UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1999
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 May 3,
1999 according to the records of the registrant's registrar and transfer agent
was 9,705,852.
<PAGE>
ALLIANCE GAMING CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1999
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 March 31, 1999 3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1999 4
Unaudited Condensed Consolidated Statements of Operations
for the nine months ended March 31, 1998 and 1999 5
Unaudited Condensed Consolidated Statements of Stockholders'
Deficiency for the nine months ended March 31, 1999 6
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended March 31, 1998 and 1999 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 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, Mar. 31,
1998 1999
ASSETS
Current assets:
Cash and cash equivalents $ 23,487 $ 29,214
Accounts and notes receivable, net of allowance for
doubtful accounts of $11,932 and $12,583 93,459 82,982
Inventories, net of reserves of $6,797 and $6,408 42,418 46,529
Other current assets 11,711 8,498
-------- -------
Total current assets 171,075 167,223
------- -------
Long-term notes receivable, net of allowance for doubtful
accounts of $1,109 and $1,022 7,931 6,439
Leased equipment, net of accumulated depreciation of
$4,020 and $3,950 7,325 7,871
Property, plant and equipment, net of accumulated
depreciation of $46,090 and $52,299 77,905 78,637
Excess of costs over net assets of acquired businesses,
net of accumulated amortization of $3,199 and $4,288 59,952 58,782
Intangible assets, net of accumulated amortization of
$13,358 and $16,659 26,732 26,708
Other assets, net of reserves of $3,488 and $3,488 15,917 16,847
------- -------
Total assets $366,837 $362,507
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 10,477 $ 15,709
Accrued liabilities 39,122 35,669
Current maturities of long-term debt 1,996 1,962
------ ------
Total current liabilities 51,595 53,340
-------- -------
Term loan facilities 137,800 134,348
Senior Subordinated Notes due 2007, net 149,245 149,285
Other long-term debt, less current maturities 36,912 40,525
Other liabilities 12,718 12,519
------- -------
Total liabilities 388,270 390,017
-------- -------
Minority interest 2,315 2,118
Commitments and contingencies
Stockholders' deficiency:
Special Stock, 10,000,000 shares authorized:
Series E, $100 liquidation value; 137,317 shares
and 149,504 shares issued and outstanding 13,732 14,950
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
Treasury Stock, at cost, 85,300 shares (522)
Additional paid-in capital 122,980 127,544
Accumulated other comprehensive loss (13,946) (13,204)
Accumulated deficit (149,726) (161,822)
-------- --------
Total stockholders' deficiency (23,748) (29,628)
-------- --------
Total liabilities and stockholders' deficiency $366,837 $362,507
======== ========
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 March 31,
1998 1999
Revenues:
Gaming equipment and systems $ 21,538 $38,406
Wall machines and amusement games 28,340 24,845
Route operations 37,054 46,037
Casino operations 15,294 16,445
------- -------
102,226 125,733
------- -------
Costs and expenses:
Cost of gaming equipment and systems 13,046 20,564
Cost of wall machines and amusement games 16,102 14,820
Cost of route operations 28,761 36,223
Cost of casino operations 6,385 6,845
Selling, general and administrative 19,472 26,944
Research and development 3,956 4,949
Depreciation and amortization 6,516 5,710
------ ------
94,238 116,055
Operating income 7,988 9,678
Other income (expense):
Interest income 184 47
Interest expense (7,464) (8,151)
Minority interest (489) (555)
Other, net 293 (74)
---- -----
Income before income taxes 512 945
Income tax (provision) benefit (1,243) 246
------ ----
Net (loss) income (731) 1,191
Special Stock dividends (384) (430)
----- -----
Net (loss) income available to common shares $(1,115) $761
======= ====
Basic and diluted (loss) earnings per share $(0.12) $0.08
====== =====
Weighted average common shares outstanding 9,155 9,742
Weighted average common and common share equivalents
outstanding 9,155 9,747
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except share data)
Nine Months Ended March 31,
1998 1999
Revenues:
Gaming equipment and systems $ 76,160 $82,847
Wall machines and amusement games 77,132 69,225
Route operations 109,749 128,791
Casino operations 43,870 47,551
------- -------
306,911 328,414
Costs and expenses:
Cost of gaming equipment and systems 44,615 45,798
Cost of wall machines and amusement games 42,835 41,562
Cost of route operations 84,584 100,868
Cost of casino operations 18,916 20,165
Selling, general and administrative 64,034 75,847
Research and development 10,270 13,094
Depreciation and amortization 17,328 16,869
Unusual items (2,545) -
------- -------
280,037 314,203
Operating income 26,874 14,211
Other income (expense):
Interest income 625 420
Interest expense (21,030) (23,556)
Rainbow royalty (587) -
Rainbow royalty buyout (19,000) -
Minority interest (1,325) (1,603)
Other, net 345 (621)
----- ------
Loss before income taxes (14,098) (11,149)
Income tax (provision) benefit ( 2,163) 307
------- -----
Loss before extraordinary item (16,261) (10,842)
Extraordinary loss, without tax benefit (note 2) (42,033) -
------- -------
Net loss (58,294) (10,842)
Special Stock dividends (note 2) (3,157) (1,254)
Premium on repurchase/redemption of Series B
Special Stock (16,553) -
Net loss applicable to common shares $(78,004) $(12,096)
Basic and diluted loss per share:
Loss before extraordinary item $(3.92) $(1.25)
Extraordinary loss (4.62) -
----- -----
Net loss $(8.54) $(1.25)
======= =======
Weighted average common shares outstanding 9,130 9,651
Weighted average common and common share
equivalents outstanding 9,130 9,651
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Nine Months Ended March 31, 1999
(In 000's)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Stock-
Series E Common Treasury Paid-in Comprehensive Accum. holders'
Special Stock Stock Stock Capital Income (Loss) Deficit Deficiency
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1998 $ 13,732 $ 3,212 $ -- $ 122,980 $(13,946) $(149,726) $(23,748)
Net loss -- -- -- -- -- (10,842) (10,842)
Shares issued upon exercise of
options and warrants -- 214 -- 4,564 -- -- 4,778
Special Stock dividends 1,218 -- -- -- -- (1,254) (36)
Repurchases of common stock for
treasury -- -- (522) -- -- -- (522)
Foreign currency translation
adjustment -- -- -- -- 742 -- 742
-------- ------ ------ -------- ------- --------- -------
Balances at March 31, 1999 $ 14,950 $ 3,426 $ (522) $ 127,544 $(13,204) $(161,822) $(29,628)
======= ====== ====== ======== ======== ========= ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
Nine Months Ended March 31,
1998 1999
Cash flows from operating activities:
Net loss $(58,294) $(10,842)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 17,328 16,869
Amortization of debt discounts 31 39
Extraordinary item 42,033 -
Write down of other assets 2,307 765
Loss on sale of assets 35 117
Provision for losses on (recovery of) receivables (7,330) 1,713
Other 1,305 (211)
Net change in operating assets and liabilities:
Accounts and notes receivable 12,627 9,743
Inventories (6,171) (9,254)
Other current assets (1,528) 2,540
Accounts payable (2,258) 5,239
Accrued liabilities (8,250) (2,760)
------ ------
Net cash (used in) provided by operating activities (8,165) 13,958
Cash flows from investing activities:
Additions to property, plant and equipment (10,231) (7,909)
Proceeds from disposal of property and equipment 304 141
Additions to other long term assets (1,862) (4,218)
------ ------
Net cash used in investing activities (11,789) (11,986)
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 (178,834) (4,696)
Net change in lines of credit 16,191 4,200
Repurchase/redemption of Series B Special Stock (77,568) -
Proceeds from exercise of stock options and warrants 729 4,778
Repurchases of common stock for treasury - (522)
------- -------
Net cash provided by financing activities 20,044 3,760
Effect of exchange rate changes on cash (356) (5)
Cash and cash equivalents:
Increase (decrease) for period (266) 5,727
Balance, beginning of period 28,924 23,487
------- -------
Balance, end of period $ 28,658 $ 29,214
======== ========
See notes to unaudited condensed consolidated financial statements.
