UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from to
Commission File Number 0-4281
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0104066
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4380 Boulder Highway
Las Vegas, Nevada 89121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (702) 435-4200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
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 aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $32,641,000 as of September 25, 1995.
The number of shares of Common Stock, $0.10 par value, outstanding as of
September 25, 1995 according to the records of registrant's registrar and
transfer agent, was 11,654,150.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held on or about December 15, 1995 (to be filed) are
incorporated by reference into Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
Introduction
Alliance Gaming Corporation (the "Company") is a diversified gaming company
which (at June 30, 1995) operates approximately 7,184 gaming devices (primarily
video poker devices and slot machines). The Company is the largest
private gaming device route operator in Nevada and one of the largest in the
United States. In its Nevada gaming device route operations, the Company
selects, owns, installs, manages and services gaming devices (approximately
5,208 as of June 30, 1995) in third-party owned local establishments such as
taverns, restaurants, supermarkets, drug stores and convenience stores
(approximately 516 locations as of June 30, 1995). Also in Nevada, the
Company owns and operates one full service small casino and leases and operates
a small casino, one small casino-hotel and three taverns which collectively
have approximately 703 gaming devices and 9 table games. In the fiscal
year ended June 30, 1992, the Company expanded its gaming device route
operations to Louisiana, where it is the operator of approximately 694 video
poker devices at the only racetrack and associated off-track betting parlors
("OTBs") in the greater New Orleans area. In March 1995, the Company completed
its acquisition of the general partnership interest in the Rainbow Casino
Vicksburg Partnership, L.P. ("RCVP"). RCVP owns a dockside casino
in Vicksburg, Mississippi which contains approximately 579 gaming devices and 28
table games. Additionally, the Company is manages the casino pursuant to a long
term management contract. The Company had previously acquired 45% of RCVP
through a limited partnership interest acquired in July 1994. The Company
also designs and manufactures gaming devices which are exclusively used in
its Nevada operations.
The Company's gaming strategy is to aggressively build its gaming business in
both existing markets, such as Nevada, as well as in emerging gaming markets
nationally. The Company will use its diversified gaming expertise,
strengthened executive management, business partners and investment community
relationships to pursue new casino operations as well as dockside, riverboat
and Native American operations in addition to expanding the existing route
business as well as the supply and management of gaming devices.
The Company was incorporated in Nevada on September 30, 1968 under the name
Advanced Patent Technology. The Company changed its name to Gaming &
Technology, Inc. in 1982, to United Gaming, Inc. in 1988 and to Alliance Gaming
Corporation on December 19, 1994. The Company conducts its gaming operations
through directly and indirectly owned subsidiaries. The term "Company" as used
herein refers to Alliance Gaming Corporation and such subsidiaries unless the
context otherwise requires. The Company's principal executive offices
are located at 4380 Boulder Highway, Las Vegas, Nevada 89121; telephone
(702)435-4200.
Gaming Device Route Operations
Nevada
Operations. The Company's Nevada gaming route operations involve the selection,
ownership, installation, operation and maintenance of video poker devices,
reel-type slot machines and other gaming devices in local establishments such
as taverns, restaurants, supermarkets, drug stores and convenience stores
operated by third parties ("local establishments"). The Company's gaming device
route operations target local residents who generally frequent local
establishments close to their homes.
The following table sets forth certain historical data concerning the Company's
Nevada gaming device route
operations:
<TABLE>
<CAPTION>
As of June 30
1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
Number of gaming devices owned 5,240 5,505 5,121 5,148 5,208
Number of locations 527 552 508 496 516
</TABLE>
The Company enters into gaming device route agreements with local establishments
through either space leases or revenue-sharing agreements. In revenue sharing
arrangements, most common with taverns, restaurants and convenience stores,
the Company does not pay rent, but rather receives a percentage of the revenues
from the gaming devices. In revenue sharing arrangements, both the owner of the
local establishment and the Company must have a gaming license. In space lease
arrangements, most common with supermarkets and drug stores, the Company pays a
fixed rental to the owner of the local establishment and the Company receives
all of the revenues derived from the gaming devices. In such arrangements, only
the Company (and not the establishment owner) is required to hold a gaming
license. Most of the local establishments serviced by the Company are
restricted by law to operating no more than 15 gaming devices.
Revenue-sharing arrangements accounted for approximately 86% of the Nevada
gaming device route revenues and 64% of its operating Nevada route gaming
devices in fiscal 1995. At June 30, 1995, the weighted average
remaining term of the Company's revenue sharing arrangements was approximately
4.2 years. Space lease arrangements accounted for approximately 14% of the
Nevada gaming device route revenues and 36% of its operating Nevada route gaming
devices in fiscal 1995. At June 30, 1995, the weighted average remaining term
of the Company's space leases was 2.7 years.
The Company has historically been able to renew or replace revenues from
expiring agreements with revenues generated by renewal or replacement contracts.
However, during the past few years, increased competitive pressures in the
gaming route business have increased the portion of gaming route revenues
payable to the local establishment, decreasing the Company's gross margins from
these operations. As a result, the Company has refocused its Nevada gaming
device route operations to emphasize return on investment rather than increasing
market share and has undertaken a systematic review process to adjust its
contract mix to emphasize higher margin contracts and, where permissible,
cancelling or not renewing unprofitable contracts.
Marketing. The Company believes it has a diversified customer base with no one
customer accounting for more than 10% of the Company's revenues generated from
Nevada gaming device route operations during the fiscal year
ended June 30, 1995 (although approximately 14.1% of such revenues was generated
through an affiliated group of such customers). As the largest Nevada gaming
device route operator, the Company believes that it is able to differentiate
itself from its competitors through a full-service operation providing its
customers marketing assistance and promotional allowances and using its advanced
design capabilities to provide gaming devices with features
customized to customers' needs, such as Gambler's Choice, a multi-game device
tailored to the local gaming market.
Strategy. The Company believes that technological enhancements are the key to
improving the appeal of its games and locations, thereby increasing operating
margins. As a result, the Company has developed and is currently
testing a new system called "Gamblers Bonus". Gamblers Bonus is designed as a
cardless slot players' club and player tracking system which, upon approval of
by Nevada gaming authorities, will allow multiple route locations
to be linked together into a distributed gaming environment. Through this
technology, the Company will be able to provide its players and customers with
many of the same gaming choices currently available only in a larger scale
casino environment such as multi-location progressive jackpots, bigger jackpot
payouts and traditional players' club enhancements. Additionally, the Company
will offer a series of new and unique games available only to members
of the Gamblers Bonus players' club. The Company believes Gamblers Bonus will
improve both the revenues and operating efficiencies of its Nevada route
operations and has the potential to enhance the basic structure of the
gaming route segment of the gaming industry.
The Company is continuing its efforts to achieve cost reductions (subsequent to
cost reductions made in fiscal 1994) and adjust its contract mix to emphasize
higher margin arrangements designed to incentivize location owners to
increase gaming revenues. Additionally, in keeping with the trends in the
Nevada market, the Company is updating its gaming device base with bill-acceptor
equipped gaming devices which are also expected to improve revenues and
operating efficiencies. The Company continues to investigate further
technological enhancements. The Company believes that following these steps
will maximize the potential of its mature and competitive Nevada gaming route
operations. In addition, the Company intends to utilize its expertise in Nevada
gaming route operations to develop new route operation opportunities in less
mature markets.
Louisiana
Operations. In March 1992, the Company capitalized on its Nevada gaming device
route expertise to obtain a contract to operate video poker gaming devices in
the greater New Orleans, Louisiana area through its controlled
subsidiary, Video Services, Inc. ("VSI"). The Company entered into an operating
agreement which runs through May 2002 with Fair Grounds Corporation, Jefferson
Downs Corporation and Finish Line Management Corporation (collectively, "Fair
Grounds") for the Company to be the exclusive operator of video poker devices at
the only racetrack and nine associated OTB parlors in the greater New Orleans
area. The Company selects, installs, manages and services video poker devices
for each of the 10 facilities owned by Fair Grounds for which it receives a
percentage of the revenue generated by the devices. The Company currently has
installed 694 video poker devices in Louisiana.
Under the Louisiana gaming laws and regulations, the majority stockholder of any
entity operating video poker devices in Louisiana must be a domiciled resident
of the State of Louisiana. As a result, the Company owns 49%
of the capital stock of VSI and three prominent members of the Louisiana
business and legal community own the remaining 51%. The Company, however, owns
all the voting stock of VSI and the majority of its officers and
directors are Company employees. The Company has a 71% interest in dividends of
VSI in the event dividends are declared. The Company also formed two other
Louisiana subsidiaries, Southern Video Services, Inc. ("SVS")
and Video Distributing Services, Inc. ("VDSI"). Both SVS and VDSI are
structured in a manner similar to VSI except that the Company is entitled to
receive 60% of any SVS dividends. Under the terms of its contract with Fair
Grounds, the Company must conduct any additional video poker operations in
Louisiana other than gaming at racetracks or OTB parlors through SVS. To date,
SVS and VDSI have not engaged in business in Louisiana. In addition, the
Company and Fair Grounds may have certain mutual rights of first refusal to
participate in certain Louisiana riverboat gaming opportunities of the other
party on terms and conditions to be specified.
The Company is prohibited by the Louisiana Act from engaging in both the
manufacture and operation of gaming devices in Louisiana and, therefore, the
Company does not manufacture its own gaming devices for use in Louisiana.
On December 17, 1993, the Company incurred a fire loss at the Fairgrounds Race
Course in New Orleans where the Company operated 199 gaming devices prior to the
fire, 193 of which were destroyed in the fire. The Company was fully insured
for all equipment, leasehold improvements, other assets and business income with
the exception of immaterial deductibles. From December 17, 1993 through
June 30, 1995, the Company recorded approximately $488,000 of income from
business interruption insurance proceeds. The Company is discussing settlement
of additional business interruption claims with the insurance carrier.
Marketing. VSI has developed an extensive marketing program under the name "The
Players Room" which is designed to attract primarily local residents to its
facilities. Media placement has focused on newspaper and radio
advertising with promotions including a player's club, direct mailings and
offerings of a wide range of prizes.
Strategy. The Company intends to selectively expand its operations in the
greater New Orleans area by increasing the number of video poker devices in
certain of its existing locations as demand warrants, as well as investigating
the addition of new locations under its current contract with the Fair Grounds
in areas where competitive factors are favorable. Under the Louisiana Act,
racetracks and OTB parlors are permitted to install an unlimited number
of video poker devices while truckstops and taverns may install only limited
numbers of such devices.
Casino Operations
On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi
permanently opened for business. Through a wholly-owned subsidiary, the
Company originally purchased a 45% limited partnership interest in RCVP, a
Mississippi limited partnership which owns the casino, all assets (including
the gaming equipment) associated with the casino and certain adjacent parcels of
land. The 55% general partnership interest in RCVP was held by The Rainbow
Casino Corporation, an unaffiliated Mississippi corporation ("RCC"). Pursuant
to a management agreement, the Company, through a wholly-owned subsidiary also
serves as manager of the casino. As previously reported, in connection with
the completion of the casino and the acquisition of its original 45% limited
partnership interest, the Company funded a $3,250,000 advance to RCC on the
same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS")
(other than the fact that such advance is subordinate to payments due to HFS).
Under the terms of this financing, the Company received a royalty of 5.2% of
annual gross revenues. On March 29, 1995, the Company consummated certain
transactions whereby the Company acquired from RCC the controlling general
partnership interest in RCVP and increased its partnership interest. In
exchange for the assumption by National Gaming Mississippi, Inc. ("NGM"), a
subsidiary of National Gaming Corporation, of approximately $1,140,000 of
liabilities (plus a financing fee payable to HFS) related to the completion
of certain incomplete elements of the project which survived the opening
of the casino (for which RCC was to have been responsible, but failed to
satisfy), a related cash payment by the Company to NGM and commitments by
the Company and NGM to fund additional financing required to complete the
project (i) a subsidiary of the Company became the general partner and RCC
became the limited partner and (ii) the respective partnership interests
were adjusted. As adjusted, RCC is entitled to receive 10% of the net available
cash flows after debt service and other items, as defined, (which amount shall
increase to 20% of cash above $35,000,000 (i.e. only on such incremental
amount)), for a period of 15 years, such period being subject to one year
extensions for each year in which a minimum payment of $50,000 is not made.
Also, the Company's 5.2% royalty on gross revenues was terminated on the
date it became the general partner. The entire project consists of the
Rainbow Casino and also includes an 89-room Days Inn hotel and a 10 acre
indoor and outdoor state-of-the-art entertainment complex called Funtricity
Entertainment Park, which was developed by a subsidiary of Six Flags. Both
the hotel and entertainment park opened in late May 1995. The entire
property, known as Vicksburg Landing, is the only destination of its kind in
Mississippi containing a unique casino/family entertainment complex.
At June 30, 1995, the Company's Nevada casino operations consisted of owning and
operating the Plantation and leasing and operating a small casino and one small
casino-hotel.
In April 1990, the Company purchased substantially all of the assets of the
Plantation Casino (the "Plantation") located near the border of Reno and Sparks
in northern Nevada. The Plantation is a 20,000 square foot casino
containing 477 gaming devices, keno and 7 table games, including blackjack,
craps, roulette and poker. In addition, the Plantation offers a race and sports
book which is leased to an independent race and sports book operator. The
Plantation, which also includes an approximately 300 seat restaurant, is
convenient to both Reno and Sparks and caters to the local market.
In July 1993, the Company began leasing and operating the casino at the 326 room
Quality Inn located approximately one mile from the Las Vegas Strip. The casino
at Quality Inn contains 156 gaming devices and 3 table games. The Company's
lease to operate this facility expired in July 1995. The Company has chosen not
to exercise its renewal rights under this lease. The Company is currently
operating under modified lease terms which expire in December 1995.
The Company leases and operates the Mizpah Hotel and Casino ("Mizpah"), a small
casino and hotel in Tonopah, Nevada. The Mizpah has 56 rooms, two restaurants
and 70 gaming devices catering primarily to local residents
and travelers between Reno and Las Vegas. The Company's Mizpah lease has a
remaining term of approximately 7.5 years with an option on the Company's behalf
to terminate the lease arrangement at any time after December 31, 1995 with 120
days notice. The Company has notified the landlord of the Mizpah of its
intention to exercise the termination clause of the lease and gave the requisite
120 days notice at that time. Accordingly, the Company's lease will expire in
April 1996.
Marketing. The Company's casinos target the cost conscious local market. The
Company promotes its casinos primarily by providing quality food at reasonable
prices and through special promotional events. The Company
believes its experience with operating small casinos targeted to local markets
will enable it to effectively operate casinos in emerging gaming jurisdictions
that have similar characteristics.
Tavern Operations
The Company currently operates three taverns in the Las Vegas area. The taverns
were acquired when the owners of the locations defaulted on their subleases with
the Company. The three locations operate a total of 80 gaming
devices. In addition, each of the locations include full-service restaurants.
The Company owns three additional such locations which defaulted on their
subleases, but which are not currently open for business or are operated by
unaffiliated third parties pending the sale of the properties.
The remaining terms of the leases on the taverns range from approximately 3 to
15 years with an average remaining lease term of approximately 7 years. The
lease payments range from approximately $6,700 to $10,280 per month
for locations ranging in size from approximately 3,500 square feet to
approximately 7,000 square feet. The Company's tavern operations are designed
to attract the local customer and emphasize repeat business.
Due to continuing operating losses and the incompatibility of small independent
tavern operations with the Company's overall growth strategy, in fiscal 1994 the
Company elected to dispose of its currently operated taverns. As a result of
this decision, the Company wrote down certain assets related to the taverns to
their net realizable value and expensed the present value of future lease
payments net of assumed future sublease income. Subsequently, the Company has
entered into an agreement to sell all six tavern locations to an unaffiliated
third party. This agreement is subject to, among other conditions, obtaining
appropriate approvals from Nevada gaming authorities, which approval is expected
by December 1995. No material gain or loss will be recognized upon
consummation of this sale, but the Company expects ongoing results of operations
to improve as a result of the disposition of these unprofitable tavern
locations.
In the future, although it does not intend to, the Company may acquire other
taverns due to defaults of current tenants on their subleases or otherwise. In
each such case, the Company will evaluate the prospects and determine
the best method of disposing of such locations.
Manufacturing Operations
The Company currently manufactures and distributes gaming devices in Nevada for
use in its gaming device route operations. The Company manufactured
approximately 80% of the gaming devices currently used in its Nevada
gaming device route operations. The manufacturing process generally involves
the assembly of standard components which are readily available from various
sources. The Company is not dependent upon any one supplier for the
materials or components used in its manufacturing operations.
The Company also participates in the development of gaming ideas, technology and
manufacturing. The Company has developed gaming devices with bill acceptor
and ticket printer features, as well as touch screen and multi-game
capabilities. The Company anticipates utilizing these devices in many of its
Nevada gaming device route locations instead of the traditional coin operated
devices. The Company believes the adoption of the bill acceptor and ticket
printer features will increase the reliability of its Nevada gaming devices,
thereby reducing service costs. The Company believes its development and
manufacturing capabilities are a competitive advantage.
Competition
Nevada. Gaming of all types is available throughout Nevada in numerous
locations, including many locations similar to those at which the Company
operates gaming devices. All of these other gaming opportunities may
compete directly or indirectly with the Company. Many of the Company's
competitors possess substantially greater financial and other resources than
the Company. Many of such competitors include large casino-hotels which offer
more variety and amenities and may be perceived to have more favorable locations
than the Company.
The Company is subject to substantial direct competition for its space lease and
revenue sharing gaming device locations from several large gaming route
operators and numerous small operators, located principally in Las Vegas,
Reno and the surrounding areas. The principal method of competition for gaming
route operators include the economic terms of the space lease or revenue sharing
arrangement, the services provided and the reputation of the
route operator. Price competition is intense and has reduced the Company's
gross margin on such operations over the past several years as the percentage of
the gaming device revenues retained by local establishment owners has
increased. The Company expects this trend to continue.
The operation of casinos and taverns is also a highly competitive business. The
principal competitive factors in the industry include the quality and location
of the facility, the nature and quality of the amenities and customer services
offered and the implementation and success of marketing programs. The Company's
primary casino and tavern operations focus on the local market rather than the
tourist market. Accordingly, the Company believes that the principal
competition for the Company's operations comes from smaller casinos and taverns.
Although large hotels and casinos also attract gaming customers from the local
market.
Louisiana. The Company is subject to extensive competition for contracts to
operate video poker devices and the Company's racetrack and OTB parlors
compete with various truck stops and locations with liquor licenses
throughout the New Orleans area. Each truck stop is permitted to operate up to
50 video poker devices and each tavern is permitted to operate up to 3 video
poker devices. In addition, Louisiana has authorized river boat gaming
statewide and several riverboats are operating in Orleans Parish. Riverboats
are permitted to have live table games and an unlimited number of gaming
devices, including slot machines. Louisiana has also authorized one land based
casino, permitted to include live table games and an unlimited number of gaming
devices, which is now open and operating in temporary facilities in New Orleans.
The adjacent state of Mississippi has legalized dockside gaming, which attracts
many local and tourist players from the New Orleans area. The Company has one
such casino located in Vicksburg, Mississippi. Dockside gaming
in Mississippi, riverboat casinos in Louisiana and the land based casino in
Orleans Parish have a wide variety of gaming devices and table games, while
the Louisiana Act limits the Company's operations to video poker devices
only. Further, the Louisiana Act limits the jackpot that may be paid by a video
poker device to a maximum of $1,000 per play in some cases and $500 per play in
others while other gaming activities have no such limits.
Mississippi. Dockside gaming, in the form of full-service casinos, is legal
throughout the state of Mississippi with no limit on the number of licenses to
be granted by the state gaming authorities. As a result, the operation of
casinos has become a highly competitive business. Like Nevada, the principal
competitive factors in the industry include the quality and location of the
facility, the nature and quality of the amenities and customer services offered
and the implementation and success of marketing programs. The Rainbow Casino
appeals to both locals and visitors to historic Vicksburg, Mississippi. Upon
completion of the three phase plan for the Rainbow Entertainment Park
which includes an 88-room Days Inn resort and a 10-acre entertainment complex to
be developed by a subsidiary of Six Flags, Rainbow will be the only destination
of its kind in Mississippi and as such hopes to encourage a significant number
of repeat visits by both locals and tourists. The Rainbow Casino is the fourth
gaming facility to open in Vicksburg, Mississippi and, as such, faces
substantial direct competition for gaming customers in the region.
Patents, Copyrights and Trade Secrets
The Company does not believe patent, copyright or trademark protection to be
material to its business. However, the Company has copyrighted both the source
code and the video presentation of its games and registered many of
these copyrights with the U. S. Copyright Office under the Copyright Act of
1976. Game version upgrades and new games are currently in the process of
United States patent and copyright registration. In addition, some of the
games have federal and/or state trademarks registered with the U.S. Patent and
Trademark office. Some of the games (either currently used or reserved for
future development) also are covered by patents filed with the U.S.
Patent and Trademark office.
The Company has registered the trademark "CEI" and its design and the logos of
United Gaming, Inc. and United Coin Machine Co. with the U.S. Patent and
Trademark Office.
Business Development Activity
On June 19, 1995, the Company publicly proposed a negotiated acquisition of
Bally Gaming International, Inc. ("BGII") for $12.50 per share of BGII common
stock. Prior to making this offer, the Company had acquired
500,000 shares of BGII stock on the open market and at June 30, 1995 held
1,000,000 shares (approximately 9.3% of BGII's total outstanding shares,
based on BGII's most recent public filings) which it acquired at an average
cost of approximately $10.41 per share. Under the proposed terms of the
offer, approximately 60% of BGII shares not held by the Company would be
acquired for cash with the remainder exchanged for shares of the Company's
common stock. The offer was contingent upon satisfactory due diligence,
regulatory and stockholder approval and reasonable financing. At the
time the offer was made public, the Company requested expedited due
diligence, subject to a confidentiality agreement. BGII had previously
announced a planned merger with WMS Industries ("WMS") which included
an exclusive period for WMS to negotiate the terms of that proposed merger.
WMS's exclusive negotiating period had expired several weeks before the
Company's proposal was made without announcement or action on the part of
BGII or WMS. On July 25, 1995, after being refused due diligence access and
the announcement by BGII that a definitive agreement had been reached to merge
with WMS, the Company announced its intent to make a tender offer for
BGII. The tender offer was on largely the same terms as the originally proposed
acquisition. On the same date, the Company announced it had filed litigation in
Delaware Chancery Court requesting that the court require BGII
to grant the Company due diligence access, enjoin BGII from proceeding with the
WMS merger (including a provision therein requiring the sale of BGII's German
operations) and declare the breakup fee provided for in the
WMS merger to be invalid. The Company indicated that it would increase the
price per share of BGII stock to $13.00 per share if the breakup fee was
declared invalid. The tender offer was conditioned upon the Company
being validly tendered a number of shares of BGII stock, which combined with its
own holdings of such stock, would give the Company a majority of BGII's
outstanding shares. The tender offer commenced on July 28, 1995
and, as extended to date, is currently set to expire on October 3, 1995.
Subsequently, the Company announced its intention to proceed with a consent
solicitation to elect a majority of independent directors to the BGII Board of
Directors. On August 14, 1995, the Company, BGII and WMS jointly announced an
agreement whereby the parties would hold in abeyance all activities related to
pending litigation until September 1, 1995, refrain from commencing
new litigation until that same date, BGII would schedule its annual shareholder
meeting for consideration of the proposed WMS merger and the election of
directors on October 30, 1995, and the Company would extend the
expiration date of the tender offer until September 12, 1995 and refrain from
soliciting proxies until September 1, 1995. On September 1, 1995, the Company
disclosed that it had obtained firm financing commitments to fund the
tender offer and that such commitments were not conditioned on due diligence of
BGII. Accordingly, the Company extended the expiration date of its tender offer
to September 29, 1995. BGII and WMS have filed lawsuits against
the Company alleging numerous public misrepresentations had been made by the
Company with regards to the WMS-BGII agreement, the Company's tender offer and
the level of cooperation of BGII's board of directors. The Company considers
these claims to be without merit and will mount a vigorous defense against said
claims. Subsequent to filing its lawsuit against the Company, BGII adopted a
poison pill provision designed to discourage the Company's acquisition efforts.
