but excluding
December 31, 1998 5.75:1
From and including
December 31, 1998
to but excluding 7.50:1
March 31, 1999
From and including 7.90:1
March 31, 1999
to but excluding
September 30, 1999
From and including
September 30, 1999
to but excluding
December 31, 1999 7.00:1
From and including
December 31, 1999
to but excluding 5.50:1
March 31, 2000
From and including
March 31, 2000
to but excluding 5.25:1
June 30, 2001
From and including
June 30, 2001
to but excluding 4.25:1
June 30, 2002
From and including June 30, 3.75:1
2002 and thereafter
7. Section 9.11 of the Credit Agreement is hereby amended by deleting the table
appearing therein in its entirety and inserting the following new table in lieu
thereof:
"Period Amount
On December 31, 1998
to but excluding $42,000,000
March 31, 1999
On March 31, 1999
to but excluding $40,000,000
September 30, 1999
On September 30, 1999
to but excluding $44,000,000
December 31, 1999
On December 31, 1999
to but excluding $56,000,000
March 31, 2000
On March 31, 2000
to but excluding $59,000,000
June 30, 2001
on June 30, 2001
to but excluding $70,000,000
June 30, 2002
On June 30, 2002
and thereafter $74,000,000
8. The definitions of "Applicable Commitment Commission Percentage" and
"Applicable Margin" appearing in Section 11.01 of the Credit Agreement are
hereby amended by (i) deleting the text "Level4, Level 5 or Level 6" appearing
in the second parenthetical appearing in said definition and inserting the text
", or Level 4" in lieu thereof,
(ii) deleting the text beginning at "Level 1: Leverage Ratio less than 3:00"
through the text "Level 6: Leverage Ratio is greater than or equal to 4.75 to
1." and inserting the following new text in lieu thereof:
Level 1: Leverage Ratio is less than 4.50 to 1.
Level 2: Leverage Ratio is greater than or equal to
4.50 to 1 but less than 4.75 to 1.
Level 3: Leverage Ratio is greater than or equal to
4.75 to 1 but less than 5.25 to 1.
Level 4: Leverage Ratio is greater than or equal to
5.25 to 1.
,(iii) deleting the table appearing in said definition in its entirety and
inserting the following new table in lieu thereof:
Level Level Level Level
"Ratio 1 2 3 4
Euro Rate Loan Margin for
U.S. Borrower Tranche A
Term Loans, German Borrower
Tranche A Term Loans and
Revolving Loans 1.75% 2.00% 2.25% 2.75%
Base Rate Loan Margin for
U.S. Borrower Tranche A
Term Loans, Revolving Loans
and Swingline Loans 0.75% 1.00% 1.25% 1.75%
Euro Rate Loan Margin for
Delayed Draw Term Loans and
Tranche B Term Loans 2.50% 2.50% 2.75% 3.25%
Base Rate Loan Margin for
Delayed Draw Term Loans and
Tranche B Term Loans 1.50% 1.50% 1.75% 2.25%
Euro Rate Loan Margin for
Tranche C Term Loans 2.75% 2.75% 3.00% 3.5%
Base Rate Loan Margin for
Tranche C Term Loans 1.75% 1.75% 2.00% 2.5%
Applicable Commitment
Commission Percentage 0.40% 0.45% 0.50% 0.50%
and (iv) deleting each reference to "Level 6" in each instance where same
appears in the proviso to the the first sentence of said definition and in the
last sentence of said definition and inserting in lieu thereof in each such
instance the text "Level 4".
9. Section 11.01 of the Credit Agreement is hereby further amended by inserting
the following new definitions in the proper alphabetical order:
"Second Amendment" shall mean the Second Amendment to this Agreement, dated as
of January 27, 1999.
"Second Amendment Effective Date" shall have the meaning provided in the Second
Amendment.
10. This Amendment shall become effective on the date (the "Second Amendment
Effective Date") when (i) each Borrower, each Credit Party and the Required
Lenders have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at the Notice Office and (ii)
the Borrower shall have paid to the Administrative Agent for the account of each
Lender which executes and delivers the counterpart of this Amendment to the
Administrative Agent on or prior to 5:00 p.m. New York time, an amendment fee
equal to 0.25 of 1% of the sum of such Lender's outstanding (x) Term Loans and
(y) Revolving Loan Commitment, in each case on the Second Amendment Effective
Date.