<PAGE>
ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1998 and 1999
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 March 31, 1999 consists of the
following:
June 30, Mar. 31,
1998 1999
(in 000's)
10% Senior Subordinated Notes due 2007, net
of unamortized discount of $755 and $715 $149,245 $149,285
Term loan facilities:
Tranche B Term Loan 74,438 72,511
Tranche C Term Loan 39,700 38,821
Delayed Draw Term Facility 25,000 24,416
Revolving Credit Facility 34,971 39,143
Other, secured by related equipment 2,599 1,944
------- -------
325,953 326,120
Less current maturities 1,996 1,962
------ ------
Long-term debt, less current maturities $323,957 $324,158
======== ========
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 a bank financing agreement 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
(collectively the "Bank Facilty"). 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)
Nine Months Ended March 31, 1998 and 1999
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 5.9% at March 31, 1999).
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 credit agreement for the Bank Facility
contains a number of maintenance covenants and 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. In the quarter ended December 31, 1998, the
Company did not meet certain financial covenants in the credit agreement.
The Company and the banks have amended the current and future financial
maintenance covenants in the credit agreement 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 are
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 nine months ended March
31, 1998 and 1999 differs from the statutory rate of 35% due to losses at
the Company's domestic subsidiaries which add to net operating loss
carryforwards and for which no benefit is recorded in the income statement
and tax losses at Bally Wulff which will be carried back to the prior year,
partially offset by state income taxes.
4. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is related to the unaudited condensed
consolidated statements of cash flows. For the nine months ended March 31,
1998 and 1999, the Company recorded the following significant non-cash
items:
Nine months ended March 31,
1998 1999
(In 000's)
Reclassify other assets to property, plant and
equipment $ 249 $ 306
Dividends for Series E and , for the 1998 period,
Series B Special Stock 3,157 1,254
Reclassify inventory to equipment 3,964 5,133
Translation rate adjustment 4,106 747
Reclassify accounts receivable to intangible assets 60 405
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 130 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 nine months ended March 31, 1998 and 1999, total comprehensive
(loss) income amounted to $(62.8) million and $(10.1) million, respectively.
8. REVERSE STOCK SPLIT
On January 14, 1999 the Company's Board of Directors announced a
one-for-three-and-one-half reverse stock split of its Common Stock effective
February 1, 1999. 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.
9. SHARE REPURCHASE PLAN
In January 1999 the Company's Board of Directors approved a share repurchase
plan for up to 1.18 million shares of its Common Stock. Subject to price and
market conditions, purchases of shares will be made from time to time over
the next twelve months in the open market or in privately negotiated
transactions using available cash financing. During the three months ended
March 31, 1999, the Company repurchased 85,300 shares of common stock at a
cost of $522,500.