In response to the poison pill adoption, the Company announced it had increased
its tender offer to $13.00 per share of BGII common stock and increased to
5,400,000 the number of BGII common shares being sought in the tender offer.
The increase in the tender offer price is being financed by the Company's
cash on hand and the proceeds of an equity private placement of approximately
3,300,000 shares of the Company's non-voting Junior Convertible Special Stock.
The proceeds of the private placement include commitments for over $1,000,000 of
new investments by certain directors and officers of the Company. The Company
also established a collar on the number of Company shares to be offered in the
proposed back-end merger. The Company will exchange between 2.167 to 3.059
shares of its common stock for each share of BGII common stock. The exact
value of the Company's common stock to be used for the exchange ratio will be
determined by averaging the closing price of the Company's common stock for a
period of ten Nasdaq trading days ending five days prior to the closing
of the merger.
Through a wholly owned subsidiary, Native American Investments, Inc. ("NAI"),
the Company has a contract to develop Class II and III gaming opportunities
with an Indian tribe in California. The contract is subject to
negotiations resulting in satisfactory compacts with the state and approval of
the contract by the National Indian Gaming Commission. The Governor of
California has to date refused to negotiate a compact covering Indian
gaming in California and is currently engaged in related litigation with certain
Indian tribes. In one case, Rumsey Indian Rancheria vs. Wilson, which had been
appealed to the U.S. Ninth Circuit Court of Appeals, a three judge
panel ruled that the State of California may be obligated to negotiate compacts
with Indian tribes for Class III gaming with respect to slot machines. However,
the determination of a legal definition for slot machines was
remanded to the U.S. Federal District Court for the Eastern District of
California. In the case of Western Telcon vs. California State Lottery, a
three judge panel from the Second Appellate District Court of Appeals ruled that
the state's lottery machines are the legal equivalent of slot machines. This
ruling was recently upheld by the full Court. The State of California has
appealed this ruling to the state Supreme Court. There can be no assurance as
to the ultimate outcome of these litigation activities or the successful
completion or operation of any part of this project.
The Company and Casino Magic Corporation, through wholly owned subsidiaries, are
members in Kansas Gaming Partners, LLC ("KGP") and Kansas Financial Partners,
LLC ("KFP"), both Kansas limited liability companies. Under an option agreement
granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown"), KGP has been
granted the exclusive right to operate gaming devices and/or casino-type gaming
at Camptown's facility if and when such gaming is permitted in Kansas. In
September 1994, the Kansas Racing Commission approved a revised financing
proposal submitted by Camptown that would facilitate completion of construction
of a greyhound racing facility on the 320 acre site in Frontenac, Kansas.
Camptown has received a $3,205,000 loan commitment which has been guaranteed by
KFP. In December 1994, the Company invested $1,580,000 in KFP for its portion
of the loan guarantee which was made in the form of a certificate of deposit.
Construction of Camptown's racing facility has been completed and the facility
opened for business in May 1995. Camptown's obligation to begin to repay
the loan guaranteed by KFP commenced in June 1995 with interest only payments.
Principal repayment is scheduled to commence in June 1996. There can be no
assurance as to the successful completion or operation of any part of
this project.
Growth Strategy
The Company's growth strategy is to utilize its diversified gaming expertise,
strengthened executive management, business partners and investment community
relationships to pursue a variety of business and investment opportunities in
existing market areas such as Las Vegas and other Nevada locations, as well as
emerging gaming markets, including land based, dockside, or riverboat
(including Native American owned) casinos, the operation of gaming device routes
and the supply and management of gaming devices.
The Company believes it is well positioned to capitalize on investment
opportunities in both existing gaming markets, especially in Nevada, as well
as emerging jurisdictions as a result of (i) its diversified gaming expertise
including gaming device route management, casino operations and gaming device
design and manufacture, (ii) an experienced management team, (iii) its
affiliation with Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland")
and Gaming Systems Advisors, L.P. ("GSA") and (iv) its demonstrated ability to
expand its gaming operations to new jurisdictions, as evidenced by its
operations in Louisiana and Mississippi.
Employees
As of June 30, 1995, the Company employed approximately 825 persons in the State
of Nevada and approximately 10 persons in various states related to its
business development activities, VSI employed approximately 62 persons
in the State of Louisiana and RCVP employed 347 persons in the State of
Mississippi. None of such employees is covered by a collective bargaining
agreement. The Company believes its relationships with its employees are
satisfactory.
Gaming Regulations and Licensing
Nevada. The ownership and operation of casino gaming facilities in Nevada are
subject to (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (the "Nevada Act") and (ii) various local ordinances and
regulations. The Company's gaming, manufacturing, distributing and slot route
operations are subject to the licensing and regulatory control of the Nevada
State Gaming Control Board (" Nevada Board"), the Nevada Gaming
Commission ("Nevada Commission"), the County Liquor and Gaming Licensing Board
("Clark County Board") and various other county and city regulatory agencies,
all of which are collectively referred to as the "Nevada Gaming
Authorities".
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things, (i) the prevention of unsavory or unsuitable persons
from having any direct or indirect involvement with gaming at any time in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective control over the
financial practices of licensees, including establishment of minimum procedures
for internal fiscal affairs and the safeguarding of assets and revenues,
providing reliable record keeping and requiring the filing of periodic reports
with the Nevada Gaming Authorities; (iv) the preventing of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Change in such laws, regulations and
procedures could have an adverse effect on the Company's gaming, manufacturing,
distributing and slot route operations.
The Company is registered with the Nevada Commission as a publicly traded
corporation ("Registered Corporation"). The Company's direct and indirect
subsidiaries which conduct gaming operations at various locations, operate a
gaming device route and manufacture and distribute gaming devices (collectively,
"Nevada Subsidiaries") are required to be licensed by the Nevada Gaming
Authorities. The licenses held by the Nevada Subsidiaries require the periodic
payments of fees, or fees and taxes, and are not transferable. The Company has
been found suitable to own the stock of the Nevada Subsidiaries, each of which
is a corporate licensee (individually, "Corporate Licensee" and collectively,
"Corporate Licensees") under the terms of the Nevada Act. As a Registered
Corporation, the Company is required periodically to submit detailed financial
and operating reports to the Nevada Commission and furnish any other information
which the Nevada Commission may require. No person may become
a stockholder of, or receive any percentage of the profits from the Corporate
Licensees without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and Corporate Licensees have obtained
from the Nevada Gaming Authorities the various registrations, approvals, permits
and licenses required in order to engage in gaming activities, gaming device
route operations, and in the manufacture and distribution of gaming
devices for use or play in Nevada or for distribution outside of Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company or the Corporate
Licensees in order to determine whether such individual is suitable
or should be licensed as a business associate of a gaming licensee. Officers,
directors and key employees of the Company who are actively and directly
involved in the licensed activities of the Corporate Licensees may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing for any cause
which they deem reasonable. A finding of suitability is comparable
to licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing
or a finding of suitability must pay all the costs of the investigation.
Changes in licensed positions must be reported to the Nevada Gaming Authorities
and in addition to their authority to deny an application for a finding of
suitability or licensure, the Nevada Gaming Authorities have jurisdiction to
disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or Corporate Licensees, the companies involved
would have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company or the Corporate Licensees to terminate the
employment of any person who refuses to file appropriate applications.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
The Company and Corporate Licensees that hold nonrestricted licenses are
required to submit detailed financial and operating reports to the Nevada
Commission. A nonrestricted license is a license for an operation consisting of
16 or more slot machines, or a license for any number of slot machines together
with any other game, gaming device, race book or sports pool at one
establishment. Substantially all material loans, leases, sales of securities
and similar financing transactions by the Corporate Licensees that hold a
nonrestricted license must be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by a Corporate Licensee,
the licenses it holds could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures.
In addition, the Company, the Corporate Licensees and the persons involved could
be subject to substantial fines for each separate violation of the Nevada Act
at the discretion of the Nevada Commission. Further a supervisor
could be appointed by the Nevada Commission to operate any nonrestricted gaming
establishment operated by a Corporate Licensee and, under certain circumstances,
earnings generated during the supervisor's appointment (except for reasonable
rental of the casino) could be forfeited to the State of Nevada. Limitation,
conditioning or suspension of the gaming licenses of the Corporate Licensees or
the appointment of a supervisor could (and revocation of any gaming license
would) materially adversely affect the Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's
voting securities determined if the Nevada Commission has reason to believe that
such ownership would otherwise be inconsistent with the declared policies of
the State of Nevada. The applicant must pay all costs of investigation
incurred by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a Registered
Corporations's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Nevada
Commission for a finding of suitability within 30 days after the Chairman of
the Nevada Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor" as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of a Registered Corporation's
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the securities for
investment purposes only. An institutional investor shall not be deemed to
hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action
if, after it receives notice that a person is unsuitable to be a
stockholder or to have any other relationship with the Company or the
Corporate Licensees, the Company (i) pays that person any dividend or interest
upon voting securities of the Company, (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person, (iii) pays remuneration in any form to that person for services
rendered or otherwise, or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities, including, if
necessary, the immediate purchase of said voting securities for cash at fair
market value. Additionally, the Clark County Board has taken the position that
it has the authority to approve all persons owning or controlling the stock of
any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any debt
securities of a Registered Corporation, to file applications, be investigated
and be found suitable to own the debt security. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if, without the prior approval of the
Nevada Commission, it (i) pays the unsuitable person any dividend, interest or
any distribution whatsoever; (ii) recognizes any voting right by such
unsuitable person in connection with such securities; (iii) pays the unsuitable
person remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation or
similar transaction.
The Company is required to maintain a current stock ledger in Nevada which may
be examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to impose a requirement that a Registered Corporation's
stock certificates bear a legend indicating that the securities are subject to
the Nevada Act. The Nevada Commission has imposed this requirement on the
Company.
The Company may not make a public offering of its securities without the prior
approval of the Nevada Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. Any such
approval, if granted, does not constitute a finding, recommendation or approval
by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of
the prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful. The Nevada Commission has also
imposed a requirement on the Company that it must receive the prior
administrative approval of the Nevada Board Chairman for any offer for the sale
of an equity security in a private transaction.
Changes in control of the Company through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he obtains control, may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission in a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as a
part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a
regulatory scheme to ameliorate the potentially adverse affects of these
business practices on Nevada's gaming industry and to further Nevada's policy
to: (i) assure the financial stability of corporate gaming licensees and their
affiliates; (ii) preserve the beneficial aspects of conducting business in the
corporate form; and (iii) promote a neutral environment for orderly governance
of corporate affairs. Approvals are, in certain circumstances, required from
the Nevada Commission before a Registered Corporation can make exceptional
repurchases of voting securities above the current market price thereof and
before a corporate acquisition opposed by management can be consummated. The
Nevada Act also requires prior approval of a plan of recapitalization proposed
by the Registered Corporation's Board of Directors in response to a tender offer
made directly to the Registered Corporation's stockholders for the purposes of
acquiring control of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada, and to the counties
and cities in which the Licensees' respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based upon either (i) a
percentage of the gross revenues received, (ii) the number of gaming
devices operated, or (iii) the number of games operated. A casino entertainment
tax is also paid by casino operations where entertainment is furnished in
connection with the selling of food or refreshments. The Corporate
Licensee's that hold a license as an operator of a gaming device route, or a
manufacturer's or distributor's license also pay certain fees to the State of
Nevada.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively
"Licensees"), and who proposes to become involved in a gaming venture
outside of Nevada, is required to deposit with the Nevada Board, and thereafter
maintain, a revolving fund in the amount of $10,000 to pay the expenses of
investigation by the Nevada Board of their participation in such foreign
gaming. The revolving fund is subject to increase or decrease in the discretion
of the Nevada Commission. Thereafter, Licensees are required to comply with
certain reporting requirements imposed by the Nevada Act. Licensees are also
subject to disciplinary action by the Nevada Commission if they knowingly
violate any laws of the foreign jurisdiction pertaining to the foreign gaming
operation, fail to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming operations, engage
in activities that are harmful to the state of Nevada or its ability to collect
gaming taxes and fees, or employ a person in the foreign operations who has been
denied a license or finding of suitability in Nevada on the ground of personal
unsuitability.
The sale of alcoholic beverages at establishments operated by a Corporate
Licensee are subject to licensing, control and regulation by applicable
regulatory agencies. All licenses are revocable and are not transferable. The
agencies involved have full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action could (and revocation would)
have a material adverse affect upon the operations of the Corporate Licensees.
Louisiana. The manufacture, distribution, servicing and operation of video draw
poker devices ("Devices") in Louisiana is subject to the Louisiana Video Draw
Poker Devices Control Law and the Rules and Regulations promulgated thereunder
(the "Louisiana Act"). Licensing and regulatory control is provided by the
Video Gaming Division of the Gaming Enforcement Section of the Office of State
Police within the Department of Public Safety and Corrections (the "Division").
The laws and regulations of the Division are based upon a primary consideration
of maintaining the health, welfare and safety of the general public and upon a
policy which is concerned with protecting the video gaming industry from
elements of organized crime, illegal gambling activities and other harmful
elements as well as protecting the public from illegal and unscrupulous gaming
to ensure the fair play of Devices.
Each of the indirect operating subsidiaries for the Company's gaming operations
in Louisiana, VSI and SVS, has been granted a license as a Device owner by the
Division. The other indirect subsidiary of the Company, VDSI, has been granted
a license as a distributor by the Division. These gaming subsidiaries are
Louisiana Licensees under the terms of the Louisiana Act. The licenses held
by the Louisiana Licensees expire at midnight on June 30 of each year and must
be renewed annually through payment of fees. All license fees must be paid on
or before May 15 in each year licenses are renewable.
The Division may deny, impose a condition on or suspend or revoke a license,
renewal or application for a license for violations of any rules and regulations
of the Division or any violations of the Louisiana Act. In addition, fines
for violations of gaming laws or regulations may be levied against the Louisiana
Licensees and the persons involved for each violation of the gaming laws. The
issuance, condition, denial, suspension or revocation is a pure and
absolute privilege and is at the discretion of the Division in accordance with
the provisions of the Louisiana Act. A license is not property or a protected
interest under the constitution of either the United States or the State of
Louisiana.
The Division has the authority to conduct overt and covert investigations of any
person involved directly or indirectly in the video gaming industry in
Louisiana. This investigation may extend to information regarding a
person's immediate family and relatives and their affiliations with certain
organizations or other business entities. The investigation may also extend
to any person who has or controls more than a 5% ownership, income or profits
interest in an applicant for or holder of a license or who is a key employee, or
who has the ability to exercise significant influence over the licensee. All
persons or entities investigated must meet all suitability requirements
and qualifications for a licensee. The Division may deny an application for
licensing for any cause which it may deem reasonable. The applicant for
licensing must pay a filing fee which also covers the cost of the investigation.
In order for a corporation to be licensed by the Division, a majority of the
stock of the corporation must be owned by persons who have been domiciled in
Louisiana for a period of at least two years prior to the date of the
application.
Devices must meet strict specifications established by the Division. The number
of devices permitted depends on the type of location at which the Devices are
operated. Fees payable to the Division include an application fee
which is non-refundable, an annual fee based upon a percentage of net revenues
from the operation of each Device, a Device owner's fee, a Device operators fee,
a license establishment fee and a Device owner's franchise fee. All
fees are payable in either quarterly or annual installments depending on the fee
being paid.
Mississippi. The ownership and operation of gaming devices in Mississippi is
subject to extensive state and local laws and regulations, including the
Mississippi Gaming Control Act (the "Mississippi Act") and the regulations (the
"Mississippi Regulations") promulgated thereunder. The Mississippi Gaming
Commission (the "Mississippi Commission") oversees licensing and regulatory
compliance. Gaming in Mississippi can be legally conducted only
on vessels of a certain minimum size in navigable waters of the Mississippi
River or in waters of the State of Mississippi which lie adjacent and to the
south (principally in the Gulf of Mexico) of the counties of Hancock,
Harrison and Jackson, and only in counties in Mississippi in which the
registered voters have not voted to prohibit such activities. The voters in
Jackson County, the southeastern-most county of Mississippi, have voted to
prohibit gaming in that county. However, gaming could be authorized in
Jackson County should the voters fail to disapprove of gaming in that county in
any referendum, which could be held annually. The underlying policy of the
Mississippi Act is to ensure that gaming operations in Mississippi are conducted
(i) honestly and competitively, (ii) free of criminal and corruptive influences
and (iii) in a manner which protects the rights of the creditors of gaming
operations. Gaming in the future may also be legally conducted on American
Indian lands in Mississippi as regulated in part by the 1988 Indian Gaming
Regulatory Act, which activity will not be subject to the Mississippi Act.
The Mississippi Act requires that a person (including any corporation or other
entity) must be licensed to conduct gaming activities in Mississippi. A
license will be issued only for a specified location which has been approved as
a gaming site by the Mississippi Commission. The Company, through its interest
in Rainbow Casino-Vicksburg Partnership ("RCVP") must apply for renewal of
such licenses, which renewal cannot be assured. The Mississippi Act also
requires that each officer or director of a gaming licensee, or other person who
exercises a significant influence over the licensee, either directly or
indirectly, must be found suitable by the Mississippi Commission.
In addition, any employee of the licensee which is directly involved in gaming,
must obtain a work permit from the Mississippi Commission. The Mississippi
Commission will not issue a license or make a finding of suitability unless
it is satisfied, only after an extensive investigation paid for by the
applicant, that the persons associated with the gaming licensee or applicant
for a license are of good character, honesty and integrity, with no relevant or
material criminal record. In addition, the Mississippi Commission will not
issue a license unless it is satisfied that the licensee is adequately
financed or has a reasonable plan to finance its proposed operations from
acceptable sources, and that persons associated with the applicant have
sufficient business probity, competence and experience to engage
in the proposed gaming enterprise. The Mississippi Commission may refuse to
issue a work permit to a gaming employee (i) if the employee has committed
larceny, embezzlement or any crime of moral turpitude, or knowingly
violated the Mississippi Act or Mississippi Regulations, or (ii) for any other
reasonable cause. If an employee is denied a license, the Company must
terminate his or her employment.
The Mississippi Commission has the power to deny, limit, condition, revoke and
suspend any license, finding of suitability or registration, or fine any
person, as it deems reasonable and in the public interest, subject to any
opportunity for a hearing. The Mississippi Commission may fine any licensee or
person who was found suitable up to $100,000 for each violation of the
Mississippi Act or the Mississippi Regulations, which is the subject of an
initial complaint, and up to $250,000 for each such violation which is the
subject of any subsequent complaint. The Mississippi Act provides for judicial
review of any final decision of the Mississippi Commission by petition to a
Mississippi Circuit Court, but filing of such petition does not necessarily stay
any action by the Mississippi Commission pending a decision by the Circuit
Court.
Each gaming licensee must pay a license fee to the State of Mississippi based
upon "gaming receipts" (generally defined as gross receipts less payouts to
customers as winnings). The license fee equals four percent of gaming
receipts of $50,000 or less per month, six percent of gaming receipts over
$50,000 and up to $134,000 per month and eight percent of gaming receipts over
$134,000 per month. The foregoing license fees are allowed as a credit
against any Mississippi State income tax liability for the year paid. An
additional license fee, equal to $100 for each table game conducted or planned
to be conducted on the gaming premises, is payable to the State annually in
advance. Municipal and county fees may also be assessed and vary from
jurisdiction to jurisdiction. All taxes and fees must be paid timely in order
to retain a gaming license.The Mississippi Act also imposes certain audit and
record keeping laws and regulations, primarily to ensure compliance with the
Mississippi Act, including compliance with the provisions relating to the
payment of license fees.
Under the Mississippi Regulations, a gaming licensee cannot be publicly held,
although an affiliated corporation, such as the Company, may be publicly held
so long as the Company registers with and gets the approval of the
Mississippi Commission. In addition, approval of any subsequent public
offerings of the securities of the Company must be obtained from the
Mississippi Commission if any part of the proceeds from that offering are
intended to be used to pay for or reduce debt used to pay for the construction,
acquisition or operation of any gaming facility in Mississippi.
Under the Mississippi Regulations, a person is prohibited from acquiring control
of a licensee without the prior approval of the Mississippi Commission. Any
person who, directly or indirectly, or in association with others,
acquires beneficial ownership of more than five percent of a licensee must
notify the Mississippi Commission of this acquisition. The Mississippi
Commission may require that a person be found suitable if that person holds
between a five percent and ten percent ownership position and must require that
a person be found suitable if that person owns more than ten percent of a
licensee. Furthermore, regardless of the amount of ownership, any person
who acquires beneficial ownership may be required to be found suitable if the
Mississippi Commission has reason to believe that the acquisition of such
ownership would be inconsistent with the declared policy of Mississippi. Any
person who is required to be found suitable must apply for a finding of
suitability from the Mississippi Commission within 30 days after being requested
to do so, and must deposit with the State Tax Commission a sum of money
which is adequate to pay the anticipated investigatory costs associated with
such finding. Any person who is found not to be suitable by the Mississippi
Commission shall not be permitted to have any direct or indirect ownership
in the licensee. Any person who is required to apply for a finding of
suitability and fails to do so, or who fails to dispose of his or her interest
in the licensee if found unsuitable, is guilty of a misdemeanor. If a finding
of suitability with respect to any person is not applied for where required,
or if it is denied or revoked by the Mississippi Commission, the licensee is
not permitted to pay such person for services rendered, or to employ or
enter into any contract with such person.
Dockside casinos may be required to be moved to a "safe harbor" in the event of
a threatened hurricane. The appropriate county civil defense director will
determine when such movement is required. In general, it is anticipated that
casino vessels will have to be moved in the event of a Class III or more severe
hurricane warning, where there is the possibility of 125 miles per hour wind
speeds. The movement of a casino barge will not necessarily insure protection
against damage or destruction by a hurricane. Furthermore, the removal of a
casino barge will generally require several days, and as a consequence, the
casino barge will be out of business during that movement, even if no hurricane
strikes the casino site.
Any permanently moored vessel used for casino operations must meet the fire
safety standard of the Mississippi Fire Prevention Code, the Life Safety Code
and the Standards for the Construction and Fire Protection of Marine
Terminals, Piers and Wharfs of the National Fire Protection Association.
Additionally, any establishment to be constructed for dockside gaming must
meet the Southern Standard Building Code or the local building code, if such
a local building code has been implemented at the casino's site.
While unpowered and permanently moored vessels do not require certification by
the United States Coast Guard, the Mississippi Commission has engaged the
American Bureau of Shipping, an independent consulting agency, which
will inspect and certify all casino barges with respect to stability and single
compartment flooding integrity, in accordance with Mississippi Regulations.
The laws and regulations permitting and governing Mississippi casino gaming were
adopted during 1990 and 1991, and the first casinos opened in August 1992.
Consequently, the interpretation and application of Mississippi law
and regulations may evolve over time, and any such changes may have an
adverse effect on Mississippi licensees.
Additional Jurisdictions. The Company, in the ordinary course of its business,
routinely considers business opportunities to expand its gaming operations into
additional jurisdictions. Any such expansion would subject the Company and,
possibly, some or all of its officers, directors, employees and stockholders, to
regulatory requirements in addition to those with which such parties are
presently obligated to comply.
As previously noted, the Company is currently attempting to acquire Bally
Gaming, International, Inc. which is licensed in many states as a manufacturer
of gaming devices. If the Company is successful in its attempted
acquisition, the Company will be required to be licensed in each of these
states.
Federal Registration. The operating subsidiaries of the Company that are
involved in gaming activities are required to file annually with the Attorney
General of the United States in connection with the sale, distribution or
operation of gaming devices. All currently required filings have been made.