11. In order to induce the Lenders to enter into this Amendment, each Borrower
hereby represents and warrants that (i) the representations and warranties
contained in Section 7 of the Credit Agreement are true and correct in all
material respects on and as of the Second Amendment Effective Date after giving
effect to this Amendment (it being understood and agreed that, as to any
representation or warranty which by its terms is made as of a specified date,
each Borrower represents and warrants that such representation and warranty is
true and correct in all material respects only as of such specified date) and
(ii) there exists no Default or Event of Default on the Second Amendment
Effective Date after giving effect to this Amendment.
12. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
13. This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument. A complete set of counterparts
shall be lodged with the U.S. Borrower and the Administrative Agent.
14. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL
BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW
YORK.
15. From and after the Second Amendment Effective Date, all references in the
Credit Agreement and in the other Credit Documents to the Credit Agreement shall
be deemed to be references to the Credit Agreement as modified hereby.
* * *
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
ALLIANCE GAMING CORPORATION
By_______________________________
Name:
Title:
BALLY WULFF VERTRIEBS GMBH
By_______________________________
Name:
Title:
BALLY WULFF AUTOMATEN GMBH
By_______________________________
Name:
Title:
CREDIT SUISSE FIRST BOSTON,
Individually and as Administrative Agent
By_______________________________
Title:
By_______________________________
Title:
THE BANK OF NOVA SCOTIA
By_______________________________
Name:
Title:
KZH ING-1 LLC
By_______________________________
Name:
Title:
SUMITOMO BANK OF CALIFORNIA
By_______________________________
Name:
Title:
THE MITSUBISHI TRUST AND BANKING CORP.
By_______________________________
Name:
Title:
SOUTHERN PACIFIC BANK
By_______________________________
Name:
Title:
CRESCENT/MACH I PARTNERS
By: TCW Asset Management Company, Its Investment
Advisor
By_______________________________
Name:
Title:
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
By_______________________________
Name:
Title:
TCW LEVERAGED INCOME TRUST, L.P.
By_______________________________
Name:
Title:
VAN KAMPEN PRIME RATE INCOME TRUST
By_______________________________
Name:
Title:
VAN KAMPEN CLO I, LIMITED
By: VAN KAMPEN MANAGERMENT INC., as Collateral
Manager
By_______________________________
Name:
Title:
INDOSUEZ CAPITAL FUNDING III, LIMITED
By: Indosuez Capital, as Portfolio Advisor
By_______________________________
Name:
Title:
DEEPROCK & COMPANY
By: Eaton Vance Management As Investment Advisor
By_______________________________
Name:
Title:
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments, Inc. as its
Investment Manager
By_______________________________
Name:
Title:
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
By_______________________________
Name:
Title:
ROYALTON COMPANY
By: Pacific Investment Management Company
By: PIMCO Management Inc., a general partner
By_______________________________
Name: Bradley W. Paulson
Title: Vice President
SENIOR DEBT PORTFOLIO
By: Boston Management and Research as Investment
Advisor
By_______________________________
Name:
Title:
KZH-CRESCENT CORP.
By_______________________________
Name:
Title:
PAMCO CAYMAN LTD.
By_______________________________
Name:
Title:
CYPRESSTREE INVESTMENT PARTNERS I, LTD.,
By: Cypresstree Investment Management Company,
Inc., as Portfolio Manager
By_______________________________
Name:
Title:
TEXAS COMMERCE BANK
By_______________________________
Name:
Title:
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors, Inc., as Collateral
Manager
By_______________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL CORPORATION
By_______________________________
Name:
Title:
EATON VANCE SENIOR INCOME TRUST|
By: EATON VANCE MANAGEMENT AS ADVISOR
By:
Name:
Title:
ROYALTON COMPANY
By: Pacific Investment Management
Company
By: PIMCO Management Inc., a general partner
By:
Name: Bradley W. Paulson
Title: Vice President
CAPTIVA III FINANCE LTD., as advised by Pacific Investment Management
Company
By:
Name:
Title:
MASSMUTUAL HIGH YIELD PARTNERS II, LLC
By: HYP Management, Inc., as Managing Member
By:
Name:
Title:
Its:
CALIFORNIA BANK & TRUST
By:
Name:
Title:
Each of the undersigned, each being a Subsidiary
Guarantor, acknowledges and agrees to the provisions
of the foregoing Second Amendment.