10. 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 due 2007, net 149,245 149,245
Other long-term debt, less current
maturities 105,279 20,878 (89,245) 36,912
Other liabilities 10,729 2,330 (341) 12,718
-------- -------- -------- ---------
Total liabilities 443,753 43,193 (98,676) 388,270
-------- -------- -------- ---------
Minority interest 2,315 2,315
Commitments and contingencies
Stockholders' equity (deficiency):
Series E Special Stock 13,732 13,732
Common Stock 3,212 17,832 (17,832) 3,212
Additional paid-in capital 122,980 68,700 (68,700) 122,980
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
March 31, 1999
(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 $ 12,312 $ 16,902 $ $ 29,214
Accounts and notes receivable, net 38,385 48,290 (3,693) 82,982
Inventories, net 32,511 14,547 (529) 46,529
Other current assets 6,348 2,150 8,498
--------- --------- -------- ---------
Total current assets 89,556 81,889 (4,222) 167,223
--------- --------- -------- ---------
Long-term notes receivable, net 99,316 2,058 (94,935) 6,439
Leased equipment, net 7,871 7,871
Property, plant and equipment, net 46,829 31,808 78,637
Excess of costs over net assets of acquired
businesses, net 39,169 19,613 58,782
Intangible assets, net 26,246 462 26,708
Investment in subsidiaries 90,180 (90,180) --
Other assets, net 25,708 (9,372) 511 16,847
--------- --------- -------- ---------
$ 417,004 $ 134,329 $(188,826) $362,507
========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 12,007 $ 3,702 $ $ 15,709
Accrued liabilities 20,379 16,251 (961) 35,669
Current maturities of long-term debt 1,400 3,284 (2,722) 1,962
--------- -------- -------- ---------
Total current liabilities 33,786 23,237 (3,683) 53,340
--------- -------- -------- ---------
Term loan facilities 134,348 134,348
Senior Subordinated Notes due 2007, net 149,285 149,285
Other long-term debt, less current
maturities 116,615 18,231 (94,321) 40,525
Other liabilities 10,506 2,330 (317) 12,519
--------- -------- -------- ---------
Total liabilities 444,540 43,798 (98,321) 390,017
--------- -------- -------- ---------
Minority interest 2,118 2,118
Commitments and contingencies
Stockholders' equity (deficiency):
Series E Special Stock 14,950 14,950
Common Stock 3,426 17,832 (17,832) 3,426
Treasury stock (522) (522)
Additional paid-in capital 127,544 68,700 (68,700) 127,544
Accumulated other comprehensive loss (13,204) (13,406) 13,406 (13,204)
Retained earnings (accumulated deficit) (161,848) 17,405 (17,379) (161,822)
-------- ------- -------- ---------
Total stockholders' equity (deficiency) (29,654) 90,531 (90,505) (29,628)
-------- ------- -------- ---------
$417,004 $134,329 $(188,826) $362,507
======== ======== ========= =========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 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 $ 19,582 $ 3,601 $ (1,645) $ 21,538
Wall machines and amusement games 28,443 (103) 28,340
Route operations 31,445 5,609 37,054
Casino operations 3,251 12,043 15,294
------ ------- ------- --------
54,278 49,696 (1,748) 102,226
Costs and expenses:
Cost of gaming equipment and systems 11,996 2,695 (1,645) 13,046
Cost of wall machines and amusement
games 16,205 (103) 16,102
Cost of route operations 25,162 3,599 28,761
Cost of casino operations 1,937 4,448 6,385
Selling, general and administrative 10,715 8,757 19,472
Research and development 3,234 722 3,956
Depreciation and amortization 4,247 2,269 6,516
------- ------- ------- --------
57,291 38,695 (1,748) 94,238
------- ------- ------- --------
Operating income (loss) (3,013) 11,001 7,988
Earnings in consolidated subsidiaries 7,532 (7,532)
Other income (expense):
Interest income 290 102 (208) 184
Interest expense (7,173) (499) 208 (7,464)
Rainbow royalty 1,411 (1,411)
Minority interest (489) (489)
Other, net 410 (117) 293
------ ------ ------- --------
Income (loss) before income taxes (1,032) 9,076 (7,532) 512
Income tax (provision) benefit 301 (1,544) (1,243)
------- ------- ------- --------
Net income (loss) (731) 7,532 (7,532) (731)
Special Stock dividends (384) (384)
------- ------ ------- -------
Net income (loss) applicable to common shares $(1,115) $7,532 $(7,532) $(1,115)
======== ====== ======== =======
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999
(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 $ 37,405 $ 2,444 $ (1,443) $ 38,406
Wall machines and amusement games 24,845 24,845
Route operations 40,280 5,757 46,037
Casino operations 3,759 12,686 16,445
------- -------- -------- --------
81,444 45,732 (1,443) 125,733
Costs and expenses:
Cost of gaming equipment and systems 19,879 2,128 (1,443) 20,564
Cost of wall machines and amusement
games 14,820 14,820
Cost of route operations 32,509 3,714 36,223
Cost of casino operations 2,221 4,624 6,845
Selling, general and administrative 16,923 10,021 26,944
Research and development 4,142 807 4,949
Depreciation and amortization 3,923 1,787 5,710
-------- -------- -------- --------
79,597 37,901 (1,443) 116,055
-------- -------- -------- --------
Operating income 1,847 7,831 9,678
Earnings in consolidated subsidiaries 5,830 (5,830)
Other income (expense):
Interest income 125 72 (150) 47
Interest expense (7,924) (377) 150 (8,151)
Rainbow royalty 1,494 (1,494)
Minority interest (555) (555)
Other, net 50 (124) (74)
------ -------- -------- --------
Income before income taxes 867 5,908 (5,830) 945
Income tax benefit (provision) 324 (78) 246
------- -------- -------- --------
Net income 1,191 5,830 (5,830) 1,191
Special Stock dividends (430) (430)
------- -------- -------- --------
Net income applicable to common shares $ 761 $ 5,830 $ (5,830) $ 761
====== ======= ======== ======
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 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 $ 72,716 $ 8,641 $ (5,197) $ 76,160
Wall machines and amusement games 77,235 (103) 77,132
Route operations 94,160 15,589 109,749
Casino operations 9,979 33,891 43,870
-------- -------- -------- --------
176,855 135,356 (5,300) 306,911
-------- -------- -------- --------
Costs and expenses:
Cost of gaming equipment and systems 43,544 6,326 (5,255) 44,615
Cost of wall machines and amusement
games 42,938 (103) 42,835
Cost of route operations 74,538 10,046 84,584
Cost of casino operations 6,104 12,812 18,916
Selling, general and administrative 34,500 29,534 64,034
Research and development 8,076 2,194 10,270
Depreciation and amortization 10,632 6,696 17,328
Unusual items (2,545) (2,545)
-------- -------- -------- --------
174,849 110,546 (5,358) 280,037
-------- -------- -------- --------
Operating income 2,006 24,810 58 26,874
Earnings in consolidated subsidiaries 16,659 (16,659)
Other income (expense):
Interest income 922 309 (606) 625
Interest expense (20,241) (1,395) 606 (21,030)
Rainbow royalty 3,387 (3,974) (587)
Rainbow royalty buyout (19,000) (19,000)
Minority interest (1,325) (1,325)
Other, net 441 (96) 345
------- -------- -------- --------
Income (loss) before income taxes (17,151) 19,654 (16,601) (14,098)
Income tax (provision) benefit 832 (2,995) (2,163)
-------- -------- -------- --------
Net income (loss) before extraordinary item (16,319) 16,659 (16,601) (16,261)
Extraordinary loss, without tax benefit (42,033) (42,033)
-------- -------- -------- --------
Net income (loss) (58,352) 16,659 (16,601) (58,294)