ITEM 2. PROPERTIES
The following table sets forth information regarding the Company's leased
properties (exclusive of space leases in connection with its gaming device
routes) as of June 30, 1995, all of which are fully utilized unless otherwise
noted:
<TABLE>
<CAPTION>
Annual
Building Rental
Location Use Square Feet Payments
(In 000s)
<S> <S> <C> <C>
Las Vegas, Nv. Executive offices, route operations 72,000 $ 486
and manufacturing
Washington, D.C. Administrative offices 400 31
New York, N.Y. Executive offices 4,650 279
Vicksburg, Mississippi Casino administration offices 2,000 15
Las Vegas, Nv. Subleased office space 9,500 58
Reno/Sparks, Nv. Route operations 12,100 71
Carson City, Nv. Route operations 2,500 8
Fallon, Nv. Route operations 900 5
Elko, Nv. Route operations 1,000 8
Las Vegas, Nv. Route location 8,000 419
Tonopah, Nv. Casino Hotel 10,000 210
Las Vegas, Nv. (1) Casino 24,700 494
Las Vegas, Nv. Tavern 7,000 122
Las Vegas, Nv. Tavern 4,864 96
Las Vegas, Nv. (1) Tavern 4,300 81
Las Vegas, Nv. Tavern 3,500 88
Las Vegas, Nv. Tavern 4,200 54
Las Vegas, Nv. Tavern 4,225 80
Las Vegas, Nv. (2) Ground Lease 320
Sparks, Nv. (3) Ground Lease 4
New Orleans, La. Administrative offices & route operations 6,000 53
</TABLE>
(1) See discussion in Item 7. Management's Discussion and Analysis of
Financial Condition for changes in utilization of these properties.
(2) Lease consists of ground lease for parking at the Trolley Stop.
(3) Lease consists of long-term land lease for parking at the Plantation.
In addition, the Company leases approximately 16 properties which have been
subleased in connection with its gaming device routes. The properties range
in size from approximately 1,750 square feet to 7,700 square feet. The
remaining terms of the leases range from 5 months to 14 years with monthly
payments ranging from approximately $1,500 to $8,100. See Note 10 of Notes
to Consolidated Financial Statements for information as to the Company's lease
commitments with respect to the foregoing rental properties. The Company
believes its facilities are suitable for its needs and the Company has no
future expansion plans that would make these properties inadequate.
The following table sets forth information regarding properties owned by the
Company as of June 30, 1995, all of which are fully utilized unless otherwise
noted:
<TABLE>
<CAPTION>
Building
Location Use Square Feet (1)
(In 000s)
<S> <S> <C>
Reno/Sparks, Nv. Casino 35,000
Vicksburg, Mississippi Casino 24,000
Las Vegas, Nv. (1) Vacant - Casino/Tavern 7,700
Las Vegas, Nv. Tavern/Land 5,000
North Las Vegas, Nv. Parking ---
(1) See discussion in Item 7. Management's Discussion and Analysis of
Financial Condition for changes in utilization of these properties.
ITEM 3. LEGAL PROCEEDINGS
On June 19, 1995, the Company publicly proposed a negotiated acquisition of
Bally Gaming International, Inc. ("BGII") for $12.50 per share of BGII common
stock. Prior to making this offer, the Company had acquired 500,000 shares of
BGII stock on the open market and at June 30, 1995 held 1,000,000 shares
(approximately 9.3% of BGII's total outstanding shares, based on BGII's
most recent public filings) which it acquired at an average cost of
approximately $10.41 per share. Under the proposed terms of the offer,
approximately 60% of BGII shares not held by the Company would be
acquired for cash with the remainder exchanged for shares of the Company's
common stock. The offer was contingent upon satisfactory due diligence,
regulatory and stockholder approval and reasonable financing. At the time the
offer was made public, the Company requested expedited due diligence, subject to
a confidentiality agreement. BGII had previously announced a planned merger
with WMS Industries, Inc. ("WMS") which included an exclusive period for
WMS to negotiate the terms of that proposed merger. WMS's exclusive negotiating
period had expired several weeks before the Company's proposal was made without
announcement or action on the part of BGII or WMS. On July 25, 1995, after
being refused due diligence access and the announcement by BGII that a
definitive agreement had been reached to merge with WMS, the Company announced
its intent to make a tender offer for BGII. The tender offer was on largely
the same terms as the originally proposed acquisition. On the same date,
the Company announced it had filed litigation in Delaware Chancery Court
requesting that the court require BGII to grant the Company due diligence
access, enjoin BGII from proceeding with the WMS merger (including a
provision therein requiring the sale of BGII's German operations) and declare
the breakup fee provided for in the WMS merger to be invalid. The Company
indicated that it would increase the price per share of BGII stock to
$13.00 per share if the breakup fee was declared invalid. The tender offer was
conditioned upon the Company being validly tendered a number of shares of BGII
stock, which combined with its own holdings of such stock, would give the
Company a majority of BGII's outstanding shares. The tender offer commenced on
July 28, 1995 and, as extended to date, is currently set to expire on October 3,
1995. Subsequently, the Company announced its intention to proceed with a
consent solicitation to elect a majority of independent directors to the BGII
Board of Directors. On August 14, 1995, the Company, BGII and WMS jointly
announced an agreement whereby the parties would hold in abeyance all activities
related to pending litigation until September 1, 1995, refrain from commencing
new litigation until that same date, BGII would schedule its annual shareholder
meeting for consideration of the proposed WMS merger and the election of
directors on October 30, 1995, and the Company would extend the
expiration date of the tender offer until September 12, 1995 and refrain from
soliciting proxies until September 1, 1995. On September 1, 1995, the Company
disclosed that it had obtained firm financing commitments to fund the
tender offer and that such commitments were not conditioned on due diligence of
BGII. Accordingly, the Company extended the expiration date of its tender offer
to September 29, 1995. BGII and WMS have filed lawsuits against the Company
alleging numerous public misrepresentations had been made by the Company with
regards to the WMS-BGII agreement, the Company's tender offer and the level of
cooperation of BGII's board of directors. The Company considers these claims
to be without merit and will mount a vigorous defense against said claims.
Subsequent to filing its lawsuit against the Company, BGII adopted a poison pill
provision designed to discourage the Company's acquisition efforts. In response
to the poison pill adoption, the Company announced it had increased its tender
offer to $13.00 per share of BGII common stock and increased to 5,400,000 the
number of BGII common shares being sought in the tender offer. The increase
in the tender offer price is being financed by the Company's cash on hand and
the proceeds of an equity private placement of approximately 3,300,000 shares of
the Company's non-voting Junior Convertible Special Stock. The proceeds of the
private placement include commitments for over $1,000,000 of new investments by
certain directors and officers of the Company. The Company also established
a collar on the number of Company shares to be offered in the proposed back-end
merger. The Company will exchange between 2.167 to 3.059 shares of its common
stock for each share of BGII common stock. The exact value of the Company's
common stock to be used for the exchange ratio will be determined by averaging
the closing price of the Company's common stock for a period of ten Nasdaq
trading days ending five days prior to the closing of the merger.
The Company and its directors are currently defendants in a lawsuit filed by a
stockholder. This suit seeks class action status and alleges several breaches
of fiduciary duty by the Company's current and former directors. The Company
believes this lawsuit was filed to thwart its attempted acquisition of BGII,
the allegations contained therein are without merit and intends to vigorously
defend itself against such claims. In the initial ruling on this case, the
plaintiff's motion for expedited discovery was denied by the U.S. District Court
of Nevada. The District Court also stated that it is unlikely that the
plaintiff in the case would be able to represent other shareholders in fairly
and adequately as defined by law.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended June 30, 1995, no matter was
submitted to a vote of the Company's stockholders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under the symbol
"ALLY". The following table sets forth the high and low closing sales prices
of the Common Stock as reported by Nasdaq for the periods indicated.
</TABLE>
<TABLE>
<CAPTION>
Price Range of
Common Stock
High Low
<S> <C> <C>
Fiscal Year Ended June 30, 1994
1st Quarter $ 9.88 $6.75
2nd Quarter 11.88 7.75
3rd Quarter 10.13 6.75
4th Quarter 7.25 5.13
Fiscal Year Ended June 30, 1995
1st Quarter $ 8.50 $5.13
2nd Quarter 7.88 5.13
3rd Quarter 8.00 5.38
4th Quarter 6.50 4.25
</TABLE>
As of September 25, 1995 the Company had approximately 1,674 holders of record
of its Common Stock.
The Company has never declared or paid cash dividends on its Common Stock. The
Company intends to follow a policy of retaining earnings, if any, to finance
growth of its business and does not anticipate paying any cash dividends in
the foreseeable future. The declaration and payment of future dividends on the
Common Stock will be at the sole discretion of the Board of Directors and will
depend on the Company's profitably and financial condition, capital
requirements, statutory and contractual restrictions, future prospects and other
factors deemed relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data have been derived from the
audited financial statements of the Company for the years ended June 30, 1991,
1992, 1993, 1994 and 1995. The table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30
1991 1992 1993 1994 1995
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Revenues:
Gaming
Routes $ 77,150 $ 77,940 $ 96,282 $102,830 $106,827
Casinos and taverns 11,281 11,560 12,526 15,679 21,287
Food and beverage sales 3,120 3,376 4,184 4,480 3,847
Net equipment sales (1) 214 379 99 65 27
91,765 93,255 113,091 123,054 131,988
Costs and expenses:
Cost of gaming
Routes 58,299 58,585 72,614 76,332 79,875
Casinos and taverns 8,528 8,459 8,667 11,871 11,436
Cost of food and beverage 2,249 2,367 2,876 3,084 2,795
Cost of equipment sales 151 284 49 20 12
Selling, general & administrative 8,059 8,950 12,667 13,555 14,633
Business development costs --- --- 900 1,192 7,843
Corporate administrative expenses 7,567 5,290 6,191 7,882 9,735
Bad debt expense 4,845 539 461 705 400
Write down of inventory 2,050 --- --- --- ---
Write-off intangible
and other assets 2,932 --- --- --- ---
Loss on abandoned casinos 7,847 2,307 --- 3,713 ---
Loss on abandoned taverns --- --- --- 2,638 ---
Depreciation and amortization 7,092 7,355 8,718 9,530 9,520
Total costs and expenses 109,619 94,136 113,143 130,522 136,249
Operating loss (17,854) (881) (52) (7,468) (4,261)
Other income (expense)
Interest income 1,750 1,324 998 2,084 2,798
Interest expense (4,663) (4,505) (5,046) (6,830) (8,133)
Other, net (1,007) (618) 450 (673) (890)
Loss before taxes (21,774) (4,680) (3,650) (12,887) (10,486)
Income tax (expense) benefit 5,958 --- --- (241) (265)
Net loss $ (15,816) $ (4,680) $ (3,650) $ (13,128) $(10,751)
Net loss per common share $ (1.73) $ (0.51) $ (0.38) $ (1.28) $ (0.95)
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>
As of June 30
1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents $ 5,774 $ 10,239 $ 9,580 $ 37,085 $ 13,734
Securities available for sale --- --- --- 12,489 23,680
Net working capital 10,450 11,557 7,991 50,926 31,552
Total assets 79,024 75,594 73,768 119,416 126,348
Total long term debt,
including current maturities 44,450 43,282 44,798 90,726 101,397
Total stockholders' equity 27,008 23,660 22,665 15,099 9,985
(1) Includes sales to related parties of $86 (1991), $236 (1992), $2
(1993), $6 (1994) and $0 (1995).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At June 30, 1995, the Company had working capital of approximately $31,552,000,
a decrease of approximately $19,374,000 from June 30, 1994. The decrease in
working capital is primarily in cash and cash equivalents which were used to
fund activities in connection with the Company's growth strategy. As of June
30, 1995, the Company had approximately $37,414,000 in cash, cash equivalents
and securities available for sale.
During fiscal 1995, the Company incurred approximately $7,843,000 in expenses
associated with pursuit of the Company's growth strategy. The Company's
strategy is to use its strengthened management team, diversified gaming
expertise and business and investment community relationships to develop new
opportunities in the operation of land-based (including Native American owned),
dockside and riverboat casinos, gaming systems and technology and the supply
and management of gaming devices.
As previously reported, on July 16, 1994 the Rainbow Casino in Vicksburg,
Mississippi permanently opened for business. In connection with the
completion of the casino and the acquisition of its original 45% limited
partnership interest, the Company, through a wholly-owned subsidiary funded
a $3,250,000 advance to RCC on the same terms as RCC's financing from
Hospitality Franchise Systems, Inc. ("HFS"). On March 29, 1995, the Company
consummated certain transactions whereby the Company acquired from RCC
the controlling general partnership interest in RCVP and increased its
partnership interest. In exchange for the assumption by National
Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation,
of approximately $1,140,000 of liabilities (plus a financing fee payable to
HFS) related to the completion of certain incomplete elements of the project
which survived the opening of the casino (for which RCC was to have been
responsible, but failed to satisfy), a related $652,000 cash payment by
the Company to NGM and commitments by the Company and NGM to fund additional
financing required to complete the project (i) a subsidiary of the Company
became the general partner and RCC became the limited partner and (ii) the
respective partnership interests were adjusted. As adjusted, RCC is entitled
to receive 10% of the net available cash flows, as defined, (which amount
shall increase to 20% of cash above $35,000,000 (i.e., only on such
incremental amount)), for a period of 15 years, such period being subject
to one year extensions for each year in which a minimum payment of $50,000
is not made.
The Company and Casino Magic Corporation, through wholly owned subsidiaries, are
members in Kansas Gaming Partners, LLC ("KGP") and Kansas Financial Partners,
LLC ("KFP"), both Kansas limited liability companies. Under an option
agreement granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown"), KGP
has been granted the exclusive right to operate gaming devices and/or
casino-type gaming at Camptown's facility if and when such gaming is permitted
in Kansas. In September 1994, the Kansas Racing Commission approved a revised
financing proposal submitted by Camptown that would facilitate completion of
construction of a greyhound racing facility on the 320 acre site in Frontenac,
Kansas. Camptown has received a $3,205,000 loan commitment which has been
guaranteed by KFP. In December 1994, the Company invested $1,580,000 in KFP for
its portion of the loan guarantee which was made in the form of a certificate
of deposit. Construction of Camptown's racing facility has been completed and
the facility opened for business in May 1995. Camptown's obligation to begin to
repay the loan guaranteed by KFP commenced in June 1995 with interest only
payments. Principal repayment is scheduled to commence in June 1996. There
can be no assurance as to the successful completion or operation of any part of
this project.
Cash provided by operations for fiscal 1995 decreased approximately $8,105,000
from amounts reported for fiscal 1994. Included in the prior year's cash flows
from operations was a non-recurring gain of $3,600,000 associated
with the termination of the Company's letter agreement with Capital Gaming
International, Inc. and $6,351,000 of charges related to the Company's
decision to exit the downtown Las Vegas gaming market and dispose of its tavern
operations. Exclusive of these prior year items, expenditures related to
supporting the Company's growth strategy increased approximately $3,051,000.
Long-term accrued expenses decreased by approximately $1,031,000 as the
Company paid rent and other exit expenses against the amounts accrued in fiscal
1994 as noted above. The remaining change in accrued expenses accounted for
a use of cash in the amount of $4,710,000. These uses of cash were partially
offset by an increase in cash flows from operations of approximately $2,666,000
from the Company's ongoing business operations and an operating cash
contribution of approximately $3,089,000 from the first year of operations by
the Rainbow Casino. Significant non-cash items added back to cash flows from
operations for 1995 include $1,313,000 in non-cash compensation expense and
$1,075,000 related to certain service contracts and termination costs.
Cash flows used for investing activities decreased by $5,651,000 from the prior
year. In the prior year, the Company completed the private placement of the
Debentures. Net collections on receivables improved by $2,605,000 compared to
fiscal 1994 as receivable activity returned to historical norms. In fiscal
1994, the Company funded approximately $7,250,000 in loans to Capital Gaming
International Inc. and the original general partner in RCVP which additions
were partially offset by increased collections of receivables related primarily
to the collection of the Capital Gaming loan in fiscal 1994. Additionally,
the Company is reporting increased cash of $2,481,000 as a result of acquiring
its consolidated interest in RCVP and changing from the equity method of
accounting to full consolidation of RCVP.
Cash flows from financing activities declined $48,402,000 from fiscal 1994. As
noted above, in September 1993, the Company completed the private placement of
$85,000,000 aggregate principal amount of its Debentures. Concurrent with the
closing of the issuance of the Debentures, Kirkland Ft. Worth Investment
Partners, L.P. ("KFW") invested $5,000,000 in the Company in exchange for
1,333,333 shares of the Company's Non-Voting Junior Convertible Special Stock
and warrants to purchase up to 2,750,000 shares of Common Stock, subject to
certain conditions. A portion of the net proceeds from these transactions was
used to repay previously existing debt and accrued interest of approximately
$38,245,000.
Management believes the Company's present working capital and funds generated
from operations will be sufficient to meet its existing commitments, debt
payments and other obligations as they become due. As discussed in
previous reports, however, it remains a part of the Company's business strategy
to seek additional gaming opportunities, including opportunities in which its
route and casino experience may be applicable. As part of its business
activities, the Company is regularly involved in the identification,
investigation and development of such opportunities. Accordingly, in order to
support such activities, the Company may in the future elect to issue
additional debt or equity securities if and when appropriate opportunities
become available on terms satisfactory to management. The Company currently
holds firm commitments for $65,000,000 of bridge financing and $15,000,000
of equity investments related to its attempted acquisition of Bally Gaming
International, Inc.
Results of Operations:
Fiscal 1995 Compared with Fiscal 1994
Revenues
Total revenues for the fiscal year ended June 30, 1995 were approximately
$131,988,000, an increase of $8,934,000 (7.3%) over those for fiscal 1994.
Revenues from all gaming route operations increased $3,997,000 (3.9%) to
approximately $106,827,000 in fiscal 1995. Revenues from route operations in
the state of Louisiana declined $1,796,000 (10.3%) primarily as a result of
increased competition from riverboat operations as well as the opening
of a land based casino in New Orleans. Revenue from Nevada route operations
increased approximately $5,739,000 (6.7%) over those for the same period last
year. The increase in the Nevada gaming route revenues was attributable
to a $2.15 increase in the average net win per gaming device per day in fiscal
1995 compared to fiscal 1994 (accounting for an increase of approximately
$4,042,000 of such increase) and an increase in the weighted average
number of gaming devices on location during fiscal 1995 as compared to fiscal
1994 (accounting for an increase of approximately $1,751,000). Revenues from
casino and tavern operations, including food and beverage sales,
increased approximately $4,975,000 (24.6%) during fiscal 1995 as compared to
those for the prior year as revenues recognized from the Rainbow Casino, which
were consolidated beginning March 29, 1995, exceeded the revenues
lost with the closing of the Company's properties in downtown Las Vegas and the
termination of the Company's lease at the Royal Casino.
Costs and Expenses
Costs of Revenues
Cost of gaming route revenues for the fiscal year ended June 30, 1995 increased
$3,543,000 (4.6%) over that for fiscal 1994. Costs of revenues for route
operations in Louisiana decreased $1,199,000 (a decrease of 10.7% from
last year) as revenues declined primarily as a result of increased competition
in that market. As a percent of related revenues, Louisiana route costs of
revenues remained relatively constant. Cost of gaming revenues for Nevada
gaming route revenues increased $4,742,000 (7.3%) as compared to the prior year
and increased slightly as a percent of Nevada gaming route revenues due
primarily to increased costs associated with additional and renewed
space lease contracts. Cost of route revenues includes rents under both space
lease and revenue sharing arrangements, gaming taxes and direct labor, including
related taxes and benefits. The cost of casino and tavern revenues, including
the cost of food and beverage sales, decreased $724,000 (4.8%) compared to
fiscal 1994 primarily due to the closing of the Company's properties in
downtown Las Vegas and the termination of the Company's lease at the Royal
Casino. These decreases were partially offset by Rainbow Casino costs of
revenues which were consolidated beginning in March 1995. Cost of casino and
tavern revenues includes cost of goods sold, gaming taxes, rent and direct
labor expenses, including taxes and benefits. Although the gross margin
percentage for Nevada operations declined slightly during fiscal 1995, the
decline was completely offset by the addition of the Rainbow Casino and a small
improvement in the Louisiana gross margin percentage. As a result, the total
cost of revenues as a percentage of total revenues declined by 2.9% compared
to fiscal 1994.
Expenses
For fiscal 1995, the Company incurred development costs associated with pursuing
the Company's long term growth strategy of approximately $7,843,000, an increase
of approximately $6,651,000 (558.0%) from fiscal 1994. Included as an offset
to development costs for fiscal 1994 was a non-recurring gain of $3,600,000
related to the Company's effort to acquire Capital Gaming International, Inc.
Prior year development costs also include certain significant expenses
associated with the Company's purchase of NAI. Development costs include
salaries and wages, related taxes and benefits, professional fees, travel
expenses, payments to third parties for business development options and other
expenses associated with supporting the Company's long-term growth strategy.
The Company expects to continue to incur a significant level of development
costs.
Corporate administrative expenses for fiscal 1995 were approximately $9,735,000,
an increase of $1,853,000 over the same amounts for fiscal 1994. The primary
cause for the increase was $1,331,000 in compensation expense recognized upon
the issuance of 250,000 shares of Common Stock to Steve Greathouse, the
Company's President, Chief Executive Officer and Chairman of the Board in
connection with his employment agreement. Also contributing to the increase
in corporate administrative expenses are $485,000 of expenses related to certain
service contracts and termination costs. Corporate administrative expenses
include salaries and wages, related taxes and benefits, professional fees and
other expenses associated with maintaining the corporate office and providing
centralized corporate services for the Company.
Exclusive of the development and corporate expenses noted above, selling,
general and administrative expenses for fiscal 1995 increased $1,078,000 (7.9%)
from the prior year. Selling, general and administrative expenses related
to gaming route operations decreased $1,340,000 (13.8%) from fiscal 1994.
Selling, general and administrative expenses for Louisiana route operations
declined approximately $660,000 (23.8%) as staff reductions and cost
containment measures were implemented to counter increased competition in that
market. The same costs for Nevada route operations decreased $680,000 (9.8%)
as the benefit of staff reductions and cost controls taken in late
fiscal 1994 was realized. Selling, general and administrative costs increased
for casino and tavern operations by $1,595,000 (44.0%) from the prior year.
The acquisition of the Rainbow Casino, which contributed $1,984,000 to the
increase, was partially offset by the closing of the Company's downtown Las
Vegas properties and the termination of the lease at the Royal Hotel. Also
contributing to the increase in selling, general and administrative
expenses are $478,000 of expenses related to certain service contracts and
termination costs. Selling, general and administrative expenses may be subject
to further increases.
In addition to the revenue improvements discussed above, the cost reductions in
selling, general and administrative expenses contributed to improved operating
margins. Operating income before depreciation ("EBITDA") as a percent of the
related revenues improved for Nevada route operations from 14.8% in fiscal 1994
to 16.5% in fiscal 1995 and for Louisiana route operations from 18.9% to 21.5%
for the same periods. EBITDA as a percent of revenues for the casino and tavern
operations also increased from 5.6% in fiscal 1994 to 17.5% in fiscal 1995 due
primarily to the acquisition of the Rainbow Casino.
In fiscal 1994, due to continuing losses from operations, negative cash flows
and incompatibility with the Company's long-term growth strategy, the Company's
Board of Directors resolved to 1) exit the downtown Las Vegas gaming
market and 2) dispose of the currently operated small independent tavern
operations. Based on these decisions, the Company recognized total expenses
of approximately $5,883,500 in fiscal 1994. As a result of the decision to exit
the downtown Las Vegas gaming market, in September 1994, the Company
substantially reduced operations at both the Trolley Stop Casino and Miss Lucy's
Gambling Hall & Saloon. Included in the 1994 statements of operations
are total expenses of approximately $3,246,000 related to these actions. The
total charge included approximately $488,000 related to the write-down of
assets and approximately $2,758,000 representing primarily the present value
of the future lease payments net of estimated future sublease income. The
decision to withdraw from the tavern business resulted in expenses of
approximately $2,638,000 being recognized in fiscal 1994. Approximately
$1,813,000 of the total amount was related to the write down of assets while
approximately $825,000 represented primarily the present value of the future
lease payments net of estimated future sublease income.