[add signature lines for Subsidiary Guarantors]
Exhibit 11
Earnings per share computations
(In 000's except share data)
Three Months ended
December 31, 1997
Income Shares Per share
(Numerator) (Denominator) Amounts
Basic EPS
Income applicable to common shares $2,973 9,135 $0.33
=====
Effect of Diluted Securities
Stock options 311
Warrants 285
Convertible preferred stock dividends --
------ -----
596
Diluted EPS
Income applicable to common shares
with assumed exercises and conversions $2,973 9,731 $0.31
====== ===== =====
Six Months ended
December 31, 1997
Loss Shares Per share
(Numerator) (Denominator) Amounts
Net loss before extraordinary item $(15,530)
Less: Special stock dividends and redemption
premium on Series B Special Stock (19,326)
Basic EPS
Net loss before extraordinary item $34,856 9,118 $(3.81)
Extraordinary loss (42,033) 9,118 (4.62)
------- -----
Net loss applicable to common shares $(76,889) 9,118 $(8.43)
======== ======
Effect of Diluted Securities (a)
Stock options --
Warrants --
Convertible preferred stock dividends --
-------- -----
Diluted EPS
Net loss applicable to common shares
with assumed exercises and conversions $(76,889) 9,118 $(8.43)
========= ===== =======
cont.
Three Months ended
December 31, 1998
Loss Shares Per share
(Numerator)(Denominator) Amounts
Basic EPS
Loss applicable to common shares $(10,175) 9,790 $(1.04)
Effect of Diluted Securities (a)
Stock options --
Warrants --
Convertible preferred stock dividends --
-------- -----
Diluted EPS
Loss applicable to Common Shares
with assumed exercises and conversions $(10,175) 9,790 $(1.04)
========= ===== =======
Six Months ended
December 31, 1998
Loss Shares Per share
(Numerator)(Denominator) Amounts
Basic EPS
Loss before extraordinary item $(12,857) 9,607 $(1.34)
Effect of Diluted Securities (a)
Stock options --
Warrants --
Convertible preferred stock dividends --
-------- -----
Diluted EPS
Loss applicable to common shares
with assumed exercises and conversions $(12,857) 9,607 $(1.34)
========= ===== =======
(a) Effect would be anti-diluted for these periods.
<PAGE>
cont.
The following securities were in-the-money as of the period end but were not
included in the computation of diluted earnings per share because to do so would
have been antidilutive for the periods presented:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
December 31, December 31, December 31, December 31,
1997 1998 1997 1998
---- ---- ---- ----
(in 000s)
<S> <C> <C> <C> <C>
Stock options N/A 34 1,275 70
Warrants - - - -
Convertible Preferred Stock - - - -
--- -- ----- --
N/A 34 1,275 70
=== == ===== ==
Adjusted for application
of the treasury stock method N/A 9 468 9
=== === === ===
</TABLE>
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 six months ended 12/31/98
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 20,518
<SECURITIES> 0
<RECEIVABLES> 94,988
<ALLOWANCES> 11,756
<INVENTORY> 47,262
<CURRENT-ASSETS> 158,745
<PP&E> 131,794
<DEPRECIATION> 52,815
<TOTAL-ASSETS> 355,357
<CURRENT-LIABILITIES> 50,211
<BONDS> 0
0
14,532
<COMMON> 3,426
<OTHER-SE> (42,751)
<TOTAL-LIABILITY-AND-EQUITY> 355,357
<SALES> 88,821
<TOTAL-REVENUES> 202,681
<CGS> 51,976
<TOTAL-COSTS> 129,941
<OTHER-EXPENSES> 69,129
<LOSS-PROVISION> (922)
<INTEREST-EXPENSE> 15,405
<INCOME-PRETAX> (12,094)
<INCOME-TAX> (61)
<INCOME-CONTINUING> (12,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,857)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary information excerpted from Form
10-Q for the six months ended 12/31/97
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 27,047
<SECURITIES> 0
<RECEIVABLES> 101,111
<ALLOWANCES> 13,661
<INVENTORY> 34,982
<CURRENT-ASSETS> 157,962
<PP&E> 130,826
<DEPRECIATION> 47,685
<TOTAL-ASSETS> 347,345
<CURRENT-LIABILITIES> 42,402
<BONDS> 0
0
12,975
<COMMON> 3,201
<OTHER-SE> (40,816)
<TOTAL-LIABILITY-AND-EQUITY> 347,345
<SALES> 103,414
<TOTAL-REVENUES> 204,685
<CGS> 58,302
<TOTAL-COSTS> 126,656
<OTHER-EXPENSES> 57,619
<LOSS-PROVISION> 1,524
<INTEREST-EXPENSE> 13,566
<INCOME-PRETAX> (14,640)
<INCOME-TAX> 920
<INCOME-CONTINUING> (15,230)
<DISCONTINUED> 0
<EXTRAORDINARY> (42,033)
<CHANGES> 0
<NET-INCOME> (76,889)
<EPS-PRIMARY> (8.43)
<EPS-DILUTED> (8.43)
</TABLE>