Special Stock dividends (3,157) (3,157)
Premium on repurchase of Series B
Special Stock (16,553) (16,553)
-------- --------- --------- ---------
Net income (loss) applicable to common
shares $ (78,062) $ 16,659 $ (16,601) $ (78,004)
========= ========= ========= =========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 1999
(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 $ 79,863 $ 8,521 $ (5,537) $ 82,847
Wall machines and amusement games 69,236 (11) 69,225
Route operations 112,539 16,252 128,791
Casino operations 10,619 36,932 47,551
-------- -------- -------- --------
203,021 130,941 (5,548) 328,414
-------- -------- -------- --------
Costs and expenses:
Cost of gaming equipment and systems 44,492 6,843 (5,537) 45,798
Cost of wall machines and amusement
games 41,573 (11) 41,562
Cost of route operations 90,219 10,649 100,868
Cost of casino operations 6,383 13,782 20,165
Selling, general and administrative 44,892 30,955 75,847
Research and development 10,731 2,363 13,094
Depreciation and amortization 11,338 5,531 16,869
-------- -------- -------- --------
208,055 111,696 (5,548) 314,203
-------- -------- -------- --------
Operating income (loss) (5,034) 19,245 14,211
Earnings in consolidated subsidiaries 13,081 (13,081)
Other income (expense):
Interest income 668 280 (528) 420
Interest expense (22,893) (1,191) 528 (23,556)
Rainbow royalty 4,334 (4,334)
Minority interest (1,603) (1,603)
Other, net (140) (481) (621)
-------- -------- -------- --------
Income (loss) before income taxes (11,587) 13,519 (13,081) (11,149)
Income tax benefit (provision) 745 (438) 307
------- -------- -------- --------
Net income (loss) (10,842) 13,081 (13,081) (10,842)
Special Stock dividends (1,254) (1,254)
------- -------- -------- --------
Net income (loss) applicable to common
shares $ (12,096) $ 13,081 $ (13,081) $ (12,096)
========= ======== ========= =========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended March 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>
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $ (25,429) $ 18,794 $ (1,530) $ (8,165)
-------- -------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (7,520) (2,711) (10,231)
Proceeds from disposal of property and
equipment 205 99 304
Additions to other long-term assets (1,656) (206) (1,862)
-------- -------- -------- --------
Net cash used in investing activities (8,971) (2,818) (11,789)
-------- -------- -------- --------
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 303,734 303,734
Reduction of long-term debt (178,459) (1,905) 1,530 (178,834)
Net change in lines of credit 10,852 5,339 16,191
Redemption of Series B Special Stock (77,568) (77,568)
Proceeds from exercise of stock options 729 729
Dividends received (paid) 13,406 (13,406)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities 28,486 (9,972) 1,530 20,044
-------- -------- -------- --------
Effect of exchange rate changes on cash (356) (356)
-------- -------- -------- --------
Cash and cash equivalents:
Increase (decrease) for period (5,914) 5,648 (266)
Balance, beginning of period 16,462 12,462 28,924
-------- -------- -------- --------
Balance, end of period $ 10,548 $ 18,110 $ -- $ 28,658
========= ========= ======== =========
</TABLE>
See accompanying unaudited note.
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1999
(In 000's)
<TABLE>
<CAPTION>
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $(12,547) $ 28,418 $ (1,913) $ 13,958
------- ------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (6,085) (1,824) (7,909)
Proceeds from disposal of property and
equipment 96 45 141
Additions to other long term assets (4,105) (113) (4,218)
-------- ------- ------- -------
Net cash used in investing activities (10,094) (1,892) (11,986)
------- ------- ------- -------
Cash flows from financing activities:
Repayments of long-term debt (4,098) (2,511) 1,913 (4,696)
Net change in lines of credit 4,200 4,200
Proceeds from exercise of stock options
and warrants 4,778 4,778
Repurchase common stock for treasury (522) (522)
Dividends received (paid) 21,986 (21,986)
------- ------- ------- -------
Net cash provided by (used in) financing
activities 26,344 (24,497) 1,913 3,760
------- ------- ------- -------
Effect of exchange rate changes on cash (5) (5)
------- ------- ------- -------
Cash and cash equivalents:
Decrease for period 3,703 2,024 5,727
Balance, beginning of period 8,609 14,878 23,487
------- ------- ------- -------
Balance, end of period $ 12,312 $ 16,902 $ -- $ 29,214
======== ======== ======== ========
</TABLE>
See accompanying unaudited note.
<PAGE>
Debt and Lines of Credit
Long-term debt and lines of credit at March 31, 1999 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 $149,285 $149,285
Term loan facilities:
Tranche B Term Loan 72,511 72,511
Tranche C Term Loan 38,821 38,821
Delayed Draw Term Facility 24,416 24,416
Revolving Credit Facility 26,900 12,243 39,143
Intercompany notes payable 89,715 7,328 (97,043) -
Other 1,944 1,944
-------- ------- ------- --------
401,648 21,515 (97,043) 326,120
Less current maturities 1,400 3,284 (2,722) 1,962
------- ------- ------- --------
Long-term debt, less current
maturities $400,248 $18,231 $(94,321) $324,158
======== ======= ======== ========
</TABLE>
<PAGE>
ALLIANCE GAMING CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
At March 31, 1999, based on the terms of the $90.0 million Revolving Credit
Facility, the Company would have been able to borrow $63.0 million, of which the
Company had borrowings of approximately $39.1 million outstanding. The borrowing
base for the revolving credit facility consists of eligible receivables and
inventory, as defined in the credit agreement.
At March 31, 1999, the Company had $29.2 million in cash and cash equivalents
and $23.9 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 $113.9 million, a
decrease of approximately $5.6 million from June 30, 1998, which is explained
below. Consolidated cash and cash equivalents at March 31, 1999 includes
approximately $15.8 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 maintenance covenants under
both the credit agreement for the Bank Facility 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 March
31, 1999, the Company did not have any significant commitments for capital
expenditures.
Working Capital
During the nine months ended March 31, 1999, working capital decreased $5.6
million to $113.9 million. The primary fluctuations in working capital were: (i)
a decrease in accounts receivable resulting from cash collections and lower
revenues at the Wall Machine and Amusement Game business unit, (ii) an increase
in inventory due new proprietary gaming products manufactured in the current
quarter and expected to be deployed in the June 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 nine months ended March 31, 1999, $14.0 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
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 nine months ended March 31, 1999 the Company used $12.0 million of
cash in investing activities primarily resulting from $7.9 million in capital
expenditures, $1.5 million of payments made in acquiring the rights to
manufacture and distribute several gaming products, and $1.5 million of payments
in acquiring gaming rights of route locations.