On December 17, 1993, the Company incurred a fire loss at the Fairgrounds Race
Course in New Orleans, Louisiana where the Company operated 199 gaming devices
prior to the fire (of which 193 were destroyed by the fire) through its
controlled subsidiary, Video Services, Inc. The Company was fully insured for
all equipment, leasehold improvements, other assets and business income with
the exception of approximately $46,000 in deductibles. During fiscal 1995,
the Company recorded approximately $247,000 of income from business
interruption insurance proceeds compared to $241,000 of such proceeds in the
prior year. The Company is discussing settlement of additional business
interruption claims with the insurance carrier. The Company has also
received insurance proceeds based on the replacement value of the assets
destroyed in the fire and, therefore, recognized a gain of approximately
$156,000 which is included in other income in fiscal 1994.
Fiscal 1994 Compared with Fiscal 1993
Revenues
Total revenues for the fiscal year ended June 30, 1994 were approximately
$123,054,000 for fiscal 1994 an increase of $9,963,000 (8.8%) over those for
fiscal 1993. Revenues from all gaming route operations increased $6,548,000
(6.8%) to approximately $102,830,000 in fiscal 1994. Route operations in the
state of Louisiana contributed $5,222,000 (an increase of 42.9%) to the overall
increase in route revenues as the Company continued to experience
increasing demand in that relatively young market. Revenue from Nevada route
operations increased approximately $1,326,000 (1.6%) over those for the same
period last year. The increase in the Nevada gaming route revenues
was attributable to a $1.30 increase in the average net win per gaming device
per day in fiscal 1994 compared to fiscal 1993 (accounting for an increase of
approximately $2,608,000 of such increase) which was partially offset
by a decrease in the weighted average number of gaming devices on location
during fiscal 1994 as compared to fiscal 1993 (accounting for a decrease of
approximately $1,282,000). Revenues from casino and taverns increased
approximately $3,449,000 (20.6%) during fiscal 1994 as compared to those for the
prior year due to the continued expansion of casino operations and operating
additional troubled tavern locations.
Costs and Expenses
Costs of Revenues
Cost of gaming route revenues for the fiscal year ended June 30, 1994 increased
$3,718,000 (5.1%) over that for fiscal 1993. Route operations in Louisiana
contributed $2,854,000 (an increase of 40.6% from last year) to the
overall increase. Cost of gaming revenues for Nevada gaming route revenues
increased $864,000 (1.3%) as compared to the prior year. The increase to cost
of Nevada route revenues was primarily due to an increase in location operators'
share of gaming revenues caused by replacing a large space lease contract with
revenue-sharing arrangements. Cost of route revenues includes rents under both
space lease and revenue sharing arrangements, gaming taxes and direct labor,
including related taxes and benefits. The cost of casino and tavern revenue
increased $3,412,000 (29.6%) compared to fiscal 1993 primarily due to the
first full year of operations of two small casinos and the first full year of
operating the hotel and food and beverage operations at the Mizpah Hotel and
Casino. Previously, the Company had operated only the casino at the Mizpah, but
in January, 1993 began operating the entire facility including food and
beverage operations to insure its availability for the casino. Cost of
casino and tavern revenues includes cost of goods sold, gaming taxes, rent and
direct labor expenses, including taxes and benefits. Although the gross margin
percentage from Nevada operations declined during fiscal 1994, the decline
was offset by increases in the Louisiana operating margin percentage. As a
result, the combined cost of gaming revenues as a percentage of gaming revenues
remained relatively constant from fiscal 1993 to fiscal 1994.
Expenses
In August 1994, due to continuing losses from operations, negative cash flows
and incompatibility with the Company's long-term growth strategy, the Company's
Board of Directors resolved to 1) exit the downtown Las Vegas gaming market
and 2) dispose of the currently operated small independent tavern operations.
Based on these decisions, the Company recognized total expenses of approximately
$5,883,500 in fiscal 1994. As a result of the decision to exit the downtown Las
Vegas gaming market, in September 1994, the Company substantially reduced
operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall &
Saloon. Included in the 1994 statements of operations are total expenses of
approximately $3,246,000 related to these actions. The total charge included
approximately $488,000 related to the write-down of assets and approximately
$2,758,000 representing primarily the present value of the future lease payments
net of estimated future sublease income. The decision to withdraw from the
tavern business resulted in expenses of approximately $2,638,000 being
recognized in fiscal 1994. Approximately $1,813,000 of the total amount was
related to the write down of assets while approximately $825,000 represented
primarily the present value of the future lease payments net of estimated
future sublease income.
The Company's lease at the Mizpah Hotel and Casino ("Mizpah") has a remaining
lease term of approximately 8.5 years with an option on the Company's behalf
to terminate the lease arrangement at any time after December 31, 1995 with
120 days notice. In September 1994, the Company notified the landlord of the
Mizpah of its intent to exercise the termination clause of its lease at the
earliest possible date of January 1, 1996 and give 120 days notice
at that time. As a result of this decision, the Company recognized additional
charges of $467,500 in fiscal 1994.
Also included in selling, general and administrative expenses for fiscal 1994
are development costs associated with pursuing the Company's long term growth
strategy of approximately $1,192,000. These developmental costs include
approximately $4,792,000 in legal fees, travel expenses and other expenses
associated with supporting the Company's long-term growth strategy, which
expenses are partially offset by the $3,600,000 recovered under the
Capital Gaming termination agreement. Fiscal 1994 was the first year in which
significant funds were expended in pursuit of this strategy.
Exclusive of the reserves, write downs and development expenses noted above,
selling, general and administrative expenses for fiscal 1994 increased
$1,679,000 (8.5%) from the prior year. The primary causes for the increase
include a $400,000 fiscal 1994 bonus granted to Shannon L. Bybee as part of the
restructuring of his employment with the Company, $350,000 in fees incurred
under the one year consulting contract with Carole A. Carter, the
former President and Chief Operating Officer of the Company, continued expansion
of the Louisiana route operations which contributed approximately $546,000 to
the overall increase and $274,000 of overall increases in Nevada route
operations. The general and administrative costs for casinos and taverns were
$3,622,000 or 18.0% of related revenues for fiscal 1994 as compared to
$3,511,000 or 21.0% for fiscal 1993. The same costs for gaming
device route operations were $9,736,000 or 9.5% of revenues for fiscal 1994 and
$8,916,000 or 9.3% of revenues for fiscal 1993.
Bad debt expense in fiscal 1994 increased 52.9% to approximately $705,000 as
compared to the 1993 year expense of $461,000 due primarily to the financial
difficulties of a particular customer in Northern Nevada.
On December 17, 1993, the Company incurred a fire loss at the Fairgrounds Race
Course in New Orleans, Louisiana where the Company operated 199 gaming devices
prior to the fire (of which 193 were destroyed by the fire) through its
controlled subsidiary, Video Services, Inc. The Company is fully insured for
all equipment, leasehold improvements, other assets and business income with
the exception of approximately $46,000 in deductibles. Through June 30, 1994,
the Company had recorded approximately $241,000 of income from business
interruption insurance proceeds. The Company will continue to receive proceeds
under this policy while the Fairgrounds Race Course is rebuilt. The Company
has also received insurance proceeds based on the replacement
value of the assets destroyed in the fire and, therefore, recognized a gain of
approximately $156,000 which is included in other income in fiscal 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, including the notes thereto,
and supplementary financial information are listed in Part IV, Item 14, of
this Report and included after the signature page beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding the identification and
background of the Company's directors is incorporated by reference to the Proxy
Statement which will be filed with the Securities and Exchange Commission
within 120 days of the end of the Company's fiscal year covered by this report.
As to those executive officers and significant employees of the Company and its
subsidiaries at June 30, 1995 and the subsequent dates noted, who, except as
noted, are not directors, of the Company, the following information is
provided:
</TABLE>
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <S>
Steven Greathouse 44 Chairman of the Board, President and
Chief Executive Officer
Shannon L. Bybee 56 Executive Vice President - Government Affairs
Anthony L. DiCesare 33 Executive Vice President - Development
John W. Alderfer 51 Sr. Vice President - Finance and Administration, Chief
Financial Officer and Treasurer
David D. Johnson 44 Sr. Vice President - Law and Government, Secretary
and Corporate Legal Counsel
Robert L. Miodunski 44 Sr. Vice President - Nevada Route Group
Robert L. Saxton 41 Vice President - Casino Group
Robert M. Hester 39 Vice President - Human Resources and Administration
Robert A. Woodson 45 Vice President - Regulatory Compliance
Johnann F. McIlwain 48 Vice President - Marketing
</TABLE>
Steve Greathouse joined the Company as President and Chief Executive Officer in
August 1994 and was elected Chairman of the Board of Directors in March 1995.
Mr. Greathouse, who has held various positions in the gaming industry since
1974, most recently served as the president of Harrah's Casino Hotels Division
of the Promus Companies. In this position, Mr. Greathouse had responsibility
for Harrah's resorts in Las Vegas, Laughlin, Reno, Lake Tahoe and Atlantic City.
From July 1991 to September 1993 Mr. Greathouse served as president and chief
operating officer of Harrah's Southern Nevada, overseeing the operations of
Harrah's Las Vegas and Harrah's Laughlin, then the two largest hotel-casinos in
the Harrah's chain. Mr. Greathouse is an active member and is currently
serving as the Chairman of the Board of the Nevada Resort Association and is on
the Executive Committee of United Way. He has also served as a member of the
Board of Directors of the Las Vegas Convention and Visitors Authority and on
the Executive Committee of the Nevada Development Authority. Mr. Greathouse
is a graduate of the University of Missouri.
Mr. Bybee joined the Company in July 1993 as President and Chief Operating
Officer. In July 1994, Mr. Bybee assumed the roles of Executive Vice
President - Government Affairs and Special Advisor to the Board of Directors.
Additionally, Mr. Bybee took a position with the William F. Harrah College of
Hotel Administration and the UNLV International Gaming Institute at the
University of Nevada, Las Vegas. Mr. Bybee also currently serves as a
member of the board of directors of The Claridge Hotel and Casino Corporation,
a position he has held since August 1988. Prior to his association with the
Company, Mr. Bybee had served as Chief Executive Officer of The Claridge Hotel
and Casino Corporation since August 1989. From 1983 to 1987 Mr. Bybee served as
Senior Vice President and from 1978 to 1981 as Vice President of Golden Nugget,
Inc. (now Mirage Resorts, Inc.), which operated the Golden Nugget Casino-Hotel
in Atlantic City and operates the Mirage Casino and the Golden Nugget
Casino-Hotel in Las Vegas, Nevada. From 1981 to 1983, Mr. Bybee served as
President of GNAC Corporation which operated the Golden Nugget Casino-Hotel
in Atlantic City. Prior to joining Golden Nugget, Inc. in 1978, Mr. Bybee
practiced law for over three years in the Las Vegas firm of Hilbrecht, Jones,
Schreck and Bybee. Prior thereto, Mr. Bybee served on the Nevada Gaming
Control Board for four and one-half years commencing in 1971. Mr. Bybee has
served as Chairman of the Gaming Law Committee, General Practice Section, of the
American Bar Association. He is a founder and past President of the
International Association of Gaming Attorneys ("IAGA") and is currently a
director of IAGA. Mr. Bybee was Chairman of the Atlantic City Convention and
Visitors Bureau from 1983 to 1987. He received a Bachelor of Arts degree from
the University of Nevada, Reno in 1966, and obtained his Juris Doctorate in
1969 from the University of Utah College of Law, where he was Managing Editor
of the Utah Law Review.
Anthony L. DiCesare was employed by KIC from April 1991 to July 1994 and joined
Alliance in July 1994. Prior to that time and since he graduated from business
school in 1989, he was employed as an associate at Wasserstein, Perella & Co.,
Inc., where he worked in the Mergers and Acquisitions group. Mr. DiCesare
graduated from Harvard College, with an A.B. degree in economics, in 1985 and
from the Harvard Business School, from which he obtained an M.B.A. degree, in
1989.
John W. Alderfer joined the Company in September 1990 as Vice President, Chief
Financial Officer and Treasurer. Mr. Alderfer was subsequently promoted to
Senior Vice President in December 1993. Prior to joining the Company, Mr.
Alderfer had been the Chief Financial Officer of The Bicycle Club, which is a
Los Angeles-based card casino, since February 1989. From 1971 to 1988 Mr.
Alderfer served in various financial capacities with the Summa Corporation,
the Howard R. Hughes Estate Businesses, which operated numerous gaming
establishments in Las Vegas and Reno. From 1966 to 1971 he was employed as a
certified public accountant by Deloitte & Touche (then known as Haskins &
Sells). Mr. Alderfer received his Bachelor of Science in Business
Administration with an accounting major from Texas Tech University in 1966
and is a certified public accountant.
David D. Johnson joined the Company as Senior Vice President and General Counsel
in March 1995. Previously, Mr. Johnson developed extensive gaming industry
experience representing a diverse group of casino clients as a
Senior Partner at Schreck, Jones, Bernhard, Woloson & Godfrey, one of Nevada's
leading law firms. Prior to joining Schreck, Jones, et al, Mr. Johnson served
as Chief Deputy Attorney General for the gaming division of the Nevada
Attorney General's office. Mr. Johnson serves as Vice Chairman of the Executive
Committee of the Nevada State Bar's Gaming Law Section and is an officer and
founding member of the Nevada Gaming Attorneys Association. He is also a
member of IAGA and has served as Editor of The Gaming Lawyer, the quarterly
newsletter of IAGA and the Gaming Law Section of the American Bar Association.
Mr Johnson holds a Bachelor of Arts degree in Political Science from the
University of Nevada at Las Vegas and earned his Doctor of Law degree from
Creighton University in 1978.
Robert L. Miodunski joined the Company as Senior Vice President - Nevada Route
Group in March 1994. From January 1991 to March 1994, Mr. Miodunski was
President of Mulholland-Harper Company, a sign manufacturing and service
company. From 1984 through 1990, Mr. Miodunski held various positions with
Federal Signal Company, the most recent being Vice President and General
Manager of the Midwest Region of the Sign Group. He received his B.S. in
Mechanical Engineering from the University of Missouri and an M.B.A. from the
University of Dallas.
Robert L. Saxton joined the Company in 1982 as Corporate Controller and was
elected a Vice President in December 1993. Since joining the Company, Mr.
Saxton has held various management positions with the Nevada Route Group and
is currently responsible for casino operations. He also serves as President of
the Company's Louisiana subsidiaries. Mr. Saxton received his B.S. from the
University of Nevada, Las Vegas and is a certified public accountant.
Robert M. Hester joined the Company in October 1993 as Director of Human
Resources and was promoted to Vice President - Human Resources and
Administration in December 1993. From 1989 to 1993, Mr. Hester was Director
of Human Resources for Sam's Town Hotel & Casino in Las Vegas. From 1987 to
1989, he was Director of Human Resources for the Showboat Hotel & Casino in
Las Vegas. Mr. Hester received his B.S. from the University of Nevada, Las
Vegas.
Robert A. Woodson joined the Company in 1988 as Director of Gaming Compliance
and was promoted to Vice President - Regulatory Compliance in September 1993.
Prior to joining the Company, Mr. Woodson was with the Investigation Division of
the State of Nevada Gaming Control Board for 10 years. Mr. Woodson received his
B.S. from California State University, Fullerton.
Johnann F. McIlwain joined the Company in June 1994 as Vice President -
Marketing. From 1991 to 1992, Ms. McIlwain was Vice President of Marketing
for Greenwood, Inc., a Philadelphia-based gaming and entertainment
company. From 1989 to 1991, she was Director of Marketing Services for
Hospitality Franchise Systems, Inc. in Parsippany, New Jersey. Prior to joining
Hospitality Franchise Systems, Ms. McIlwain served as Director of
Advertising for the Resorts International Casino Hotel and the Trump Taj Mahal
Casino Hotel. Ms. McIlwain received her B.A. from the University of Miami in
1969 and an M.B.A. from the Florida Atlantic University in 1976.
The information required by this item related to the Company's directors who are
not also employees is incorporated by reference from the Proxy Statement which
will be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement which will be filed with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year covered by
this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy Statement which will be filed with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year covered by
this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement which will be filed with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year covered by
this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
<TABLE>
<S> <S>
(a) Documents filed as part of report: Page
1. Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1994 and 1995 F-2
Consolidated Statements of Operations for the Years ended June 30, 1993, 1994 and 1995 F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1993, 1994 and 1995 F-5
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 1993, 1994 and 1995 F-6
Notes to Consolidated Financial Statements F-7
2. Consolidated Supplemental Schedules:
Not applicable.
</TABLE>
3. Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <S>
2.1 Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow
Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, and exhibits thereto. (12)
2.2 Letter Agreement, dated as of November 5, 1993, among United Gaming, Inc., Capital Gaming
International, Inc., I.G. Davis, Jr. and John E. Dell, with exhibits thereto. (14)
2.3 Asset purchase agreement between Plantation Investments, Inc. and Richards-Schnack
Development Corp. dated April 2, 1990. (1)
2.4 First Amendment to Agreement of purchase and sale between Plantation Investments, Inc. and
Richards-Schnack Development Corp. (1)
2.5 Bill of Sale between Plantation Investments, Inc. and Richards-Schnack Development, Corp. (1)
2.6 Consolidation Agreement, dated March 29, 1995 among the Company, United Gaming Rainbow,
Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development
Corporation and Leigh Seippel and John A. Barrett, Jr. (23)
2.7 Offer to Purchase common shares of Bally Gaming International, Inc., dated July 28, 1995. (24)
3.1 Restated Articles of Incorporation of the Registrant, as amended. (16)
3.2 Revised By-Laws of the Registrant. (20)
4.1 Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan
commitment with Video Services, Inc. (6)
4.2 Certificate of Designations, Preferences and Relative, Participating, Optional and other Special
rights of Special Stock and Qualifications, Limitations and Restrictions thereof of Non-Voting
Junior Convertible Special Stock of United Gaming, Inc. (8)
4.3 Form of Certificate evidencing Non-Voting Junior Convertible Special Stock. (8)
4.4 Indenture, dated as of September 14, 1993, between United Gaming, Inc. and NationsBank of
Texas, N.A., as Trustee in respect of the Company's 7-1/2% Convertible Subordinated
Debentures due 2003. (16)
4.5 Form of 7-1/2% Convertible Subordinated Debenture due 2003 (included in Exhibit 4.4, above).
4.6 Registration Rights Agreement, dated as of September 21, 1993, by and among United Gaming,
Inc., Donaldson Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc. and L.H.
Friend, Weinress & Frankson, Inc. (16)
10 Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video
Services, Inc. and Alfred H. Wilms. (6)
10.1 Lease, dated August 3, 1988, as amended April 6, 1989, from Walter Schwartz to the Company
for the Company's Corporate headquarters building at 4380 Boulder Highway, Las Vegas,
Nevada. (2)
10.5 * Employment agreement between United Gaming, Inc. and Ira S. Levine. (13)
10.5.1 * Amendment to Employment agreement between United Gaming, Inc. and Ira S. Levine. (21)
10.6 * Employment agreement between United Gaming, Inc. and John W. Alderfer. (13)
10.6.1 * Amendment to Employment agreement between United Gaming, Inc. and John W. Alderfer. (20)
10.7 Letter Agreement dated June 25, 1993 among United Gaming, Inc., Kirkland-Ft. Worth
Investment Partners, L.P., Kirkland Investment Corporation and, as to certain provisions, Alfred
H. Wilms, including Exhibit A (form of Securities Purchase Agreement), Exhibit B (form of
Stockholders Agreement), Exhibit C (form of Certificate of Designations of Non-Voting Junior
Convertible Special Stock), Exhibit D (Form of Warrant Agreement), and Exhibit E (form of
press release) thereto. (7)
10.8 Advisory Agreement, dated June 25, 1993 among United Gaming, Inc., Gaming Systems
Advisors, L.P. and, as to certain provisions, Mr. Alfred H. Wilms, including Exhibit A (form
of Warrant Agreement) and Exhibit B (form of press release) thereto. (7)
10.9 * United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (10)
10.10 * Gaming and Technology, Inc. 1984 Employee Stock Option Plan (11)
10.12 Agreement, dated as of September 14, 1993, by and among United Gaming, Inc., Kirkland-Ft.
Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors,
L.P. and Alfred H. Wilms. (8)
10.13 Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and
Kirkland-Ft. Worth Investment Partners, L.P. relating to warrants to purchase 2.75 million shares
of Common Stock. (8)
10.14 Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and
Gaming Systems Advisors, L.P. relating to warrants to purchase 1.25 million shares of Common
Stock. (8)
10.15 Stockholders Agreement, dated as of September 21, 1993, by and among United Gaming, Inc.,
Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems
Advisors, L.P. and Alfred H. Wilms. (8)
10.15.1 Amendment to Stockholders Agreement dated as of October 20, 1994 (16)
10.15.2 Selling Stockholder Letter Agreement dated as of March 20, 1995 (22)
10.16 Securities Purchase Agreement, dated as of September 21, 1993, by and among United Gaming,
Inc., Kirkland-Ft. Worth Investment Partners, L.P. and Kirkland Investment Corporation (8)
10.20 * Confidential Separation and Consulting Agreement with Carole A. Carter (including mutual
release) dated July 15, 1993. (9)
10.21 * Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993. (9)
10.21.1 * Amendment to Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993. (20)
10.23 Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett, Jr. and Leigh
Seippel to United Gaming, Inc. (12)
10.24 Escrow Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow
Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens &
Cannada. (12)
10.25 Pledge Agreement, dated as of October 29, 1993, among United Gaming, Inc. (as secured party)
and The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (as pledgors) (12)
10.26 Management Agreement, dated as of October 29, 1993, among Rainbow Casino-Vicksburg
Partnership, L.P., The Rainbow Casino Corporation and Mississippi Ventures, Inc., as manager.
(12)
10.28 Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc., Capital Gaming
International, Inc.and I.G. Davis, Jr. (15)
10.29 Loan and Security Agreement, dated as of August 2, 1993, between United Gaming, Inc., Alfred
H. Wilms and Video Services, Inc. (16)
10.30 Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc. and Alfred H.
Wilms. (16)
10.31 Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation. (16)
10.32 Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and Oppenheimer & Co. Inc. (16)
10.33 Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and L.H. Friend, Weinress & Frankson, Inc. (16)
10.34 Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation. (16)
10.36 Consulting Agreement, dated as of November 8, 1993, between David A. Scheinman and United
Gaming, Inc. (16)
10.37 Letter Agreement, dated as of March 3, 1994, by and among United Native American Gaming,
Inc., USA Gaming of Native America, Inc., USA Gaming, Inc. and others. (17)
10.38 Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc., The Rainbow
Casino Corporation, John A. Barrett, Jr. and Leigh Seippel. (18)
10.39 Letter Agreement, dated as of June 29, 1994, among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation.
(19)
10.40 Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation.
(19)
10.41 Second Amendment to Casino Financing Agreement, dated as of August 11, 1994, among United
Gaming, Inc., United Gaming Rainbow, Inc., Rainbow Casino-Vicksburg Partnership, L.P., The
Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and HFS Gaming Corporation.
(19)
10.42 Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8, 1994.