During the nine months ended March 31, 1999, $3.8 million was provided by
financing activities primarily resulting from additional borrowings from the
Company's revolving credit facility of $4.2 million and $4.8 million of cash
proceeds from the exercise of certain warrants to purchase common stock,
partially offset by $4.7 million used to reduce the Company's long-term debt and
$0.5 million used to repurchase the Company's common stock for treasury.
The following is a summary of the Company's earnings before interest, taxes,
depreciation and amortization (EBITDA) by business unit:
Three Months Nine Months
Ending March 31, Ending March 31,
1998 1999 1998 1999
(In $000's)
EBITDA by Business Unit:
Bally Gaming and Systems $ (539) $ 4,777 $ 5,387 $ 2,205
Wall Machines and Amusement Games 6,598 3,178 14,409 7,610
Route Operations 6,364 6,504 18,746 18,217
Casino Operations 5,724 6,106 14,938 16,153
Corporate Administrative Expenses (3,643) (5,177) (11,823) (13,105)
Unusual Items - - 2,545 -
------- ------- ------- -------
EBITDA $14,504 $15,388 $44,202 $31,080
======= ======= ======= =======
The Company believes that the analysis of EBITDA is a useful adjunct to net
income, cash flow and other GAAP measurements. However, this information should
not be construed as an alternative to net income or any other GAAP measure of
performance as an indicator of the Company's performance or to GAAP-defined cash
flows generated by operating, investing and financing activities as an indicator
of cash flows or a measure of liquidity.
The Bank Facility is collateralized by substantially all domestic property and
is guaranteed by each domestic subsidiary of the U.S. Borrower and German
Subsidiaries (both as defined), other than the entity which holds the Company's
interest in its Louisiana operations and other non-material subsidiaries (as
defined), and secured by both a U.S. and German Pledge Agreement (both as
defined). The Bank Facility contains a number of maintenance covenants and it
and the Indenture have other significant covenants that, among other things,
restrict the ability of the Company and certain of its subsidiaries to dispose
of assets, incur additional indebtedness, issue preferred stock, pay dividends
or make other distributions, enter into certain acquisitions, repurchase equity
interests (as defined) or subordinated indebtedness, issue or sell equity
interests of the Company's subsidiaries (as defined), engage in mergers or
acquisitions, or engage in certain transactions with subsidiaries and
affiliates, and that otherwise restrict corporate activities. In the quarter
ended December 31, 1998,, the Company did not meet certain covenants in the
credit agreement. The Company and the banks have amended the current and future
financial maintenance covenants in the credit agreement 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
up to 43 months.
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, certain 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 October 31,, 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 includes dedicated outside resources and internal
business representatives. Although management believes that its efforts will be
successful and the costs will be immaterial (currently estimated between
$400,000 to $500,000) 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 June 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 third quarter 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, changing the coin handling tubes inside the
machine and modifying the front glass to show Euros instead of deutschmarks. The
cost of this conversion to Euro denominations will be borne by the customers.
The Company currently has borrowings outstanding on its revolving 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 segments organized by the following 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 nine months ended March 31,
1998 and 1999:
Three Months Ending Nine Months Ending
March 31, March 31,
1998 1999 1998 1999
(In $000's)
Revenues:
Bally Gaming and Systems $ 21,538 $ 38,406 $ 76,160 $ 82,847
Wall Machines and Amusement Games 28,340 24,845 77,132 69,225
Route Operations 37,054 46,037 109,749 128,791
Casino Operations 15,294 16,445 43,870 47,551
------- ------- ------- -------
Total Revenues $102,226 $125,733 $306,911 $328,414
======== ======== ======== ========
Operating Income (Loss):
Bally Gaming and Systems $(2,504) $3,726 $ 1,021 $ (581)
Wall Machines and Amusement Games 5,246 2,234 10,113 4,513
Route Operations 4,309 3,789 12,752 10,226
Casino Operations 5,203 5,524 13,403 14,409
Corporate Administrative Expenses (4,266) (5,595) (12,960) (14,356)
------ ------ ------- -------
Subtotal 7,988 9,678 24,329 14,211
Unusual Items - - 2,545 -
------ ------ ------- -------
Total Operating Income (Loss) $7,988 $9,678 $26,874 $14,211
====== ====== ======= =======
Three Months Ended March 31, 1998 and 1999
Bally Gaming and Systems
For the quarter ended March 31, 1999, Bally Gaming and Systems business unit
reported revenues of $38.4 million, a 78% increase compared to revenues of $21.5
million in the prior year quarter. Bally Gaming reported unit sales of
approximately 4,450 new gaming machines, an increase of 137% compared to unit
sales of approximately 1,900 in the prior year quarter due primarily to an
overall increase in market demand and the successful introduction of new
products recently licensed in more jurisdictions. By market segment, Bally
Gaming's unit sales for the quarter consisted of approximately 750 units to the
Nevada and Atlantic City markets, 3,000 units to international markets and 700
units to riverboats, Native American and other domestic markets. Bally Gaming
reported revenues from the sale of new gaming machines of $26.3 million, an
increase of 168% compared to $9.8 million in the prior year quarter due to
higher unit volume and a 12% increase in average selling prices over the prior
year quarter. Bally Systems reported revenues of $6.7 million, an increase of
10% compared to revenues of $6.1 million in the prior year quarter. In addition,
revenues from recurring revenue sources were $1.7 million, an increase of 55%
compared to revenues of $1.1 million in the prior year quarter.
For the quarter ended March 31, 1999, gross profit margins increased to 46% from
39% in the prior year quarter. The improvement was due primarily to a change in
product mix to higher margin gaming machines, higher revenues from gaming
machines that provide recurring revenue to the Company and the impact of higher
production at the manufacturing facility. Bally Gaming and Systems reported
operating income of $3.7 million compared to an operating loss of $2.5 million
in the prior year quarter. The improvement resulted from higher revenues and an
improved gross margin percentage, partially offset by higher selling, general
and administrative costs, and higher research and development costs. Research
and development costs totaled $4.1 million, an increase of 28 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 March 31, 1999, the Wall Machines and Amusement Games
business unit reported revenues of $24.8 million, a decrease of 12% compared to
revenues of $28.3 million in the prior year quarter. The revenue decline
resulted from a 28 percent decrease in unit shipments of new wall machines, a 12
percent decrease in leased wall machine revenues, discussed below, and a 25
percent decrease in amusement game distribution revenues both due to lower
market demand. This was partially offset by a 40 percent increase in the average
selling price of new wall machines due primarily to sales of wall machines
coupled with a new single-site progressive jackpot system. The foreign currency
fluctuation between the dollar and the deutschmark increased revenues and EBITDA
by $1.0 million and $0.1 million, respectively, in the quarter ended March 31,
1999.
Wall Machines and Amusement Games continued 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 1% due to competitive pricing
pressures.
For the quarter ended March 31, 1999, gross profit margin decreased to 40% from
43% in the prior year quarter. This decrease was due to the unfavorable impact
of lower revenues, a higher volume of trade-ins of used equipment on the sales
of new wall machines and lower production at the manufacturing facility. Wall
Machines and Amusement Games reported operating income of $2.2 million, compared
to $5.2 million in the prior year quarter. The decrease in operating income was
primarily due to decreased revenues and higher selling, general and
administrative expenses, including a higher provision for doubtful accounts,
partially offset by lower depreciation expense resulting from a lower installed
base of leased equipment.
Route Operations
For the quarter ended March 31, 1999, the Route Operations business unit
reported revenues of $46.0 million, an increase of 24% compared to revenues of
$37.1 million in the prior year quarter. Revenues for the Nevada operations
increased 28% as net win per gaming machine per day increased to $60.50 from
$55.00 in the prior year quarter, while the average number of gaming machines
increased to 7,330 from 6,310 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 March 31, 1999, 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 3%. The revenue improvement was primarily due to an increase in the
average gaming machine net win per day of 8% to $85.40 from $79.20 in the prior
year quarter, partially offset a decrease in the average number of gaming
machines deployed of 4% to 750 machines from 780 machines.
For the quarter ended March 31, 1999, cost of revenues increased 26% to $36.2
million compared to $28.8 million in the prior year quarter. As a percentage of
revenues, cost of revenues increased to 79% from 78% in the prior year quarter.
Nevada route operations cost of revenues increased 29%, and as a percentage of
revenues increased to 81% from 80% in the prior year quarter due primarily to
the lower margins in Southern Nevada route locations due primarily to an
increase in rental and participation payments on gaming machines and reduced
margins at new locations. Louisiana operations cost of revenues increased 3%,
and as a percentage of revenues remained consistent at 64% between quarters. The
Route Operations business unit reported operating income of $3.8 million, a
decrease of 12% compared to operating income of $4.3 million in the prior year
quarter. The decrease in operating income resulted primarily from higher
operating costs, higher selling, general and administrative expenses, primarily
increased marketing costs at the Nevada route operations and an increase in
depreciation from an increase in the number of gaming machines deployed and
amortization of costs incurred in taking over contracts in the prior fiscal year
for the Nevada route operations, partially offset by higher revenues.
Casino Operations
For the quarter ended March 31, 1999, the Casino Operations business unit
reported revenues of $16.4 million, an increase of 8% compared to revenues of
$15.3 million in the prior year quarter. This increase was a result of a 5%
increase at the Rainbow Hotel Casino and a 16% 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 15% to $172 from $150 in the prior
year quarter, partially offset by a 1 percent decrease in the average number of
gaming machines and the impact from the removal of 3 table games. The number of
gaming machines decreased from the March 1998 quarter as a result of temporarily
removing machines as part of an internal remodeling project which will be
completed during the September 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 8% to $65 from $60 in the prior year quarter and an 8% increase
in the average number of gaming machines, partially offset by a lower number of
table games.
For the quarter ended March 31, 1999, the cost of revenues for Casino Operations
increased 7% to $6.8 million compared to $6.4 million in the prior year quarter
but, as a percentage of revenues, remained stable at 42% between quarters as
costs increased proportionally with the increase in revenues. The Casino
Operations business unit reported operating income of $5.5 million, an
improvement of 6% compared to operating income of $5.2 million in the prior year
quarter. Operating income at the Rainbow Hotel Casino increased by 3% to $4.9
million due primarily to the increase in revenues, partially offset by higher
selling, general and administrative expenses, primarily higher promotional and
marketing costs. Operating income at the Rail City increased by 47% to $0.6
million primarily due to the increase in revenues coupled with stable operating
costs and selling, general and administrative expenses as a percentage of
revenues.
Consolidated
Total revenues for the quarter ended March 31, 1999, were $125.7 million, a
increase of 23% compared to revenues of $102.2 million in the prior year
quarter. The increase is primarily due to the aforementioned increases at the
Bally Gaming and Systems, Route Operations and Casino Operations business units,
partially offset by a decrease in revenues from the Wall Machines and Amusement
Games business unit.
Cost of revenues for the quarter ended March 31, 1999, were $78.5 million, an
increase of 22% compared to $64.3 million in the prior year quarter. Cost of
revenues as a percentage of total revenues improved to 62% from 63% in the prior
year quarter. The improvement was primarily due to the decrease in costs as a
percentage of revenues at the Bally Gaming and Systems business unit, partially
offset by an increase in costs as a percentage of revenues at the Wall Machines
and Amusement Games and the Route Operations business units.
Selling, general and administrative expenses for the quarter ended March 31,
1999 were approximately $26.9 million, an increase 38% compared to costs of
$19.5 million for the prior year quarter. This increase is due to increases in
expenses at all of the business units, an increase in Corporate expenses,
primarily an increase in payroll and related costs, and an increase in the
provision for doubtful accounts.
Research and development costs for the quarter ended March 31, 1999 were
approximately $4.9 million, an increase of 25% compared to costs of $4.0 million
in the prior year quarter. 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 March 31, 1999 was
approximately $5.7 million, a decrease of 12% compared to $6.5 million in the
prior year quarter as decreases at the Bally Gaming and Systems and the Wall
Machines and Amusement Games business units were partially offset by increases
at the Route Operations and Casino Operations business units.
Net Interest Expense and Income Taxes
Net interest expense in the three months ended March 31, 1999 increased to $8.1
million from $7.3 million in the 1998 quarter. The increase is primarily due to
a one time fee associated with amending the credit agreement, coupled with a
higher average amount of working capital borrowings in the current quarter,
partially offset by lower interest rates. During the quarter, the Company
increased its total indebtedness by $8.8 million, primarily due to increased
working capital borrowings and the semi-annual payment of interest on its 10
percent subordinated notes.