(19)
10.42.1 Second Amended and Restated Agreement of Limited Partnership, dated march 29, 1995, between
United Gaming Rainbow and RCC. (23)
10.43 Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow
Casino Corporation. (19)
10.44 Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The
Rainbow Casino Corporation. (19)
10.45 Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and Leigh Seippel to
United Gaming, Inc. (19)
10.46 Escrow Agreement, dated as of August 11, 1994, among United Gaming Rainbow, Inc., The
Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara,
Stevens & Cannada, together with Agreement dated February 7, 1994, as amended July 11, 1994
between Rainbow Casino-Vicksburg Partnership, L.P. and the City of Vicksburg, Mississippi. (19)
10.47 * Employment Agreement between United Gaming, Inc. and Johnann McIlwain. (20)
10.48 Settlement Agreement, dated December 4, 1994, by and among the Company, United Gaming of
Iowa, Inc., GDREC and Joseph and Paula Zwack (16)
10.49 * Employment Agreement, dated August 15, 1994, between the Company and Steven Greathouse
(22)
10.50 Warrant Agreement, dated August 15, 1994, between the Company and Steven Greathouse (22)
10.51 Agreement, dated September 1, 1994, between the Company and Craig Fields (22)
10.52 Warrant Agreement, dated September 1, 1994, between the Company and Craig Fields (22)
10.53 Agreement, dated March 20, 1995, between the Company and Joel Kirschbaum (22)
10.54 Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel,
John A. Barrett, Jr and Butler, Snow, O'Mara, Stevens & Cannada. (23)
10.55 Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow. (23)
10.56 Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow. (23)
10.57 Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi,
Inc. (23)
10.58 Release, dated March 29, 1995, by United Gaming Rainbow and the Company and their affiliates
of RCC, Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their
affiliates (other than RCVP). (23)
10.59 Release, dated March 29, 1995, by RCC, Rainbow Development Corporation, John A. Barrett,
Jr. and Leigh Seippel and their affiliates (other than RCVP) of United Gaming Rainbow and the
Company and their affiliates. (23)
10.60 Letter Agreement, dated August 14, 1995, among the Company, Bally Gaming International, Inc.
and WMS Industries, Inc. (24)
10.61 Commitment Letter, dated August 30, 1995, between Foothill Capital Corporation and the
Company. (25)
10.62 Commitment Letter, dated August 30, 1995, between Canpartners Investments IV, LLC and
Cerberus Partners, L.P. and the Company. (25)
10.63 Fee Letter, dated August 30, 1995, between Canyon Capital Management, L.P. and the Company.
(25)
10.64 Fee Letter, dated August 30, 1995, between Cerberus Partners, L.P. and the Company. (25)
10.65 Guarantee, dated August 30, 1995, from CPI Securities, L.P. and The Value Realization Fund,
L.P. to the Company. (25)
10.66 Form of Stock Purchase Agreement, dated September 15, 1995
for the private placement of Non-Voting Junior Convertible
Special Stock, Series B.
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
24 Power of Attorney
27 Financial Data Schedule
99 Complaint in Alliance Gaming Corporation v. Bally Gaming International, Inc., WMS Industries,
Inc., Richard Gillman, Hans Kloss, Neil E. Jenkins, Charles C. Carella, James J. Florio, Lewis
Katz, and Kenneth D. McPherson filed in the Chancery Court of Delaware for New Castle County
on July 25, 1995. (24)
</TABLE>
<TABLE>
<S> <S>
(1) Incorporated by reference to the Registrant's Form 8-K dated April 9, 1990 as amended.
(2) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1989.
(3) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1990.
(4) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30,
1990.
(5) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1991.
(6) Incorporated by reference to the Registrant's Form 8-K dated March 31, 1992.
(7) Incorporated by reference to the Registrant's Form 8-K dated June 25, 1993.
(8) Incorporated by reference to the Registrant's Form 8-K dated September 21, 1993.
(9) Incorporated by reference to the Registrant's Form 10-Q dated September 30, 1993.
(10) Incorporated by reference to the Registrant's Forms S-8 Reg. Nos. 33-45811 and 33-75308.
(11) Incorporated by reference to the Registrant's Form S-8 Reg. No. 2-98777.
(12) Incorporated by reference to the Registrant's Form 8-K dated October 29, 1993.
(13) Incorporated by reference to the Registrants's Form 10-Q for the quarter ended March 31, 1993.
(14) Incorporated by reference to the Registrant's Form 8-K dated November 5, 1993.
(15) Incorporated by reference to the Registrant's Form 8-K dated December 10, 1993.
(16) Incorporated by reference to the Registrant's Form S-2 Reg. No. 33-72990 and subsequent
amendments thereto.
(17) Incorporated by reference to the Registrant's Form 8-K dated March 7, 1994.
(18) Incorporated by reference to the Registrant's Form 8-K dated March 15, 1994.
(19) Incorporated by reference to the Registrant's Form 8-K dated August 11, 1994.
(20) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1994.
(21) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30,
1994.
(22) Incorporated by reference to the Registrant's Form S-3 Reg. No. 33-58233.
(23) Incorporated by reference to the Registrant's Form 8-K dated March 29, 1995.
(24) Incorporated by reference to the Registrant's Schedule 14D-1 and Schedule 13D dated July 28,
1995.
(25) Incorporated by reference to the Registrant's amended Schedule 14D-1 and amended Schedule 13D
dated September 1, 1995.
* Identifies each management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of this Report.
</TABLE>
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months ended
June 30, 1995.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIANCE GAMING CORPORATION DATED: September 27, 1995
By /s/ Steve Greathouse
Steve Greathouse, Chairman of
the Board of Directors, President
and Chief Executive Officer
By /s/ John W. Alderfer
John W. Alderfer, Sr. Vice
President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
/s/ Joel Kirschbaum Director September 27, 1995
Joel Kirschbaum
/s/ Alfred H. Wilms Director September 27, 1995
Alfred H. Wilms
/s/ Anthony DiCesare Director September 27, 1995
Anthony DiCesare
/s/ Craig Fields Vice Chairman September 27, 1995
Dr. Craig Fields of the Board
/s/ David Robbins Director September 27, 1994
David Robbins
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIANCE GAMING CORPORATION DATED: September 27, 1995
By
Steve Greathouse, Chairman of the Board
of Directors, President and Chief
Executive Officer
By
John W. Alderfer, Sr. Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
Director September 27, 1995
Joel Kirschbaum
Director September 27, 1995
Alfred H. Wilms
Director September 27, 1995
Anthony DiCesare
Vice Chairman September 27, 1995
Dr. Craig Fields of the Board
Director September 27, 1995
David Robbins
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Alliance Gaming Corporation
We have audited the consolidated balance sheets of Alliance Gaming Corporation
and subsidiaries as of June 30, 1995 and 1994 and the related consolidated
statements of operations, stockholders equity and cash flows for each
of the years in the three-year period ended June 30, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alliance Gaming
Corporation and subsidiaries as of June 30, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 6 to the consolidated financial statements, effective
July 1, 1993 Alliance Gaming Corporation adopted the provisions of Financial
Accounting Standards Board's Statement of Financial Accounting Standard No.
109, Accounting for Income Taxes.
KPMG Peat Marwick LLP
September 1, 1995
F-1
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1994 and 1995
<TABLE>
<CAPTION>
ASSETS
1994 1995
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37,085 $ 13,734
Securities available for sale 12,489 23,680
Receivables, net 5,924 3,316
Inventories 661 714
Prepaid expenses 4,420 4,148
Refundable income taxes 361 361
Other 30 156
Total current assets 60,970 46,109
Property and equipment:
Land and improvements 3,229 17,296
Building and improvements 4,286 8,822
Gaming equipment 30,395 36,396
Furniture, fixtures and equipment 9,632 11,582
Leasehold improvements 5,222 5,372
Construction in progress 212 30
52,976 79,498
Less accumulated depreciation and amortization 24,293 29,146
Property and equipment, net 28,683 50,352
Other assets:
Receivables, net 4,609 5,309
Excess of costs over net assets of an acquired business,
net of accumulated amortization of $295 (1994) and $585 (1995) 3,789 3,842
Intangible assets, net of accumulated amortization of
$4,145 (1994) and $5,516 (1995) 13,527 12,405
Deferred tax assets 1,081 1,399
Investment in minority owned subsidiary 2,000 1,585
Other 4,757 5,347
Total other assets 29,763 29,887
$119,416 $126,348
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1994 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1995
(In thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long term debt $ 1,504 $ 3,995
Accounts payable 1,661 1,758
Accrued expenses, including related parties
of $312 (1994) and $931 (1995) 6,879 8,804
Total current liabilities 10,044 14,557
Long term debt, less current maturities 89,222 97,402
Deferred tax liabilities 1,218 1,205
Other liabilities 3,587 2,556
Total liabilities 104,071 115,720
Commitments and contingencies
Minority interest 246 643
Stockholders' equity:
Common stock, $.10 par value; authorized 175,000,000 shares;
issued 10,505,928 shares (1994) and 11,654,150 shares (1995) 1,051 1,165
Special stock, $0.10 par value; authorized 10,000,000 shares;
issued 1,333,333 (1994 and 1995) 133 133
Paid-in capital 26,716 32,134
Unrealized loss on securities available for sale (421) (316)
Accumulated deficit (12,380) (23,131)
Total stockholders' equity 15,099 9,985
$119,416 $126,348
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30 1993, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Gaming
Routes $ 96,282 $102,830 $106,827
Casino and gaming arcades 12,526 15,679 21,287
Food and beverage sales 4,184 4,480 3,847
Net equipment sales 99 65 27
113,091 123,054 131,988
Costs and expenses:
Cost of gaming:
Routes 72,614 76,332 79,875
Casino and taverns 8,667 11,871 11,436
Cost of food and beverage 2,876 3,084 2,795
Cost of equipment sales 49 20 12
Selling, general & administrative 12,667 13,555 14,633
Business development expenses 900 1,192 7,843
Corporate expenses 6,191 7,882 9,735
Bad debt expense 461 705 400
Loss on abandoned small casinos --- 3,713 ---
Loss on abandoned taverns --- 2,638 ---
Depreciation and amortization 8,718 9,530 9,520
113,143 130,522 136,249
Operating loss (52) (7,468) (4,261)
Other income (expense):
Interest income 998 2,084 2,798
Interest expense (5,046) (6,830) (8,943)
Minority share of income --- (506) (397)
Equity in income of affiliate --- --- 31
Other, net 450 (167) 286
Loss before income taxes (3,650) (12,887) (10,486)
Income tax expense (241) (265)
Net loss $ (3,650) $(13,128) $(10,751)
Net loss per common share $ ( 0.38) $ (1.28) $ (0.95)
Weighted average common shares outstanding 9,696 10,251 11,300
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30 1993, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
Cash flows from operating activities: (In thousands)
<S> <C> <C> <C>
Net loss $ (3,650) $(13,128) $ (10,751)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 8,718 9,530 9,520
Loss on abandoned casinos --- 3,713 ---
Loss on abandoned taverns --- 2,638 ---
Write-off of other assets 149 1,817 2,796
Provision for losses on receivables 461 705 400
Amortization of debt discounts 265 292 297
Undistributed earnings of affiliate --- --- (31)
Non-cash stock compensation expense --- --- 1,313
Net change in operating assets and liabilities:
(Increase) decrease in:
Inventories (233) 78 (40)
Prepaid expenses 1,475 (519) 381
Refundable income taxes 766 (361) ---
Other 305 254 (126)
Increase (decrease) in:
Accounts and slot contracts payable (2,378) 269 (447)
Accrued and deferred income taxes --- 137 (137)
Other liabilities, including minority interest (153) 511 397
Accrued expenses 184 3,126 (2,615)
Net cash provided by operating activities: 5,909 9,062 957
Cash flows from investing activities:
Additions to property and equipment (5,092) (5,385) (8,887)
Proceeds from sale of property and equipment 257 1,466 351
Additions to receivables (8,715) (18,801) (8,970)
Cash collections on receivables 7,925 17,541 10,315
Net cash provided by acquisition of business --- --- 2,481
Acquisition of securities available for sale --- (12,910) (11,086)
Acquisition of partnership interests --- (2,000) (1,585)
Additions to intangible assets (77) (5,179) (390)
Additions to other long-term assets (3,296) (2,031) (3,877)
Net cash used in investing activities (8,998) (27,299) (21,648)
Cash flows from financing activities:
Proceeds from long-term debt, net of expenses 1,941 81,984 ---
Issuance of common stock warrants 559 116 ---
Reduction of long-term debt (2,167) (41,776) (3,125)
Issuance of special stock, net of costs --- 4,799 ---
Issuance of common stock 2,097 619 465
Net cash provided by
(used in) financing activities 2,430 45,742 (2,660)
Cash and cash equivalents:
(Decrease) increase for year (659) 27,505 (23,351)
Balance, beginning of year 10,239 9,580 37,085
Balance, end of year $ 9,580 $ 37,085 $ 13,734
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1993, 1994 and 1995
<TABLE>
<CAPTION>
(in thousands)
Total Retained
Stock- Earnings Unreal.
holders Common Stock Special Stock Paid-in (Accum. Loss on
Equity Shares Dollars Shares Dollars Capital Deficit) Securities
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1992 $23,660 9,409 $ 941 --- --- $18,320 $ 4,399 ---
Net loss (3,650) --- --- --- --- --- (3,650) ---
Common stock warrants issued 559 --- --- --- --- 559 --- ---
Shares issued upon exercise of
options 2,096 591 59 --- --- 2,038 --- ---
Balances, June 30, 1993 22,665 10,000 1,000 --- --- 20,917 748 ---
Net loss (13,128) --- --- --- --- --- (13,128) ---
Shares issued for acquisitions 249 112 11 --- --- 238 --- ---
Common stock warrants issued 116 --- --- --- --- 116 --- ---
Cost of private placement (201) --- --- --- --- (201) --- ---
Net change in unrealized loss on
securities available for sale (421) --- --- --- --- --- --- (421)
Shares issued for capital infusion 4,999 --- --- 1,333 133 4,866 --- ---
Shares issued upon exercise of
options 819 394 39 --- --- 780 --- ---
Balances, June 30, 1994 15,099 10,506 1,051 1,333 133 26,716 (12,380) (421)
Net loss (10,751) --- --- --- --- --- (10,751) ---
Shares issued for acquisitions 3,754 712 71 --- --- 3,683 --- ---
Compensatory stock issued 1,313 250 25 --- --- 1,288 --- ---
Cost of private placement 22 --- --- --- --- 22 --- ---
Net change in unrealized loss on
securities available for sale 105 --- --- --- --- --- --- 105
Shares issued upon exercise of
options 443 186 18 --- --- 425 --- ---
Balances, June 30, 1995 $ 9,985 11,654 $1,165 1,333 $ 133 $32,134 $(23,131) $ (316)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1993, 1994 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF
BUSINESS
Description of business
Alliance Gaming Corporation and its subsidiaries (collectively, the
"Company") are presently engaged in gaming device route operations
in Nevada and in the greater New Orleans, Louisiana area; casino
operations in Nevada and Mississippi; and the design, manufacture
and refurbishment of gaming devices.
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of Alliance Gaming Corporation, its wholly-owned
subsidiaries and indirect subsidiaries and its partially owned,
controlled subsidiaries. In the case of Video Services, Inc.
("VSI"), the Company owns 490 shares of class B voting stock, which
constitutes 100% of the voting stock, of VSI. The Company is
entitled to receive 71% of dividends declared by VSI, if any, at such
time that such dividends are declared. In July 1994, the Company
acquired a 45% limited partnership interest in the Rainbow Casino-
Vicksburg Partnership. Accordingly, the Company accounted for its
investment in this partnership under the equity method until March
29, 1995 at which time the Company increased its partnership interest
and assumed the general partnership position (see Note 11).
Effective March 29, 1995, the results of operations of the Rainbow
Casino have been included in the accompanying consolidated
financial statements. All significant intercompany accounts and
transactions have been eliminated.
Revenue recognition
In accordance with industry practice, the Company recognizes gaming
revenues as the net win from route, casino and tavern
operations, which is, for gaming devices, the difference between
coins and currency deposited into the devices and payments
to customers and, for other games, the difference between gaming wins
and losses. The Company recognizes total net win from gaming
devices as revenues for gaming routes which operate under revenue-
sharing arrangements and revenue-sharing payments as a cost of
gaming routes. The Company recognizes revenue from parts and
equipment sales to outside purchasers when the products are shipped.
Location rent expense
For financial statement purposes, the Company recognizes expenses for
fixed periodic rental payments (including scheduled
increases) made in connection with route operation space lease
arrangements or sublease agreements on a straight line basis
over the term of the agreement including any extension periods which
are expected to be exercised. Contingent periodic rental payments
are expensed in the period incurred.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be
cash equivalents. Such investments of $29,799,000 (1994) and
$5,238,000 (1995) are included in cash and cash equivalents
and are carried at cost, which approximates market value.
Securities available for sale
Effective January 1, 1994, the Company adopted Financial Accounting
Standard No. 115. For fiscal years beginning after
December 15, 1993, Statement 115 requires that, except for debt
securities classified as "held-to-maturity" securities,
investments in debt and equity securities should be reported at fair
market value. The Company has designated certain securities as
being available for sale. Securities are designated as available for
sale at the time of their purchase. The Company determines which
securities are available for sale by evaluating whether such
securities would be sold in response to liquidity needs,
asset/liability management and other factors. Securities available
for sale are recorded at market value with the resulting unrealized
gains and losses being recorded, net of tax, as a component of
stockholders' equity. Gains or losses on these securities are
determined using the specific identification method.
F-7
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF
BUSINESS (Continued)
Inventories
Inventories are stated at the lower of cost or market and are
determined by the first-in, first out method.
Property and equipment
Property and equipment are stated at cost and are depreciated and
amortized over their estimated useful lives or lease terms,
if less, using the straight line method as follows:
Building and improvements 31-39 years
Gaming equipment 5-7 years
Furniture, fixtures and equipment 3-10 years
Leasehold improvements 5-20 years
Excess of costs over net assets of an acquired business
Excess of costs over net assets of an acquired business is the excess
of the cost over the value of net tangible assets of an
acquired business and is generally amortized on the straight-line
method over a period of 40 years. In the case of the
Company's majority-owned subsidiary, Native American Investments,
Inc., where the assets acquired are largely intangible,
the Company has elected a 10-year amortization period representing
the estimated life of the rights acquired, consisting
principally of contracts to conduct gaming operations on Indian
lands.
Intangible assets
Intangible assets consist primarily of costs associated with the
acquisition of location leases which are capitalized and
amortized using the straight-line method over the terms of the
leases, ranging from one to 40 years, with an average life of
approximately 11 years. Intangible assets for fiscal 1995 includes
approximately $4,547,000 of commissions, discounts and
other capitalized costs related to the issuance of the Company's 7.5%
Convertible Subordinated Debentures due 2003, net
of approximately $957,000 of accumulated amortization. At June 30,
1994, intangible assets includes $4,993,000 of such
costs, net of $405,000 of accumulated amortization. Such amounts are
being amortized over the term of the debentures.
Other Assets
Other assets includes assets held for sale, long-term deposits and
other non-current assets. In fiscal 1993, the Company paid
to certain property owners a $2,500,000 refundable deposit to operate
gaming devices at their location. Additionally, other
assets are presented net of valuation allowances of $1,763,000 and
$631,000 at June 30, 1994 and 1995, respectively.
Loss per share of common stock
Loss per share of common stock has been computed based on the
weighted average number of shares of common stock
outstanding. Fully diluted earnings per share is not presented
because the effect would be anti-dilutive.
Income taxes
In February 1992, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 109 Accounting for
Income Taxes. Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected
F-8
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF
BUSINESS (Continued)
to apply to taxable income in the years which those temporary
differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. Effective July 1, 1993, the Company
adopted Statement 109. The Company previously used
the asset and liability method under Statement 96.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform with the current year presentation.
2. RECEIVABLES
The Company's gaming route operations from time to time involve
making loans to location operators in order to participate
in revenues over extended periods of time. The loans, made for
build-outs, tenant improvements and initial operating
expenses are generally secured by the personal guarantees of the
operators and the locations' assets. The majority of the
loans are interest bearing and are expected to be repaid over a
period of time not to exceed the life of the revenue sharing
arrangement. The loans have varying payment terms, with weekly
payment amounts ranging from $200 to $1,440 and
monthly payment amounts ranging from $200 to $18,780. Interest rates
on the loans range from prime plus 1.50% to stated
rates of 12% with various due dates ranging from July 1995 to April
2007. The loans are expected to be repaid from the
locations' cash flows or proceeds from the sale of the leaseholds.
<TABLE>
<CAPTION>
Receivables at June 30 consist of the following: 1994 1995
(In thousands)
<S> <C> <C>
Notes receivable-location operators $ 8,319 $ 7,760
Other receivables 2,214 865
10,533 8,625
Less current amounts (5,924) (3,316)
Long-term receivables, excluding current amounts $ 4,609 $ 5,309
</TABLE>
Receivables are presented net of an allowance for doubtful accounts
of $1,389,000 and $1,659,000 as of June 30, 1994 and
1995, respectively. The allowance is allocated between current and
long-term receivables on a pro rata basis related to notes
receivable from location operators.
During fiscal 1994, the Company cancelled certain sublease agreements
as a result of defaults by payors in making payments
and acquired title to the assets and operating rights to the tavern
locations in exchange for releases of the customers' debt
owed to the Company. During fiscal 1994, interest income of
approximately $48,000 was recognized on these receivables.
Total interest income of $130,000 would have been recognized if the
receivables had been current in accordance with their
original terms. The total initial investment in these tavern
locations of approximately $2,011,000 includes the net receivables
of approximately $1,362,000 and other assets of $649,000. No such
transactions were completed in fiscal 1995. Management
of the Company has determined the fair value of the locations' assets
from knowledge of sales of comparable establishments
and expertise acquired from operating its gaming devices at similar
locations. Due to the Company's decision to dispose
of the currently operated small independent tavern operations,
certain reserves and write downs were recognized in fiscal
1994 results of operations.
Management believes properly managing the disposal of these
operations will protect the Company's existing contractual
arrangements from the tavern locations as well as assure their
continued operation while preserving the Company's
investment. Management cannot estimate when or how many of these
locations will be obtained and subsequently disposed.
F-9
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
3. LOSS ON ABANDONMENT OF SMALL CASINOS AND TAVERNS
In fiscal 1994, due to continuing losses from operations, negative
cash flows and incompatibility with the Company's long-
term growth strategy, the Company's Board of Directors resolved to
1) exit the downtown Las Vegas gaming market and
2) dispose of the currently operated small independent taverns on
commercially reasonable terms as market conditions warrant.
As a result of the decision to exit the downtown Las Vegas gaming
market, the Company substantially reduced operations
at both the Trolley Stop Casino and Miss Lucy's Gambling Hall &
Saloon. Included in the 1994 statements of operations
are total expenses of approximately $3,246,000 related to these
actions. The total charge included approximately $488,000
related to the write-down of assets and approximately $2,758,000
representing primarily the present value of the future lease
payments net of estimated future sublease income.
The decision to withdraw from the tavern business resulted in
expenses of approximately $2,638,000 being recognized in
fiscal 1994. Approximately $1,813,000 of the total amount was
related to the write down of assets while approximately
$825,000 represented primarily the present value of the future lease
payments net of estimated future sublease income. The
Company has entered into an agreement to sell all of its tavern
locations to an unaffiliated third party. The sale is contingent
upon, among other conditions, approval by Nevada gaming authorities.
In addition to the items noted above, the Company's lease on the
Mizpah Hotel and Casino has a remaining term of
approximately 7.5 years with an option on the Company's behalf to
terminate the lease arrangement with 120 days written
notice at any time after December 31, 1995. The Company has notified
the landlord of the Mizpah of its intention to exercise the
termination clause of the lease at that time. As a result of this
decision, the Company recognized an expense of $467,500 in fiscal
1994.