The Company recorded an income tax benefit of $0.2 million in the March 31, 1999
quarter compared to an income tax provision of $1.2 million in the prior year
quarter. The current quarter benefit is primarily due to tax losses for the
Bally Wulff entities, which will be carried back to the prior year, partially
offset by various state income tax provisions.
Nine Months Ended March 31, 1998 and 1999
Bally Gaming and Systems
For the nine months ended March 31, 1999 the Bally Gaming and Systems business
unit reported revenues of $82.8 million, an increase of 9% compared to revenues
of $76.2 million in the prior year period. The improvement was primarily due to
an increase in System sales, an increase in recurring revenue from proprietary
gaming machines and an increase in average selling price of new gaming machines,
partially offset by a decrease in unit sales. Bally Gaming reported unit sales
of approximately 8,400 new gaming machines, a decrease of 11% compared to unit
sales of approximately 9,500 in the prior year period. By market segment, Bally
Gaming's unit sales for the period consisted of approximately 1,700 units to the
Nevada and Atlantic City markets, 5,300 units to international markets and 1,400
units to riverboats, Native American and other domestic markets. Bally Gaming
reported revenues from the sale of new gaming machines of $46.9 million, a
decrease of 2% compared to $47.8 million in the prior year quarter due to lower
unit volume partially offset by a 9% increase in average selling price of new
gaming machines. Bally Systems sales increased to $17.9 million, a 20% increase
compared to $14.9 million in the prior year period. In addition, revenues from
recurring revenue sources were $4.4 million, an increase of 64% compared to
revenues of $2.7 million in the prior year period.
For the nine months ended March 31, 1999 gross profit margins improved to 45%
from 41% in the prior year period. The improvement was due primarily to a change
in product mix to higher margin gaming machines, higher revenues from machines
that provide recurring revenue to the Company and the impact of higher
production at the manufacturing facility. Bally Gaming and Systems reported an
operating loss of $0.6 million, compared to operating income of $1.0 million for
the prior year period. The decrease in operating income resulted primarily from,
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 higher revenues and improved gross margins.
Wall Machines and Amusement Games
For the nine months ended March 31, 1999, the Wall Machines and Amusement Games
business unit reported revenues of $69.2 million, a decrease of 10% compared to
revenues of $77.1 million in the prior year period. The currency translation
impact of the fluctuation of the deutschmark versus the U.S. dollar increased
revenues by $2.7 million during the current year period. The revenue decrease
resulted primarily from a 28% decrease in unit shipments of new wall machines
due to lower market demand, a 9% decrease in leased wall machine revenues due to
a lower installed base of leased machines and a 12% decrease in amusement game
distribution revenues, partially offset by a 14% increase in the average sales
price of new wall machines, due primarily to sales of wall machines coupled with
a new single-site progressive jackpot system, and a 9% increase in used wall
machine revenues.
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. Lease revenues
decreased as the total number of machines out on lease decreased by 15% between
periods and the average monthly lease rate decreased by 3% due to competitive
pricing pressures. At March 31, 1999 approximately 5,050 machines were out on
lease compared to approximately 5,900 machines at March 31, 1998.
For the nine months ended March 31, 1999, gross profit margin decreased to 40%
from 44% 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 $4.5 million compared to operating income of $10.1
million in the prior year period. The decrease in operating income resulted
primarily from the aforementioned decrease in revenues and lower gross margins.
Selling, general and administrative expenses have increased by less than 1%
between periods.
Route Operations
For the nine months ended March 31, 1999, the Route Operations business unit
reported revenues of $128.8 million, an increase of 17% compared to revenues of
$109.7 million in the prior year period. Nevada route operations revenues
increased 20% as net win per gaming machine per day increased 5% to $56.20 from
$53.60 in the prior year period and the average number of gaming machines
increased 14% to 7,240 from 6,370 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 4% as net win per gaming machine
per day increased 6% to $80.40 from $76.10 in the prior year period while the
average number of gaming machines decreased 1% to 740 machines.
For the nine months ended March 31, 1999, Nevada route operations cost of
revenues increased 21% and, as a percentage of revenues, increased to 80% from
79% in the prior year period primarily due to an increase in direct costs,
principally an increase in rental and participation payments on gaming machines
and reduced margins at new locations. Louisiana route operations cost of
revenues increased 6% and as a percentage of revenues increased to 65% from 64%
in the prior year period due to higher direct costs, principally increased
health insurance costs. Route Operations reported operating income of $10.2
million, a decrease of 20% compared to operating income of $12.8 million in the
prior year quarter. The decrease in operating income resulted primarily from the
increase in operating costs, an increase in selling, general and administrative
expenses due to increases in promotions and advertising costs at the Nevada
route operations, a higher provision for doubtful receivables, and an increase
in depreciation expense as a result of the increase in the number of gaming
machines deployed and amortization of costs incurred in taking over contracts in
the prior fiscal year for the Nevada route operations, partially offset by the
increase in revenues.
Casino Operations
For the nine months ended March 31, 1999, the Casino Operations business unit
reported revenues of $47.6 million, an increase of 8% compared to revenues of
$43.9 million in the prior year period. This increase reflects a 9% increase at
the Rainbow Hotel Casino and a 6% 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 4% to $152 from $146 in the prior year
quarter coupled with a 2% 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 5% to $62 from $59 in the prior year
quarter and a 4% increase in the average number of gaming machines, partially
offset by lower food and beverage revenues.
For the nine months ended March 31, 1999, the cost of revenues for Casino
Operations increased 7% to $20.2 million compared to $18.9 million in the prior
year period but, as a percentage of revenues, improved to 42% from 43% in the
prior year period. Casino Operations reported operating income of $14.4 million,
an improvement of 8% compared to operating income of $13.4 million in the prior
year period. Operating income at the Rainbow Hotel Casino increased by 5% to
$12.9 million due primarily to the increase in revenues, partially offset by
higher selling, general and administrative expenses, primarily higher
promotional and marketing costs and an increase in depreciation expense.
Operating income at the Rail City increased by 38% to $1.5 million primarily due
to the increase in revenues and a decrease in selling, general and
administrative expenses.