4. DEBT
<TABLE>
<CAPTION>
Long-term debt at June 30 consists of the following:
1994 1995
(In thousands)
<C> <C> <C>
7.5% Convertible subordinated debentures due 2003 $85,000 $85,000
Due to stockholder, net of discount of $983,709 (1994)
and $747,619 (1995). 4,390 3,309
Hospitality Franchise Systems --- 9,065
Other 1,336 4,023
90,726 101,397
Less current maturities 1,504 3,995
Long-term debt, less current maturities $89,222 $97,402
</TABLE>
F-10
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
4. DEBT (continued)
Accrued interest of approximately $1,893,000 (1994) and $1,991,000
(1995) is included in accrued expenses in the
Consolidated Balance Sheets. Included in these amounts are $30,343
(1994) and $27,813 (1995) due to affiliates of Alfred
H. Wilms, principal stockholder and member of the Board of Directors
of the Company, related to funding of VSI's gaming device route
operations.
In September 1993, the Company completed the private placement of
$85,000,000 aggregate principal amount of its 7.5%
Convertible Subordinated Debentures due 2003. The debentures pay
interest semi-annually on March 15 and September 15.
These debentures are convertible at any time into shares of the
Company's common stock at a conversion price of $10 per
share (equivalent to a conversion rate of 100 shares per $1,000
principal amount of debentures), subject to adjustment.
Upon certain defined events, including a change of control, holders
of the debentures have the right to require the Company
to redeem the debentures for cash at the rate of 101% of principal
amount plus accrued interest. The debentures are
redeemable at predetermined redemption prices, in whole or in part,
at the option of the Company for cash at any time on
and after September 15, 1995 if the market price of the common stock
exceeds 250% of the conversion price for 20 out of
any 30 consecutive trading days or at any time on and after
September 15, 1996.
In March 1992, Alfred H. Wilms, director and principal stockholder
(and then Chairman of the Board of Directors and Chief
Executive Officer) of the Company, committed to provide or cause
others to provide a $6,500,000 five year subordinated
loan to VSI, the Company's controlled subsidiary which loan has
been funded in full and is secured by a subordinated interest
in all of VSI's present and future personal property. Until
August 1993, the loan required quarterly payments of interest.
In August 1993, the loan agreement was amended to extend the
maturity of the loan to September 1, 1998 and to require
quarterly payments of principal and interest. Interest on the
loan accrues at the rate of 200 basis points above the 90-day
London Inter Bank Offered Rate, adjusted quarterly. At June 30, 1995
the interest rate for the note was 8.2275%.
During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to
loan $7,750,000 to the Company's majority controlled
subsidiary RCVP in connection with the construction of the Rainbow
Casino. The loan amount was subsequently increased
to $10,000,000. The note bears interest at 7.5% per annum and
requires monthly payments of principal and interest over
an 24 month period. In exchange for funding this loan, HFS is also
entitled to receive a monthly royalty fee equal to 12%
of the casino's gaming revenues. Included in the consolidated
results of operations for fiscal 1995 are approximately
$810,000 of such royalties.
<TABLE>
<CAPTION>
Maturities of long-term debt for each of the five years ending subsequent to June 30, 1995 are as follows:
<S> <C>
1996 $ 3,995,000
1997 3,927,000
1998 2,825,000
1999 1,670,000
2000 1,723,000
Thereafter 87,257,000
</TABLE>
F-11
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
5. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorize the issuance of up
to 10,000,000 shares of special stock, par value $.10
per share ("Special Stock"). Special Stock consists of non-voting
stock where no holder of the Special Stock shall be entitled
to vote at any meeting of stockholders or otherwise, except as
otherwise may be specifically provided by law or as approved
by the Board of Directors in certain limited circumstances at the
time of the stock issuance. The Special Stock may be issued
from time to time in one or more series, each series having such
designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions
as shall be stated and expressed in the resolution providing
for the issuance of Special Stock or any series thereof adopted by
the Board of Directors. The Board has designated an
initial series of Special Stock as "Non-voting Junior Convertible
Special Stock" which consists of 1,333,333 shares (the
"Initial Series"). The Company's Articles of Incorporation provide
that the Initial Series is intended to have the same rights
as the Common Stock except that the Initial Series has no voting
rights and a $.01 per share liquidation preference. At June
30, 1995, only the Initial Series of Special Stock was outstanding.
The Initial Series is convertible on a share for share basis
into shares of Common Stock of the Company.
In 1984, the Company created an Employee Stock Option Plan (the "1984
Plan") that provides for the issuance of up to 2,000,000 shares of
common stock to Company employees and directors. At June 30, 1995,
there were incentive stock options covering 207,000 shares and
non-qualified stock options covering 10,000 shares outstanding
under the 1984 Plan.
At June 30, 1994 there were incentive stock options covering 376,000
shares and non-qualified stock options covering 15,000
shares outstanding under the 1984 Plan. Generally, options are
granted at the fair market value of the Company's Common
Stock at the date of the grant and become exercisable over five
years.
In 1992, the Company created the 1991 Long Term Incentive Plan (the
"Incentive Plan") that, as amended, provides for the
issuance of up to 3,000,000 shares of common stock to Company
employees and directors. At June 30, 1995 there were
incentive stock options covering 2,400,834 shares outstanding under
the Incentive Plan. At June 30, 1994 there were
incentive stock options covering 1,099,500 shares outstanding under
the Incentive Plan. Generally, options are granted at
the fair market value of the Company's Common Stock at the date of
the grant and become exercisable over five years.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding
Shares Exercise Price
<S> <C> <C>
Balance, June 30, 1992 1,546,150 1.375-8.750
Granted 300,000 5.875-8.750
Exercised (590,700) 1.375-4.875
Cancelled (3,600) 3.875
Balance, June 30, 1993 1,251,850 1.375-8.750
Granted 690,500 6.500-10.125
Exercised (393,850) 1.625-4.000
Cancelled (58,000) 2.125-4.000
Balance, June 30, 1994 1,490,500 1.375-10.125
Granted 1,598,334 5.750-8.000
Exercised (186,000) 1.375-4.000
Cancelled (285,000) 3.500-10.000
Balance, June 30, 1995 2,617,834 1.625-9.250
Exercisable at June 30, 1995 825,600 1.625-9.250
</TABLE>
F-12
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
5. STOCKHOLDERS' EQUITY (Continued)
Also at June 30, 1995, Mr. Wilms held warrants to purchase 2,000,000
shares of Common Stock at $2.50 per share, subject
to adjustment. These warrants were issued in connection with the
funding of the $6,500,000 five year subordinated loan
for VSI.
Upon closing of the private placement of the Company's 7.5%
Convertible Subordinated Debentures and the $5 million
equity investment by Kirkland-Ft. Worth Investment Partners, L.P.
("Kirkland") on September 21, 1993, the Company issued
warrants to purchase up to 2,750,000 shares of Common Stock at $1.50
per share to Kirkland. These warrants are
exercisable one year after the grant date and only after the market
price of the Common Stock reaches certain predetermined
levels. Under the same terms, the Company issued warrants to
purchase 1,250,000 and 30,000 shares of Common Stock
to Gaming Systems Advisors, L.P. ("GSA") and L.H. Friend, Weinress &
Frankson, Inc. ("Friend"), respectively. The
Company also issued warrants to purchase 500,000 and 250,000 shares
of Common Stock at $8.25 per share to the initial
purchasers of the Debentures, Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and Oppenheimer & Co., Inc.
("Oppenheimer"), respectively. Under the same general terms and
conditions, DLJ may earn warrants to purchase an
additional 250,000 shares of the Company's Common Stock. In fiscal
1995, in connection with the commencement of their
employment with the Company, Steve Greathouse, the Company's Chairman
of the Board,President and Chief Executive
Officer and Dr. Craig Fields, Vice Chairman of the Board were each
granted warrants to purchase 250,000 shares of
common stock on the same terms as the Kirkland warrants described
above.
As of June 30, 1995, none of the warrants granted to Kirkland, GSA,
Friend, Greathouse or Fields are exercisable.
6. INCOME TAXES
The Company generally accounts for income taxes and files its income
tax returns on a consolidated basis. However, VSI,
in which the Company holds 100% of the voting interests, has
previously filed its income tax returns on a separate basis and
was not consolidated for tax purposes. During the quarter ended
December 31, 1994, the Company determined that VSI
can be consolidated for tax purposes. As a result, the Company filed
for and has received a refund of estimated income taxes
paid for fiscal year 1994.
Effective July 1, 1993, the Company adopted Financial Accounting
Standard No. 109 Accounting for Income Taxes,
prospectively. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary are
expected to be recovered or settled. Under Statement
109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that
includes the enactment date.
F-13
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
6. INCOME TAXES (continued)
The federal and state income tax effects of temporary differences
that give rise to significant portions of the deferred tax
assets and liabilities at June 30, 1995 are presented below.
<TABLE>
<CAPTION>
1994 1995
(in thousands)
Deferred Tax Assets:
<S> <C> <C> <S>
Net Operating Loss Carryforwards $ 8,495 $ 12,470
Inventory Obsolescence Reserve 578 179
Receivables, Bad Debt Allowance 472 564
Organization and Start-up Costs 267 172
Reserves for abandoned projects 1,577 1,356
Other 307 566
Total gross deferred tax assets 11,696 15,307
Less: Valuation allowance (10,615) (13,908)
Net deferred tax assets $ 1,081 $ 1,399
Deferred tax liabilities:
Property and equipment, principally due to
depreciation differences 1,218 1,399
Total gross deferred tax liabilities (in 1995,
$194 is included in accrued expenses) 1,218 1,399
Net deferred tax assets (liabilities) $ (137) $ ---
</TABLE>
The valuation allowance for deferred tax assets as of June 30, 1994
was $10,615,000. The net change in the total valuation
allowance for the twelve months ended June 30, 1995 was an increase
of $3,293,000.
At June 30, 1995, the Company has estimated net operating loss
carryforwards for federal income tax purposes of
approximately $36,678,000 which are available to offset future
federal taxable income, if any, expiring in the years 2007
through 2010.
A reconciliation of the Company's provision for income tax expense as
compared to the tax benefit calculated by applying
the statutory federal tax rate to the loss before income taxes
follows.
<TABLE>
<CAPTION>
1994 1995
(in thousands)
<S> <C> <C>
Statutory Rate $(4,202) $(3,565)
Meals, entertainment 3 27
State Income Taxes 33 67
Tax losses for which no
current benefit is recognized 4,385 3,736
Alternative Minimum Tax 22 ---
$ 241 $ 265
</TABLE>
F-14
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
6. INCOME TAXES (continued)
The components of the Company's income tax expense for the year ended
June 30, 1995 are:
<TABLE>
<CAPTION>
1994 1995
(in thousands)
<S> <C> <C>
Federal - current $ 73 $ ---
State - current 31 102
Federal - deferred 118 163
State - deferred 19 ---
Total $ 241 $ 265
7. STATEMENTS OF CASH FLOWS
The following supplemental information is related to the Consolidated
Statements of Cash Flows. In fiscal 1995, the
Company reclassified approximately $212,000 from receivables to
intangible assets and reclassified other assets of
approximately $1,099,000 to property and equipment ($1,074,000) and
receivables ($25,000). Additionally, numerous non-
cash items related to the Company's acquisition of the general
partnership interest in RCVP impacted the statement of cash
flows. The most significant of these non-cash items included
non-cash additions to property, plant and equipment of
approximately $23,400,000 and additions to total debt of
approximately $13,839,000. See also Note 11.
In fiscal 1994, the Company reclassified approximately $1,445,000
of accounts receivable to intangible assets ($1,393,000)
and property and equipment ($52,000) on a net basis.
Payments for interest expense in 1993, 1994 and 1995 were
approximately $4,408,000, $4,690,000 and $7,102,000 respectively.
F-15
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
8. INTERIM FINANCIAL INFORMATION (Unaudited)
Following is the unaudited quarterly results of the Company for
the years ended June 30, 1994 and 1995. This information
is not covered by the Independent Auditors' Report.
</TABLE>
<TABLE>
<CAPTION>
Primary
Net Income
Total (Loss) (Loss) Per
Revenues Income Share(1)
(Dollars in thousands, except per share amounts)
1994
<S> <C> <C> <C>
First Quarter $28,419 $ (1,376) $ (.14)
Second Quarter 30,566 (1,221) (.12)
Third Quarter 31,807 847 .08
Fourth Quarter 32,262 (11,378) (1.09)
1995
First Quarter $30,824 $ (1,926) $ (.18)
Second Quarter 31,514 (3,090) (.28)
Third Quarter 31,439 (1,775) (.16)
Fourth Quarter 38,211 (3,960) (.34)
</TABLE>
(1) The sum of the income (loss) per share for the four quarters,
which are based on average shares outstanding during each
quarter, does not equal income (loss) per share for the year,
which is based on average shares outstanding during the year.
9. RELATED PARTY TRANSACTIONS
The Company sold products to Seeben N.V., a company in which
Alfred H. Wilms is the brother of a member of the
company's board of directors. Sales to this company were
approximately $2,000 (1993), $6,000 (1994) and $0 (1995). No
accounts receivable were due from this company at June 30, 1994
or June 30, 1995. Sales prices and terms were similar
to those of non-affiliated persons.
In March 1992, Alfred H. Wilms, a director and principal stock holder
(and then Chairman and Chief Executive Officer of
the Company), committed to provide or cause others to provide
a $6,500,000 five year, unsecured, subordinated loan to VSI,
a majority-controlled subsidiary of the Company engaged in
the Company's Louisiana gaming device route operations. As
consideration for this commitment, the Company issued to
Mr. Wilms five year warrants to purchase 200,000 shares of
Common Stock at $2.50 per share subject to certain adjustments,
and agreed to issue an additional warrant to purchase
1,800,000 shares of Common Stock at $2.50 per share subject
to certain adjustments upon complete funding of the loan.
At June 30, 1993 approximately $6,000,000 of the loan had
been funded. The remaining $500,000 was funded in October
1993 at which time the Company issued to Mr. Wilms the
additional warrant for 1,800,000 shares of common stock.
David Robbins, a director appointed to the Board in July 1994, as a
designee of Kirkland Investment Corporation ("KIC"),
is employed by the law firm of Kramer, Levin, Naftalis, Nessen,
Kamin & Frankel which has represented the Company in
various matters related to the Company's growth strategy and
its transactions with Kirkland and KIC. The Company paid
fees of approximately $1,046,000 and $493,000 to such firm in
fiscal 1994 and fiscal 1995, respectively.
In connection with the agreements with KIC (100% owned by
Joel Kirschbaum) and its affiliates and related transactions,
the Company has paid to or on behalf of Kirkland and its
affiliates a total of approximately $346,000 in fiscal 1994 and
$597,000 in fiscal 1995 primarily for reimbursement of expenses
incurred on behalf of the Company.
F-16
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
9. RELATED PARTY TRANSACTIONS (continued)
In 1993 and 1994 the Company entered into employment agreements
with certain key employees. These agreements range
from one to three years in length and cover certain other terms
of employment including compensation. As a condition of
his employment, in April 1995 the Company issued 250,000 shares
of common stock to Steve Greathouse, the Company's
Chairman, President and Chief Financial Officer and recognized
a non-cash charge of $1,313,000 related to this transaction.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment, warehouse and
repair facilities, gaming route locations, casino and other
locations under non-cancelable operating leases.
Future minimum rentals under non-cancelable operating leases at
June 30, 1995 are:
<TABLE>
<CAPTION>
Year Total Net
Ended Minimum Sublease Minimum
June 30 Rentals Income Rentals
(In thousands)
<C> <C> <C> <C>
1996 $ 8,828 $ 921 $ 7,907
1997 6,462 842 5,620
1998 6,173 809 5,364
1999 5,623 758 4,865
2000 3,737 598 3,139
Thereafter 34,349 2,757 31,592
$ 65,172 $ 6,685 $ 53,387
</TABLE>
Certain gaming route location leases provide only for contingent
rentals based upon a percentage of gaming revenue and are
cancelable at any time by either party.
Operating lease rental expense, including contingent lease
rentals, for years ended June 30 was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
(In thousands)
<S> <C> <C> <C>
Minimum rentals $ 11,727 $ 13,743 $ 9,704
Contingent rentals 49,621 55,910 58,113
61,348 69,653 67,817
Sublease rental income (850) (1,004) (1,192)
$ 60,498 $ 68,649 $ 66,625
</TABLE>
These amounts are included in the cost of gaming revenues on
the accompanying Consolidated Statements of Operations.
In April, 1990, the Company entered into a ten year lease to
operate a non-restricted gaming location in Las Vegas, Nevada.
The lease commencement date was scheduled to begin no later than
90 days after the construction had been finalized. In
January, 1991, the Company received notice that the construction
was complete; however, upon review of the property, the
Company did not believe that construction had been completed.
In August, 1992, the lessor filed a suit against the Company
seeking compensatory and exemplary damages totalling $18,700,000.
In fiscal 1992, the Company had accrued a $480,000
F-17
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
10. COMMITMENTS AND CONTINGENCIES (continued)
liability representing back rent owed to the lessor. In
February, 1993 the lawsuit was settled and the Company paid the
lessor $425,000 in return for resolution of all prior and
current disputes regarding the lease terms. The lease calls for
monthly rentals of approximately $31,000 and provides for
annual increases based on certain indices. At June 30, 1992,
the Company sublet the property to a location operator in
exchange for the right to operate gaming devices at the property
under a space lease arrangement for a period of 10 years
beginning December, 1992.
The Company and Casino Magic Corporation, through wholly
owned subsidiaries, are members in Kansas Gaming Partners,
LLC ("KGP") and Kansas Financial Partners, LLC ("KFP"), both
Kansas limited liability companies. Under an option
agreement granted to KGP by Camptown Greyhound Racing, Inc.
("Camptown"), KGP has been granted the exclusive right
to operate gaming devices and/or casino-type gaming at
Camptown's facility if and when such gaming is permitted in Kansas.
In September 1994, the Kansas Racing Commission approved a
revised financing proposal submitted by Camptown that
would facilitate completion of construction of a greyhound
racing facility on the 320 acre site in Frontenac, Kansas.
Camptown has received a $3,205,000 loan commitment which has
been guaranteed by KFP. In December 1994, the
Company invested $1,580,000 in KFP for its portion of the
loan guarantee which was made in the form of a certificate of
deposit. Construction of Camptown's racing facility has been
completed and the facility opened for business in May 1995.
Camptown's obligation to begin to repay the loan guaranteed by
KFP commenced in June 1995 with interest only payments.
Principal repayment is scheduled to commence in June 1996.
There can be no assurance as to the successful completion or
operation of any part of this project.
The Company is also involved in various claims and legal
actions arising in the ordinary course of business. Management
of the Company believes that the ultimate outcome of these
matters will not have a material adverse effect on the Company's
consolidated financial statements taken as a whole.
11. ACQUISITIONS
On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. Through a wholly-owned
subsidiary, the Company originally purchased a 45% limited
partnership interest in RCVP, a Mississippi limited partnership
which owns the casino, all assets (including the gaming equipment)
associated with the casino and certain adjacent parcels
of land. As consideration for its 45% limited partnership
interest, the Company paid $2,000,000 in cash and issued 600,000
shares of its common stock to RCC and its two sole shareholders.
The 55% general partnership interest in RCVP was held
by RCC. In connection with the completion of the casino, the
Company, through a wholly-owned subsidiary, funded a $3,250,000
advance to RCC on the same terms as RCC's financing from
Hospitality Franchise Systems, Inc. ("HFS") (other than the
fact that such advance is subordinate to payments due to HFS).
On March 29, 1995, the Company consummated certain transactions
whereby the Company acquired from RCC the controlling general
partnership interest in RCVP and increased its partnership interest.
In exchange for the assumption by National Gaming Mississippi,
Inc. ("NGM"), a subsidiary of National Gaming Corporation, of
approximately $1,140,000 of liabilities (plus a financing fee
payable to HFS) related to the completion of certain incomplete
elements of the project which survived the opening of
the casino (for which RCC was to have been responsible, but failed
to satisfy), a related $652,000 cash payment by the
Company to NGM and commitments by the Company and NGM to fund
additional financing required to complete the project
(i) a subsidiary of the Company became the general partner and
RCC became the limited partner and (ii) the respective
partnership interests were adjusted. As a result of these
transactions, RCVP assumed $1,304,000 of new debt of which 50%
was payable to the Company. Under the adjusted partnership
interests, RCC is entitled to receive 10% of the net available
cash flows after debt service and other items, as defined (which
amount shall increase to 20% of cash above $35,000,000 (i.e., only
on such incremental amounts)), for a period of 15 years, such
period being subject to one year extensions for each year in which
a minimum payment of $50,000 is not made. This transaction was
accounted for as an acquisition using the purchase method.
Accordingly, the purchase price was allocated to assets acquired
based on their estimated fair values. This treatment resulted in
no cost in excess of net assets acquired (goodwill) being
recognized. The Rainbow Casino's results of operations have
been included in the consolidated results of operations since
the date of acquisition.
F-18
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
11. ACQUISITIONS (continued)
The following summarized, unaudited pro forma results of
operations for the fiscal year ended June 30, 1995, assume the
complete acquisition of RCVP occurred on the date the casino
permanently opened for business.
<TABLE>
<CAPTION>
1995
<S> <C>
Revenues $ 142,051
Net loss (10,862)
Net loss per common share $ (0.96)
</TABLE>
12. RECENT DEVELOPMENTS (Unaudited)
On June 19, 1995, the Company publicly proposed a negotiated
acquisition of Bally Gaming International, Inc. ("BGII") for
$12.50 per share of BGII common stock. Prior to making this
offer, the Company had acquired 500,000 shares of BGII
stock on the open market and at June 30, 1995 held 1,000,000
shares (approximately 9.3% of BGII's total outstanding
shares, based on BGII's most recent public filings) which it
acquired at an average cost of approximately $10.41 per share.
Under the proposed terms of the offer, approximately 60% of
BGII shares not held by the Company would be acquired for cash
with the remainder exchanged for shares of the Company's common
stock. The offer was contingent upon satisfactory due diligence,
regulatory and stockholder approval and reasonable financing.
At the time the offer was made public, the Company requested
expedited due diligence, subject to a confidentiality agreement.
BGII had previously announced a planned merger with WMS Industries,
Inc. ("WMS") which included an exclusive period for WMS to negotiate
the terms of that proposed merger. WMS's exclusive
negotiating period had expired several weeks before the Company's
proposal was made without announcement or action on
the part of BGII or WMS. On July 25, 1995, after being refused
due diligence access and the announcement by BGII that
a definitive agreement had been reached to merge with WMS, the
Company announced its intent to make a tender offer for
BGII. The tender offer was on largely the same terms as the
originally proposed acquisition. On the same date, the
Company announced it had filed litigation in Delaware Chancery
Court requesting that the court require BGII to grant the
Company due diligence access, enjoin BGII from proceeding with
the WMS merger (including a provision therein requiring
the sale of BGII's German operations) and declare the breakup
fee provided for in the WMS merger to be invalid. The
Company indicated that it would increase the price per share
of BGII stock to $13.00 per share if the breakup fee was
declared invalid. The tender offer was conditioned upon the
Company being validly tendered a number of shares of BGII
stock, which combined with its own holdings of such stock,
would give the Company a majority of BGII's outstanding
shares. The tender offer commenced on July 28, 1995 and, as
extended to date, is currently set to expire on October 3,
1995. Subsequently, the Company announced its intention to
proceed with a consent solicitation to elect a majority of
independent directors to the BGII Board of Directors. On
August 14, 1995, the Company, BGII and WMS jointly announced
an agreement whereby the parties would hold in abeyance all
activities related to pending litigation until September 1, 1995,
refrain from commencing new litigation until that same date,
BGII would schedule its annual shareholder meeting for
consideration of the proposed WMS merger and the election of
directors on October 30, 1995, and the Company would
extend the expiration date of the tender offer until September
12, 1995 and refrain from soliciting proxies until September
1, 1995. On September 1, 1995, the Company disclosed that it
had obtained firm financing commitments to fund the tender
offer and that such commitments were not conditioned on due diligence
of BGII. Accordingly, the Company extended the
expiration date of its tender offer to September 29, 1995. BGII
and WMS have filed lawsuits against the Company alleging
numerous public misrepresentations had been made by the Company with
regards to the WMS-BGII agreement, the Company's tender offer and the
level of cooperation of BGII's board of directors. The Company
considers these claims to be without merit and will mount a
vigorous defense against said claims. Subsequent to filing its
lawsuit against the Company, BGII adopted a poison pill
provision designed to discourage the Company's acquisition
efforts. In response to the poison pill adoption, the Company
announced it had increased its tender offer to $13.00 per share
of BGII common stock and increased to 5,400,000 the number
of BGII common shares being sought in the tender offer.
The increase in the tender offer price is being financed by
the Company's cash on hand and the proceeds of an equity
private placement of approximately 3,300,000 shares of the
Company's non-voting Junior Convertible Special Stock. The
proceeds of the private placement include commitments for
over $1,000,000 of new investments by certain directors and
officers of the Company.
F-19
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
12. RECENT DEVELOPMENTS (continued)
The Company also established a collar on the number of Company
shares to be offered in the proposed back-end merger.
The Company will exchange between 2.167 to 3.059 shares of its
common stock for each share of BGII common stock.
The exact value of the Company's common stock to be used for the
exchange ratio will be determined by averaging the
closing price of the Company's common stock for a period of ten
Nasdaq trading days ending five days prior to the closing
of the merger.
F-20
<PAGE>
EXHIBIT 21
ALLIANCE GAMING CORPORATION
SUBSIDIARIES OF THE REGISTRANT
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
<S> <S>
Casino Electronics, Inc. Nevada
BGII Acquisition Corporation Delaware
APT Games, Inc. Nevada
United Coin Machine Company (1) Nevada
APT Coin Machines, Inc. dba Miss Lucy's (1) Nevada
Slot Palace, Inc. dba Quality Inn Casino (1) Nevada
Trolley Stop, Inc. dba Trolley Stop Casino (1) Nevada
United Games, Inc. (6) Nevada
Mizpah Investments, Inc. dba Mizpah Casino (1) Nevada
Plantation Investments, Inc. dba Plantation Casino (1) Nevada
Double Eagle Hotel and Casino, Inc. (1) Nevada
WCAL, Inc. (1) Nevada
FCJI, Inc. (2) Nevada
Foreign Gaming Ventures, Inc. Nevada
Oregon Ventures, Inc. (3) Nevada
Louisiana Ventures, Inc. (3) Nevada
Video Services, Inc. (4) Louisiana
Video Distributing Services, Inc. (4) Louisiana
Southern Video Services, Inc. (5) Louisiana
Mississippi Ventures, Inc. (3) Nevada
Mississippi Ventures II, Inc. (3) Nevada
United Gaming Rainbow, Inc. (3) Nevada
Rainbow Casino Vicksburg Partnership (7) Mississippi
United Native American, Inc. (3) Nevada
Native American Investments, Inc. (8) Delaware
Indiana Gaming Ventures, Inc. (3) Nevada
United Gaming of Iowa, Inc. (3) Nevada
Kansas Gaming Ventures, Inc. (3) Nevada
Kansas Gaming Partners, LLC (9) Nevada
Kansas Financial Partners, LLC (9) Nevada
Vermont Financial Ventures, Inc. (3) Nevada
Missouri Ventures II, Inc. (3) Nevada
Alpine Willow Investments, Inc. (3) California
Pennsylvania Gaming Ventures I, Inc. (3) Nevada
</TABLE>
(1) 100% owned by APT Games, Inc.
(2) 100% owned by WCAL, Inc.
(3) 100% owned by Foreign Gaming Ventures, Inc.
(4) 71% owned by Louisiana Ventures, Inc.
(5) 60% owned by Louisiana Ventures, Inc.
(6) 60% owned by APT Games, Inc.
(7) General partnership interest owned by United Gaming Rainbow, Inc.
(8) 90% owned by United Native American, Inc.
(9) 50% owned by Kansas Gaming Ventures, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for 6/30/95 Form 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1994 JUN-30-1995
<PERIOD-END> JUN-30-1994 JUN-30-1995
<CASH> 37,085 13,734
<SECURITIES> 12,489 23,680
<RECEIVABLES> 5,924 3,316
<ALLOWANCES> 0 0
<INVENTORY> 661 714
<CURRENT-ASSETS> 60,970 46,109
<PP&E> 28,683 50,352
<DEPRECIATION> 24,293 29,146
<TOTAL-ASSETS> 119,416 126,348
<CURRENT-LIABILITIES> 10,044 14,557
<BONDS> 85,000 85,000
<COMMON> 1,051 1,165
0 0
0 0
<OTHER-SE> 14,048 8,820
<TOTAL-LIABILITY-AND-EQUITY> 119,416 126,348
<SALES> 4,545 3,874
<TOTAL-REVENUES> 123,054 131,988
<CGS> 4,004 2,807
<TOTAL-COSTS> 91,307 94,118
<OTHER-EXPENSES> 38,510 41,731
<LOSS-PROVISION> 705 400
<INTEREST-EXPENSE> 6,830 8,943
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ALLIANCE GAMING CORPORATION
STOCK PURCHASE AGREEMENT
AGREEMENT, dated as of September 15, 1995, by and among
ALLIANCE GAMING CORPORATION, a Nevada corporation (the
"Company"), and each of the persons identified on the signature
pages hereof. The persons identified on the signature pages
hereof are sometimes hereinafter collectively referred to as the
"Purchasers" and individually as a "Purchaser"
WHEREAS, the company desires to issue and sell, and the
Purchasers desire to purchase, shares of Non-Voting Junior
Convertible Special stock, Series B (the "Special Stock"), of the
Company, subject to the terms and conditions herein;
NOW, THEREFORE, in reliance upon the representations and
warranties made herein and in consideration of the premises and
the mutual covenants and conditions herein contained, the Company
and each Purchaser, severally and not jointly, hereby agree as
follows:
SECTION I
Sale and Purchase of the Shares; Fees
1.1 Sale of Shares. At the Closing (as defined in
Section 2.2 hereof ), and subject to the terms and conditions
hereof, the Company will issue and sell to the Purchasers and
each Purchaser will purchase from the Company the number of
shares (the "Shares") of Special Stock set forth below its name
on the signature page hereof at a purchase price of $4.50 per
share (the "Purchase Price").
1.2 Issue of Special Stock. On or before the Closing,
the Company will have authorized the issuance of up to 6,666,667
shares of Special Stock pursuant to a Certificate of
Designations, Preferences and Relative, Participating , Optional
and other Special Rights of Special stock and Qualifications,
Limitations and Restrictions thereof of Special Stock in the form
attached hereto as Annex A (the "Certificate") which will be
filed with the appropriate officials of the State of Nevada on or
before the Closing Date; and the Company will have authorized,
subject to stockholder approval as provided herein, the issuance
of 6,666,667 shares of Common Stock, par value $0.10 per share
(the "Common Stock"), subject to adjustment as provided in the
Certificate, to be issued upon the conversion of the Shares in
accordance with the Certificate.
<PAGE>
The Special Stock will automatically convert, upon the
approval of the Company's stockholders, into shares of Common
Stock.
Pursuant to the Certificate, if the approval for
conversion shall not have occurred within six months following
the Closing Date, the Company shall immediately make an offer to
each holder of the Shares by registered mail to redeem, put of
funds legally available therefor, on a date specified in such
offer (which shall not be lose than 30 nor more than 60 days
after the date of such notice), all such holder's Shares at a
cash price equal to the greater of (i) the Quoted Price (as
defined in the Certificate) of the Common Stock an the date
notice is sent or (ii) 125% of the original issue price of the
Shares, upon the acceptance of such offer received by the Company
at least 10 days prior to the redemption date specified in the
Company's offer. If the holder of any Share shall accept such
offer, such Shares shall be redeemed on the specified redemption
date, and on surrender of the certificates evidencing the Shares
will receive payment of the redemption price.
1.3 Commitment Fees. Each Purchaser shall be paid a
commitment fee (the "First Commitment Fee") on September 19, 1995
equal to 1.5% of its total committed purchase amount for the
period from the date hereof to November 2, 1995 (the "First
Commitment Period"). In addition, if at the option of the
Company the First Commitment Period is extended by notice to each
Purchaser on or before November 2, 1995, each Purchaser shall be
paid on the earlier of (i) the Closing Date, (ii) the termination
of the Tender Offer or (iii) December 15, 1995, an additional
commitment fee equal to 0.25% of such Purchaser's total committed
purchase amount for each week after November 2, 1995, until such
time as any of the events specified in clauses (i) through (iii)
above shall have occurred (the "Second Commitment Fee", and
together with the First Commitment Fee, the "Commitment Fees").
The Commitment Fees shall be payable in immediately available
funds by wire transfer (to the extent wire transfer instructions
have been provided to Donaldson, Lufkin & Jenrette Securities
Corporation (the "Placement Agent") by such Purchaser) or by
check sent by first class mail to the address of such Purchaser
listed on the signature page hereof.
SECTION 2
Closing, Payment And Delivery
2.1 Closing Date and Place of Closing. The closing of
the purchase and sale the Shares hereunder (the "Closing") shall
be held at the offices of Milbank, Tweed, Hadley & McCloy, 1
Chase Manhattan Plaza, New York, New York at 10:00 a.m. Eastern
Time on the Closing Date, as set forth in Section 2.2.
-2-
<PAGE>
2.2 Closing. Upon the satisfaction of the conditions
set forth in Section 2.3 hereof, and subject to obtaining Nevada
gaming authority approval for issuance of the Shares, the Company
shall notify each Purchaser of the date (the "Closing Date"),
place and time of the closing (the "Closing") which shall in no
event be later than 10 business days after the time that all of
the conditions set forth in Section 2.3 have been satisfied, at
which time each Purchaser shall pay to the Company, by wire
transfer of immediately available funds to the account specified
by the Company in such notice of Closing or such other form of
payment as shall be mutually agreed upon by the Company and the
Purchaser, the Purchase Price, and the Company shall deliver to
the Purchaser a certificate or certificates representing the
number of Shares purchased as set forth below such Purchaser's
name on the signature page hereof appropriately legended to
reflect the restrictions of this Agreement and the Securities Act
of 1933, as amended (the "Securities Act").
2.3 Conditions to Closing. The several obligations of
the Purchasers to purchase the Shares on the Closing Date
hereunder are subject to the following conditions:
(a) the tender offer by the Company's subsidiary, BGII
Acquisition Corp., a Delaware corporation ("BGII), for 4.4
million shares of Common Stock, $.01 par value, of Bally Gaming
International, Inc., a Delaware corporation ("Bally"), as the
same may be amended from time to time (the "Tender Offer"), shall
have been consummated on or before December 15, 1995;
(b) the representations and warranties of the Company
contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date as though made on
and as of such date (except for those made as of a specified
date, which shall be true and correct as of such date) and the
company shall have performed in all material respects its
obligations hereunder required to be performed on or before the
Closing Date and the Placement Agent shall have received an
Officers' Certificate addressed to the Purchasers and signed by
the Chief Executive Officer and the Chief Financial Officer to
the effect of the foregoing;
(c) the Purchasers shall have received a legal opinion
or opinions covering the matters set forth in Annex B; and
(d) no injunction, writ, restraining order or other
order of any nature arising out of the Tender offer or the
purchase of the Shares hereunder shall have been issued by any
governmental or judicial authority and remain in force against
such Purchaser preventing such Purchaser from purchasing Shares
or against the Company preventing the
-3-
<PAGE>
Company from issuing the Shares and the Placement Agent shall
have received an Officers' Certificate addressed to the
Purchasers and signed by the Chief Executive Officer and the
Chief Financial Officer to the effect of the foregoing insofar as
the foregoing relates to the Company.
SECTION 3
Representations and Warranties of the Company
The Company hereby represents and warrants to each
Purchaser as follows:
3.1 Due Authorization and Qualification. The Company
is duly organized and existing and in good standing,under the
laws of the State of Nevada and qualified and licensed to do
business in, and in good standing in, any state where the failure
to be so licensed or qualified could reasonably be expected to
have a material adverse affect on the business, operations,
condition (financial or otherwise), finances, or prospects of the
Company.
3.2 Due Authorization.--No Conflict. The execution,
delivery and performance of this Agreement is within the
Company's corporate powers, been duly authorized, and is not in
conflict with nor constitute a breach of any provision contained
in the Company's Articles or Certificate of Incorporation or By-
laws, nor will it constitute an event of default under any
material agreement to which the Company is a party or by which
its properties or assets may be bound, nor will it violate the
requirements of all applicable laws, rules, regulations, and
orders of any governmental authority, including any Gaming
Authority, other than laws, rules, regulations and orders the
non-compliance with which, individually or in the aggregate,
would not have and could not reasonably be expected to have a
material adverse effect on the business, operations, condition
(financial or otherwise), finances, or prospects of the Company.
"Gaming Authorities" as used herein means all regulatory
authorities and other bodies regulating or having jurisdiction
over the gaming activities of the Company or any of its
subsidiaries (or any entity under the control of the Company or
any of its subsidiaries), including, without limitation, the
Nevada Gaming Commission.
3.3 Litigation. There are no actions or proceedings
pending by or against the Company before any court or
administrative agency and the Company does not have knowledge or
belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or
prosecutions involving the Company, except for: (a) ongoing
collection matters in which the Company is the plaintiff; and b)
matters that would not reasonably be expected in the Company's
good faith judgment to have a materially adverse effect
-4-
<PAGE>
on the condition (financial or otherwise), finances, results of
operations or prospects of the Company.
3.4 Capitalization. As of September 14, 1995, the
Company's authorized capital stock consists of 175,000,000 shares
of Common Stock and 10,000,000, of which as of July 31, 1995
11,654,150 shares of Common Stock and 1,333,333 shares of Special
Stock were issued and outstanding. As of the date hereof, the
Company had reserved 18,454,834 shares of Common Stock for
issuance upon the exercise of outstanding convertible debentures,
options and warrants. All of the issued and outstanding shares
of Common Stock are validly issued, fully paid and non-
assessable. All of the Shares being issued to the Purchasers
pursuant to this Agreement, and (subject to stockholder approval
as contemplated hereby) all of the shares of Common Stock
issuable upon conversion of the Shares (the "Conversion Shares"),
upon issuance will be validly issued, fully paid and non-
assessable shares of Special Stock and Common Stock,
respectively. Except for the foregoing and as disclosed in the
Company's Reports (as hereinafter defined), as of the date hereof
there are no outstanding options, warrants or other rights of any
kind to acquire any additional shares of capital stock of the
Company or securities convertible into or exchangeable for, or
which otherwise confer on the holder thereof any right to
acquire, any such additional shares, nor is the Company committed
to issue any such option, warrant, right or security.
3.5 No Restrictive Agreements. The issuance and
delivery of the Shares to the Purchasers, and the issuance and
delivery of the Conversion Shares upon conversion of the Shares,
is not and will not be subject to any preemptive rights.
3.6 Valid-Agreement. This Agreement constitutes a valid
and binding agreement of the Company enforceable in accordance
with its terms, except as such enforceability may be limited by
bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and general principles
of equity.
3.7 Financial Information. The financial statements
included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994 together with the Company's
Quarterly Reports on Form 10-Q for the fiscal quarters ended
September 30, 1994, December 31, 1994 and March 31, 1995
(collectively, the "Exchange Act Documents") present fairly in
all material respects in accordance with generally accepted
accounting principles consistently followed (except as disclosed
therein) the financial position and results of operations of the
Company at the dates and for the periods to which they relate
(subject, in the case of the unaudited financial statements, to
normal year-end adjustments).
3.8 Consents. Except for those consents and filings
contemplated by Section 5 hereof and such approvals as at the
-5-
<PAGE>
time of the Closing will have been obtained, no consent,
approval, qualification, order or authorization of, or filing
with any governmental authority is required in connection with
the Company's execution, delivery or performance of this
Agreement or the offer, sale or issuance of the Shares by the
Company other than as required under "Blue Sky" laws.
3.9 Company Reports; Private Placement Memorandum.
Since June 30, 1994, all reports, proxy statements, registration
statements and other filings required to be filed by the Company
with the Securities and Exchange Commission (the "SEC") pursuant
to the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act), including without limitation the
Company's Schedule 14D-1 and Schedule 13D, each as amended, have
been duly filed with the SEC, and none of such documents and the
Private Placement Memorandum, dated September 1995, when taken
together with such documents as a whole (collectively, the
"Company Reports"), contained as of their respective dates any
untrue statement of a material fact or omitted to state a
material fact required to be stated therein, or necessary to make
the statements therein, in the light of the circumstances in
which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to any
projections or other forward-looking information or statements
contained in the Private Placement Memorandum except that such
projections or forward-looking information or statements were
made in good faith based upon reasonable assumptions and provided
further that no representation or warranty is made with respect
to information concerning any person other than the Company and
its affiliates on the date hereof.
SECTION 4
Representations, Warranties and Covenants of Purchasers
Each Purchaser represents and warrants to the Company
and agrees, severally and not jointly, and only as to itself, as
follows:
4.1 Experience. It is experienced in evaluating and
investing in companies such as the Company, and has such
knowledge and experience in evaluating the merits and risks of
its investment, and has the ability to bear the economic risks of
its investment. It is an "accredited investor," as such term in
defined in Regulation D under the Securities Act. It has
completed and delivered to the Placement Agent an investors
questionnaire, and all information set forth therein is true and
correct as of the date hereof. It acknowledges that it has
received all information relating to the Company reasonably
requested by it and that it has had an opportunity to ask
questions and receive answers concerning the investment
contemplated hereby.
-6-
<PAGE>
4.2 Investment. It is acquiring the Shares for
investment for its own account and not with the view to, or for
resale in connection with, any distribution thereof (subject to
the provisions of Sections 5.2 and 5.3 hereof) . It understands
that the shares have not been registered under the Securities Act
by reason of exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona
fide nature of its investment intent as expressed herein. it
acknowledges that the Company may place restrictive legends on,
and stop transfer orders against, the certificates representing
the Shares being acquired by it.
4.3 Rule 144. It acknowledges that the shares must be
held indefinitely unless they are subsequently registered under
the Securities Act or an exemption from such registration is
available. It agrees that it will not sell, transfer or assign
the Shares or the Conversion shares for a period of six months
after the Closing and thereafter without furnishing an opinion of
counsel reasonably satisfactory to the Company to the effect that
such sale will not violate the Securities Act. It has been
advised or is aware of the provisions of Rule 144 promulgated
under the securities Act, which permits limited resale of shares
purchased in a private placement subject to the satisfaction of
certain conditions and that such Rule may not become available
for resale of the Shares.
4.4 Authority. It has full power and authority under
all applicable laws to enter into this Agreement and to
consummate the transactions herein and has taken all action
necessary to authorize its execution and performance of this
Agreement. This Agreement when executed and delivered will be
duly executed and will constitute a legal, valid and binding
obligation of each of the Purchasers, enforceable in accordance
with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency or other similar laws affecting
the enforcement or creditors, rights generally and general
principles of equity. Its source of funds is not an employee
benefit plan.
SECTION 5
Covenants of the Company
5.1 Future Reports; Stockholders Meeting. (a) Until the
earlier of the termination of the Purchaser's commitment to
purchase the Shares and the Closing Date and thereafter for a
period of two (2) years from the Closing Date for so long as the
Purchaser is a holder of Shares or Conversion Shares, the Company
will furnish to the Purchaser (i) all annual, quarterly and
periodic reports and proxy statements filed by the Company with
the SEC pursuant to the Exchange Act, (ii) all registration
statements filed by the Company under the Securities Act, within
five (5) days after filing such report or registration statement
-7-
<PAGE>
with the SEC and (iii) all amendments to the Company's offer to
purchase Bally. Until the Closing Date and for so long. after
the Closing Date as any Purchaser holds any Shares or Conversion
Shares, the Company will file all reports required to be filed by
it under the Exchange Act and will take such further action as
any Purchaser may reasonably request, all to the extent required
to enable such Purchaser to sell pursuant to Rule 144 adopted by
the SEC under the Securities Act. Until the closing Date and
thereafter for so long as the Purchaser is a holder of shares or
Conversion Shares, the Company will also promptly furnish to the
Purchasers copies of all reports or other material information
relating to the Company which it furnishes to stockholders (as
such) of the Company generally.
(b) The Company shall cause a meeting of its
stockholders (the "Stockholders Meeting"), to be duly called and
held within six months of the Closing Data for the purpose of
approving the conversion of the Shares into shares of Common
Stock. The Board of Directors of the Company shall recommend to
its stockholders the approval of such conversion and shall use
all reasonable efforts to obtain the approval of such
stockholders; provided, however, that nothing herein shall
require the Board of Directors of the Company to act, or refrain
from acting, in any manner that it may deem, after consultation
with its outside counsel, to be necessary to the proper discharge
of the Directors' fiduciary duties to their stockholders. In
connection with the Stockholders Meeting, the Company shall
prepare and file a preliminary proxy statement relating to the
conversion of Shares (the "Preliminary Proxy Statement") with the
SEC, and the Company shall use its best efforts to respond to the
comments of the SEC and to cause a definitive proxy statement
(the Definitive Proxy Statement") to be mailed to its
stockholders. The Definitive Proxy Statement, as of the date of
the mailing of the Definitive Proxy Statement by the Company to
its stockholders and as of the date of the Stockholders Meeting,
(i) will comply in all material respects with the provisions of
the Exchange Act and the rules and regulations thereunder and
(ii) will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made not misleading.
5.2 Piggyback Registration.
(a) Right to Include Shares. Whenever the Company
proposes to register under the securities Act an offering of the
Common Stock on any form for the registration of securities under
such Act, whether or not for its own account (other than by (i) a
registration statement on Form S-4 or S-8 or any successor or
similar forms, (ii) any registration statement to be used
exclusively in the offering and sale of the Company's securities
acquired by any of its or its subsidiaries, employees, directors
or consultants pursuant to any employee compensation, option,
restricted stock or similar plan arrangement or agreement, (iii)
-8-
<PAGE>
a registration statement filed exclusively in connection with an
exchange offer or an offering of securities solely to the
securityholders of the Company, or (iv) any registration
statement filed exclusively in connection with a rights offering)
(a "Piggyback Registration") it shall give written notice to all
Purchasers of its intention to do so no later than 20 days prior
to the proposed date of filing such registration statement. Such
rights are referred to hereinafter as "Piggyback Registration
Rights" Upon the written request of any such Purchaser made
within 10 days after receipt of any such notice (which request
shall specify the Registrable securities (as defined below)
intended to be disposed of by such Purchaser), the Company shall
subject to Section 5.2(a) hereof, include in the registration
statement the Registrable Securities which the company has been
so requested to register by the Purchasers thereof (such
requesting Purchasers hereinafter the "Holders") and the Company
shall keep such registration statement (the "Registration
Statement") in affect and maintain compliance with each Federal
and state law or regulation for the period necessary for such
Holder to effect the proposed sale or other disposition (but in
no event for a period greater than 120 days). "Registrable
Securities" shall mean any shares of common Stock issued to a
Purchaser and/or its permitted designees or transferees on
conversion of Shares and/or other securities that may be or are
issued by the Company upon conversion of any Shares, including
those which may thereafter be issued by the Company in respect of
any such securities by means of any stock splits, stock
dividends, recapitalizations, reclassifications or the like, and
as adjusted pursuant to the Certificate; provided, however, that
as to any particular securities contained in Registrable
Securities such securities shall cease to be Registrable
Securities when (i) a Registration Statement with respect to the
sale of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in
accordance with such Registration Statement; or (ii) they shall
have boon sold to the public pursuant to Rule 144 (or any
successor provision) under the Securities Act or are eligible for
sale to the public under Rule 144(k) (or any successor provision)
under the Securities Act.
(b) Withdrawal of Piggyback Registration by Company.