Consolidated
Total revenues for the nine months ended March 31, 1999, were $328.4 million, an
increase of 7% compared to revenues of $306.9 million in the prior year period
as the improvements at Bally Gaming and Systems, the Route Operations and Casino
Operations business were partially offset by a decrease at the Wall Machines and
Amusement Games business unit.
Cost of revenues for the nine months ended March 31, 1999, were $208.4 million,
an increase of 9% compared to $191.0 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 nine months ended March 31,
1999 were approximately $75.8 million, an increase of 18% compared to costs of
$64.0 million for the prior year quarter. This increase is due to an increase in
expenses at all of the business units, an increase in Corporate expenses and a
higher provision for doubtful receivables.
Research and development costs for the nine months ended March 31, 1999 were
approximately $13.1 million, an increase of 28% compared to costs of $10.3
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 nine months ended March 31, 1999 was $16.9
million, a 3% decrease compared to depreciation and amortization of $17.3
million in the prior year quarter as increases at the Route Operations and
Casino Operations business units more than 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 nine months ended March 31, 1999 increased to $23.1
million compared to the net interest expense of $20.4 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, a higher average amount of working capital borrowings in the
current period and a one time fee associated with amending the credit agreement
in January 1999, 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 $0.3 million in the nine months
ended March 31, 1999 compared to a provision of $2.2 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 6. Exhibits and Reports on Form 8-K
a. Exhibits
11 Computation of per share amounts
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
ALLIANCE GAMING CORPORATION
(Registrant)
By /s/ Morris Goldstein
-----------------------------
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Scott D. Schweinfurth
-----------------------------
Sr. Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
Exhibit 11
Earnings per share computations
(In 000's except share data)
Three Months ended
March 31, 1998
Loss Shares Per share
(Numerator) (Denominator) amounts
Basic EPS
Net loss applicable to common shares $(1,115) 9,155 $(0.12)
======
Effect of Dilutive Securities (a)
Stock options
Warrants
Convertible preferred stock dividends --
------- ------
Diluted EPS
Net loss applicable to common shares
with assumed exercises and conversions $(1,115) 9,155 $(0.12)
======= ===== ======
Nine Months ended
March 31, 1998
Loss Shares Per share
(Numerator) (Denominator) amounts
Net loss before extraordinary item $(16,261) 9,130 $(1.77)
Less: Special stock dividends and redemption
premium on Series B Special Stock (19,710) 9,130 (2.15)
Basic EPS
Net loss before extraordinary item $(35,971) 9,130 $(3.92)
Extraordinary loss (42,033) 9,130 (4.62)
------- -----
Net loss applicable to common shares $(78,004) 9,130 $(8.54)
======== ======
Effect of Dilutive Securities (a)
Stock options --
Warrants --
Convertible preferred stock --
------- ------
Diluted EPS
Net loss applicable to common shares
with assumed exercises and conversions $(78,004) 9,130 $(8.54)
======== ===== ======
(a) Effect would be anti-dilutive for these periods.
cont.
Three Months ended
March 31, 1999
Loss Shares Per share
(Numerator) (Denominator) amounts
Basic EPS
Income applicable to common shares $761 9,742 $0.08
Effect of Dilutive Securities
Stock options 5
Warrants --
Convertible preferred stock dividends --
----- ------
Diluted EPS
Net income applicable to Common Shares
with assumed exercises and conversions $761 9,747 $0.08
==== ===== =====
Nine Months ended
March 31, 1999
Loss Shares Per share
(Numerator) (Denominator) amounts
Basic EPS
Loss applicable to shareholders $(12,096) 9,651 $(1.25)
Effect of Dilutive Securities (a)
Stock options --
Warrants --
Convertible preferred stock dividends --
------- ------
Diluted EPS
Loss applicable to common shares
with assumed exercises and conversions $(12,096) 9,651 $(1.25)
======== ===== ======
(a) Effect would be anti-dilutivee 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:
For the three For the nine
months ended March 31, months ended March 31,
1998 1999 1998 1999
(in 000s)
Stock options 1,242 N/A 1,242 46
Warrants 642 - 571 -
Convertible Preferred Stock - - - -
----- ---- ----- ---
1,884 N/A 1,813 46
===== ==== ===== ===
Adjusted for application
of the treasury stock method 699 N/A 567 5
==== ==== ==== ===
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 financial information excerpted from
Form 10-Q for the period ended March 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,214
<SECURITIES> 0
<RECEIVABLES> 95,565
<ALLOWANCES> 12,583
<INVENTORY> 46,529
<CURRENT-ASSETS> 167,223
<PP&E> 142,757
<DEPRECIATION> 56,249
<TOTAL-ASSETS> 362,507
<CURRENT-LIABILITIES> 53,340
<BONDS> 0
0
14,950
<COMMON> 3,426
<OTHER-SE> (48,004)
<TOTAL-LIABILITY-AND-EQUITY> 362,507
<SALES> 152,072
<TOTAL-REVENUES> 328,414
<CGS> 87,360
<TOTAL-COSTS> 208,393
<OTHER-EXPENSES> 104,097
<LOSS-PROVISION> 1,713
<INTEREST-EXPENSE> 23,556
<INCOME-PRETAX> (11,149)
<INCOME-TAX> (307)
<INCOME-CONTINUING> (10,842)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,096)
<EPS-PRIMARY> (1.25)
<EPS-DILUTED> (1.25)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information excerpted from
Form 10-Q for the period ended March 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 28,658
<SECURITIES> 0
<RECEIVABLES> 95,582
<ALLOWANCES> 13,164
<INVENTORY> 39,536
<CURRENT-ASSETS> 159,273
<PP&E> 133,368
<DEPRECIATION> 50,079
<TOTAL-ASSETS> 346,568
<CURRENT-LIABILITIES> 42,891
<BONDS> 0
0
13,348
<COMMON> 3,208
<OTHER-SE> (43,643)
<TOTAL-LIABILITY-AND-EQUITY> 346,568
<SALES> 153,292
<TOTAL-REVENUES> 306,911
<CGS> 87,450
<TOTAL-COSTS> 190,950
<OTHER-EXPENSES> 70,679
<LOSS-PROVISION> 1,080
<INTEREST-EXPENSE> 21,030
<INCOME-PRETAX> (14,098)
<INCOME-TAX> 2,163
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</TABLE>