If, at any time after giving written notice of its intention to
register any securities in a Piggyback Registration but prior to
the effective date of the related Registration Statement, the
Company shall determine for any reason not to register such
securities, the Company shall give notice of such determination
to each Holder and, thereupon, shall be relieved of its
obligation to register any Registrable Securities in connection
with such Piggyback Registration. All best efforts obligations
of the Company pursuant to Section 5.4 hereof shall cease if the
company determines to terminate prior to such effective date any
registration where Registrable Securities are being registered
pursuant to this Section 5.2.
-9-
<PAGE>
(c) Piggyback Registration of Underwritten Public
Offerings. If a Piggyback Registration involves an offering by
or through underwriters, then (i) all Holders requesting,to have
their Registrable Securities included in the Company's
Registration Statement must sell their Registrable Securities to
the underwriters selected by the Company on the same terms and
conditions as apply to other selling stockholders and (ii) any
Holder requesting to have his or its Registrable Securities
included in such Registration Statement may elect in writing, not
later than three Business Days prior to the filing of the
Registration Statement filed in connection with such
registration, not to have his or its Registrable Securities so
included in connection with such registration.
(d) Payment of Registration Expenses for Piggyback
Registration. The Company shall pay all expenses (including any
and all fees, disbursements and expenses incurred in connection
with any registration or action incident to performance of or
compliance by the Company with Section 5 hereof, including,
without limitation, (i) all SEC, national securities exchange and
NASD registration and filing fee, all listing fees and all
transfer agent fees; (ii) all fees and expenses of complying with
state securities or blue sky laws (including the fees and
disbursements of counsel of the underwriters in connection with
blue sky qualifications of the Registrable Securities); (iii) all
printing, mailing, messenger and delivery expenses; (iv) all fees
and disbursements of counsel for the Company and of its
accountants, including the expenses of any special audits and/or
"cold comfort" letters required by or incident to such
performance and compliance, and all reasonable fees and
disbursements of one counsel for the holders of Shares; and (v)
any disbursements of underwriters or their counsel in connection
with the preparation of a customary blue sky and legal investment
survey, but excluding underwriting discounts and commissions,
brokerage fees and transfer taxes, if any (all of such expenses
hereinafter referred to as "Registration Expenses")) in
connection with each registration of Registrable Securities
requested pursuant to a Piggyback Registration Right contained in
this Section 5.2.
(e) Priority in Piggyback Registration. If a Piggyback
Registration involves an offering by or through underwriters, the
Company, except as otherwise provided herein, shall not be
required to include Registrable Securities therein if and to the
extent the underwriter managing the offering reasonably believes
in good faith and advises the Company that such inclusion would
materially adversely affect such offering; provided that any
reduction or elimination of the Registrable Securities shall
occur (i) first, to the extent necessary to permit the sale of
all of the shares of Common Stock to be sold by the company or
the other stockholders with demand registration rights requesting
a registration and (ii) second, pro rata among persons having
piggyback registration rights, based on the number of shares
requested to be registered by all such stockholders.
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<PAGE>
If the Piggyback Registration does not involve an
offering by or through underwriters, the Company shall not be
required to include Registrable Securities therein if and to the
extent the company reasonably believes such inclusion would
adversely affect such offering; provided, however, that a
reduction or elimination in the Registrable Securities included
in such registration shall be applied according to the priorities
set forth above for an underwritten offering.
5.3 Demand Registration.
(a) Request for Registration. If, at any time after a
period of six months from the Closing Date, one or more Holders
holding in the aggregate at least 10% of the outstanding
Registrable Securities request that the Company file a
registration statement under the Securities Act with, respect to
the Registrable Securities held by such Holder or Holders (a
"Demand Registration"), as soon as practicable thereafter the
company shall use its best efforts to file a registration
statement with respect to all Registrable Securities that it has
been so requested to include and obtain the effectiveness
thereof, and to take all other action necessary under any Federal
or state law or regulation to permit the Registrable Securities
that are specified in the notices of the Holders or holders
thereof to be sold or otherwise disposed of, and the Company
shall maintain such compliance with each such Federal and state
law and regulation for the period necessary for such Holder or
Holders to effect the proposed sale or other disposition;
provided, however the Company shall be entitled to defer such
registration for a period of (i) up to 90 days if and to the
extent that its board of directors shall determine that such
registration would interfere with a pending corporate transaction
or (ii) up to 120 days following the effective date of any
registration statement previously filed by the Company under the
Securities Act, other than registration statements of the type
described in clauses (i) through (iv) of Section 5.2(a) hereof.
The Company shall promptly give written notice to the Holders of
any Registrable Securities who or that have not made a request to
the Company pursuant to the provisions of this Section 5.3(a) of
its intention to effect any required registration or
qualification, and shall use its best efforts to effect as
expeditiously as possible such registration or qualification of
all such other Registrable Securities that are then held, the
Holder or Holders of which have requested such registration or
qualification, within 15 days after such notice has been given by
the Company, as provided in the preceding sentence. The Company
shall be required to effect a registration or qualification
pursuant to this Section 5.3(a) in the aggregate on three
occasions only.
(b) Payment of Expenses for Demand Registration. The
company shall pay all Registration Expenses in connection with
the Demand Registration.
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<PAGE>
(c) Selection of Underwriters. If any Demand
Registration is requested to be in the form of an underwritten
offering, the managing underwriter shall be selected by the
Company and reasonably acceptable to the holders of a majority of
the Registrable Securities included in such Demand Registration,
which acceptance will not be unreasonably withheld, and the
independent pricer required under the rules of the National
Association of Securities Dealers, Inc. ("NASD") (if any) shall
be so selected and obtained by the Company. All fees and
expenses (other than expenses otherwise required to be paid) of
any managing underwriter, any co-manager or any independent
underwriter or other independent pricer required under the rules
of the NASD shall be paid for by such underwriters or by the
Holders whose Registrable Securities are being registered.
(d) Procedure for Requesting Demand Registration. Any
request for a Demand Registration shall specify the aggregate
number of the Registrable Securities proposed to be sold and the
intended method of disposition. Within ten (10) days after
receipt of such a request, the Company will give written notice
of such registration request to all Holders, and, subject to the
limitations of Section 5.3(b) hereof, the Company will include in
such registration all Registrable Securities with respect to
which the company has received written requests for inclusion
therein within five business days after the date on which such
notice is given. Each such request will also specify the
aggregate number of Registrable Securities to be registered and
the intended method of disposition thereof.
5.4 Registration Procedures. If and whenever the
company is required to use its best efforts to take action
pursuant to any Federal or state law or regulation to permit the
sale or other disposition of any Registrable Securities in order
to effect or cause the registration of any Registrable Securities
under the Securities Act as provided in this Article 5, the
Company shall, as expeditiously as practicable;
(a) prepare and file with the SEC, as soon as
practicable within ninety (90) days after the and of the period
within which requests for registration may be given to the
Company under Section 5.3 hereof (but subject to the provision
for deferral contained in Section 5.3(a) hereof) a Registration
statement or Registration Statements relating to the registration
on any appropriate form under the Securities Act, which form
shall be selected by the Company and available for the sale of
the Registrable Securities in accordance with the intended method
or methods of distribution thereof, subject to Section 5.2(c)
hereof, and use its best efforts to cause such Registration
Statements to become effective; provided that before filing a
Registration Statement or prospectus or any amendment or
supplements thereto, including documents incorporated by
reference after the initial filing of any Registration Statement,
the Company will furnish to the Holders of the Registrable
Securities covered by such Registration Statement and the
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underwriters, if any, copies of all such documents provided to be
filed, which documents will be subject to the review of such
Holders and underwriters;
(b) prepare and file with the SEC such amendments and
post-effective amendments to a Registration Statement as may be
necessary to keep such Registration Statement effective for a
reasonable period not to exceed the shorter of the completion of
distribution of the registered securities and 120 days; cause the
related prospectus to be supplemented by any required prospectus
supplement, and as so supplemented to be filed pursuant to Rule
424 under the Securities Act; and comply with the provisions of
the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during such
period in accordance with the intended methods of disposition by
the sellers thereof set forth in such Registration Statement or
supplement to such prospectus;
(c) notify the selling Holders of Registrable
Securities and the managing underwriters, if any, promptly, and
(if requested by any such person) confirm such advice in writing,
(i) when a prospectus or any prospectus supplement or post-
effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the SEC for
amendments or supplements to a Registration Statement or related
prospectus or for additional information; (iii) of the issuance
by the SEC of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for
that purpose; (iv) if at any time the representation and
warranties of the Company contemplated by paragraph (m) below
cease to be true and correct in all material respects; (v) of the
receipt by the Company of any notification with respect to the
suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and (vi) of the
happening of any event that makes any statement of a material
fact made in the Registration statement, the prospectus or any
document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement
or prospectus so that they will not contain any untrue statement
of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading;
(d) make every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of a
Registration Statement at the earliest possible moment;
(e) if reasonably requested by the managing
underwriters, immediately incorporate in a prospectus supplement
or post-effective amendment such information as the underwriters
believe (on advice of counsel) should be included therein as
required by applicable law relating to the sale of Registrable
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Securities, including, without limitation, information with
respect to the purchase price being paid for the Registrable
securities by such underwriters and with respect to any other
terms of the underwritten (or "best-efforts" underwritten
offering; and make all required filing of such prospectus
supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-
effective amendment;
(f) furnish to each selling Holder of Registrable
Securities and each managing underwriter, without charge, at
least one signed copy of the Registration Statement and any post-
effective amendment thereto, including financial statements and
schedules, all documents incorporated therein by reference and
all exhibits (including those incorporated by reference);
(g) deliver to each selling Holder of Registrable
Securities and the underwriters, if any, without charge, as many
copies of the prospectus or prospectuses (including each
preliminary prospectus) any amendment or supplement thereto as
such persons may reasonably request; the Company consents to the
use of such prospectus or any amendment or supplement thereto by
each of the selling Holders of Registrable Securities and the
underwriters, if any, in connection with the offering and sale of
the Registrable Securities covered by such prospectus or any
amendment or supplement thereto;
(h) prior to any public offering of Registrable
Securities, cooperate with the selling Holders of Registrable
Securities, the underwriters, if any, and their respective
counsel in connection with the registration or qualification of
such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the
United states as any selling Holder or underwriter reasonably
requests in writing, keep each such registration or qualification
effective during the period such Registration Statement is
required to be kept effective and do any and all other acts or
things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the
applicable Registration Statement; provided that the Company will
not be required to qualify to do business in any Jurisdiction
where it is not then so qualified or to take any action which
would subject the Company or any of its subsidiaries to general
service of process in any jurisdiction where it is not at the
time so subject;
(i) cooperate with the selling Holders of Registrable
Securities and the managing underwriters, if any, to facilitate
the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any restrictive
legends and enable such Registrable Securities to be in such
denominations and registered in such names as the managing
underwriters may request at least two business days prior to any
sale of Registrable Securities to the underwriters;
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(j) use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be
registered with or approved by such other governmental agencies
or authorities within the United States as may be necessary to
enable the seller or sellers thereof or the underwriters, if any,
to consummate the disposition of such Registrable Securities;
(k) upon the occurrence of any event contemplated in
Section 5. 4 (c) (vi) above, prepare a supplement or post-
effective amendment to the applicable Registration Statement or
related prospectus or any document incorporated therein by
reference or file any other required document so that, as
thereafter delivered to the purchaser of the Registrable
Securities being sold thereunder, such prospectus will not
contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not
misleading;
(1) with respect to each issue or class of Registrable
securities, use its best efforts to cause all Registrable
Securities covered by the Registration Statements to be listed on
each securities exchange, if any, on which securities of the same
class issued by the Company are then listed if requested by the
holders of a majority of such issue or class Registrable
Securities;
(m) enter into such agreements (including an
underwriting agreement) and take all such other action consistent
with its obligations hereunder and reasonably required in
connection therewith in order to expedite or facilitate the
disposition of such Registrable Securities and in such
connection, if the registration is in connection with an
underwritten offering, (i) make such representations and
warranties to the underwriters, in such form, substance and scope
as are customarily made by issuers to underwriters in
underwritten offerings and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and
updates thereof (which counsel and opinions in form, scope and
substance shall be reasonably satisfactory to the underwriters)
addressed to the underwriters covering the matters customarily
covered in opinions requested in underwritten offerings; (iii)
obtain "cold comfort" letters and updates thereof from the
Company's accountants addressed to the underwriters, such letters
to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters by underwriters in
connection with underwritten offerings; (iv) set forth in full in
any underwriting agreement entered into the indemnification
provisions and procedures of Section 5.5 hereof with respect to
all parties to be indemnified pursuant to said Section; and (v)
deliver such documents and certificates as may be reasonably
requested by the underwriters to evidence compliance with clause
(i) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the
Company; the above shall be done at each closing under such
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<PAGE>
underwriting or similar agreement or as and to the extent
required hereunder;
(n) make available for inspection upon reasonable
notice by one or more representatives of the Holders of
Registrable Securities being sold, any underwriter participating
in any disposition pursuant to such registration, and any
attorney or accountant retained by such Holders or underwriter,
all financial and other records, pertinent corporate documents
and properties of the Company, and cause the Company's officers,
directors and employees to supply all information reasonably
requested by any such representatives at reasonable times, in
connection with such; and
(o) otherwise use its best efforts to comply with all
applicable Federal and state regulations; and take such other
action as may be reasonably necessary to or advisable to enable
each such Holder and each such underwriter to consummate the sale
or disposition in such jurisdiction or jurisdiction in which any
such Holder or underwriter shall have requested that the
Registrable Securities be sold.
Except as otherwise provided in this Agreement, the
Company shall have sole control in connection with the
preparation, filing, withdrawal, amendment or supplementing of
each Registration Statement, the selection of underwriters, and
the distribution of any preliminary prospectus included in the
Registration Statement, and may include within the coverage
thereof additional shares of Common Stock or other securities for
its own account or the account of one or more of its other
security holders.
The Company may require each seller of Registrable
Securities as to which any registration is being affected to
furnish to the Company such information regarding the
distribution of such securities and such other information as may
otherwise be required by the Securities Act to be included in
such Registration Statement.
5.5 Indemnification
(a) Indemnification by company. In connection with
each Registration Statement relating to disposition of
Registrable Securities, the Company shall indemnify and hold
harmless each Holder and each underwriter of Registrable
Securities and each person, if any, who controls such Holder or
underwriter (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) (collectively, "Holder
Indemnified Parties") against any and all losses, claims, damages
and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of any action, suit or
proceeding or any claim asserted), to which they, or any of them,
may become subject under the Securities Act, the Exchange Act or
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other Federal or state law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration
Statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto, or arise out of or are based upon
any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that such indemnity
shall not inure to the benefit of any Holder or underwriter (or
any person controlling such Holder or underwriter within the
meaning of Section 1 of the Securities Act or Section 20 of the
Exchange Act) on account of any losses, claims, damages or
liabilities arising from the sale of the Registrable Securities
if such untrue statement or omission or alleged untrue statement
or omission was made in such Registration Statement, prospectus
or preliminary prospectus, or such amendment or supplement, in
reliance upon and in conformity with information furnished in
writing to the Company by the Holder or underwriter specifically
for use therein. This indemnity agreement shall be in addition
to any liability which the Company may otherwise have.
(b) Indemnification by Holder. In connection with the
Registration Statement, each Holder shall indemnify, to the same
extent as the indemnification provided by the Company in Section
5.5(a) hereof, the Company, its directors and each officer who
signs the Registration Statement and each person who controls the
Company (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act) but only insofar as such
losses, claims, damages and liabilities arise out of or are based
upon any untrue statement or omission or alleged untrue statement
or omission which was made in the Registration Statement, the
prospectus or preliminary prospectus or any amendment thereof or
supplement thereto, in reliance upon and in conformity with
information furnished in writing by such Holder to the Company
specifically for use therein. In no event shall the liability of
any selling Holder of Registrable Securities hereunder be greater
in amount than the dollar amount of the not proceeds received by
such Holder upon the sale of the Registrable Securities giving
rise to such indemnification obligation. The company shall be
entitled to receive indemnities from underwriters, selling
brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same
extent as provided above, with respect to information so
furnished in writing by such persons specifically for inclusion
in any prospectus, registration statement or preliminary
prospectus or any amendment thereof or supplement thereto.
(c) Conduct of Indemnification Procedure. Any party
that proposes to assert the right to be indemnified hereunder
will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which
a claim is to be made against any indemnifying party or parties
under this Section, notify each such indemnifying party of the
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<PAGE>
commencement of such action, suit or proceeding, enclosing a copy
of all papers served. No indemnification provided for in Section
5.5(a) or 5.5(b) hereof shall be available to any party who shall
fail to give notice as provided in this Section 5.5(c) to the
extent the party to whom notice was not given was prejudiced by
the failure to give such notice, but the omission so to notify
such indemnifying party of any such action, suit or proceeding
shall not relieve it from any liability that it may have to any
indemnified party for contribution otherwise than under this
Section. In case any such action, suit or proceeding shall be
brought against any indemnified party, it shall notify the
indemnifying party of the commencement thereof and the
indemnifying party shall be entitled to participate in, and, to
the extent that it shall wish, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and the
approval by the indemnifying party of such indemnified party of
such, counsel, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses, except as
provided below. The indemnified party shall have the right to
employ its counsel in any such action, but the feet and expenses
of such counsel shall be at the expense of such indemnified party
unless (i) the employment of counsel by such indemnified party
has been authorized in writing by the indemnifying parties, (ii)
the indemnified party shall have reasonably concluded that there
may be a conflict of interest between the indemnifying parties
and the indemnified party in the conduct of the defense of such
action (in which case the indemnified parties shall not have the
right to direct the defense of such action on behalf of the
indemnified party) or (iii) the indemnified parties shall not
have employed counsel to assume the defense of such action within
a reasonable time after notice of the commencement thereof, in
each of which cases the fees and expenses of counsel shall be at
the expenses of the indemnifying parties. The indemnifying party
shall not without the prior written consent of each indemnified
party affected thereby, effect any settlement of any pending or
threatened proceeding in which such indemnified party has sought
indemnity hereunder, unless such settlement involves an
unconditional release of such Indemnified Party from all
liability arising out of such action, claim, litigation or
proceeding.
(d) Contribution. If the indemnification provided for
in this Section 5.5 is unavailable to any party entitled to
indemnification pursuant to Section 5.5(a) or 5.5(b) hereof, then
each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages,
judgments, liabilities and expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the
Company on the one hand and each Holder Indemnified Party on the
other from the offering of the Registrable Securities or (ii) if
the allocation provided by clause (i) above is not permitted by
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<PAGE>
applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above
but also the relative fault of the Company on the one hand and
each Holder Indemnified Party on the other in connection with
trio statements or omissions which resulted in such losses,
claims, damages, judgments, liabilities or expenses, an well as
any other relevant equitable considerations. The relative fault
of the company on the one hand and each Holder Indemnified Party
on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on
the one hand or by each Holder Indemnified Party on the other and
the parties relative intent, knowledge, access or information and
opportunity to correct or prevent such statement or omission.
(e) The Company and each Holder Indemnified Party agree
that it would not be just and equitable if contributions pursuant
to Section 5.5(d) hereof were determined by pro rata allocation
or by any other method of allocation that does not take account
of the equitable considerations referred to in Section 5.5(d)
hereof. The amount paid or payable by an Indemnified Party as a
result of the losses, claims, damages, liabilities, or expenses
referred to in the immediately preceding paragraph shall be
deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending
any such action or claim. No person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was to
found guilty of such fraudulent representation.
5.6 Reservation of Shares. The Company hereby agrees
that at all times there shall be reserved for issuance and
delivery upon conversion of any of the Shares such number of
conversion Shares as may be issuable upon conversion of the
shares. All Conversion Shares shall be duly authorized, and when
issued upon such conversion, shall be validly issued, fully paid
and nonassessable, free and clear of all lions, security
interests, charges and other encumbrances or restrictions on sale
and free and clear of all preemptive rights.
SECTION 6
Miscellaneous
6.1 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Now
York, without giving effect to conflicts of law.
6.2 Survival. The representations and warranties made
in Sections 3 aand 4 herein shall survive the Closing Date for a
period of one year.
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<PAGE>
6.3 Successors and Assigns. This Agreement shall inure
to the benefit of, and be binding upon, the parties hereto and
their respective successors, permitted assigns, heirs, executors
and administrators. No Purchaser may assign its obligations
hereunder to be performed on or before the closing.
6.4 Entire agreement Amendment. This Agreement and the
documents delivered pursuant hereto constitute the full and
entire understanding and agreement among the parties with regard
to the subjects hereof. Neither this Agreement nor any term
hereof may be amended, waived, discharged or terminated except by
a written instrument signed by the Company and the Purchasers;
provided, however, that Purchasers holding a majority of the
Shares together with the Company may by written instrument amend
the provisions of Sections 5 or 6 (other than this Section 6.4)
hereof.
6.5 Notices, Etc. All notices and other communications
required or permitted hereunder shall be in writing and shall be
mailed by first class mail, postage prepaid, or by express
courier, or delivered either by hand or by messenger, addressed
(a) if to a Purchaser, as indicated on the signature page hereof,
or at such other address as such Purchaser shall have furnished
to the Company in writing, or (b) if to the Company, at 4380
Boulder Highway, Las Vegas, Nevada 89121, Attn: Chief Financial
Officer, or at such other address as the Company shall have
furnished to the Purchasers in writing.
6.6 Rights; Separability. Unless otherwise expressly
provided herein, the rights of the Purchasers hereunder are
several rights, not rights jointly held with any of the other
Purchasers. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way
be affected or impaired thereby.
6.7 Information Confidential. Each Purchaser
acknowledges that the information received by it pursuant to this
Agreement may be confidential and is for the Purchaser's use
only. It will not use such confidential information in violation
of the Exchange Act or otherwise, or reproduce, disclose or
disseminate such information to any other person (other than its
employees or agents having a need to know the contents of such
information, and its attorneys and financial advisors), except in
connection with the exercise of rights under this Agreement,
unless the Company has made such information available to the
public generally or such Purchaser is required to disclose such
information by a governmental body.
6.8 Expenses. The company and the Purchasers shall bear
their own expenses and legal fees incurred on their behalf with
respect to this Agreement and the transactions contemplated
hereby.
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<PAGE>
6.9 Titles and Gender. The titles of the Sections and
Subsections of this Agreement are for convenience of reference
only and are not to be considered in construing this Agreement.
Whenever used herein, the singular member includes the plural,
the plural includes the singular, and the use of either gender
shall include both genders.
6.10 Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be an original,
but all of which together shall constitute one instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this
Agreement to be duly executed and delivered by their respective
proper and duly authorized officers as of the day and year first
above written.
ALLIANCE GAMING CORPORATION
By:
PURCHASER:
By:
Address:
No. of Shares:
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<PAGE>
ANNEX A
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF SPECIAL
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
or
NON-VOTING JUNIOR CONVERTIBLE
SPECIAL STOCK, SERIES 3
OF
ALLIANCE GAMING CORPORATION
a Nevada corporation,
Pursuant to Section 79.195 of the
Nevada Revised Statutes
ALLIANCE GAMING CORPORATION, a Nevada corporation (the
"Corporation"), certifies that, pursuant to the authority
contained in Article IV of its Amended Articles of Incorporation
(the "Articles of Incorporation") and in accordance with the
provisions of Section 78.195 of the Nevada Revised Statutes, the
Board of Directors of the Corporation at a meeting duly called
and held on September _, 1995, adopted the following resolution
which resolution remains in full force and effect on the date
hereof:
RESOLVED, that the Articles of Incorporation have
authorized 10,000,000 shares of special stock, par value $.10 per
share, of which 8,666,667 remain unissued; and
FURTHER RESOLVED, that it is necessary to set forth the
designation, preferences and relative, participating, optional
and other special rights and qualifications, limitations and
restrictions of 6,666,667 shares of such non-voting special
stock; and
FURTHER RESOLVED, that there is hereby established a
series of authorized special stock having a par value of $.10 per
share, which series shall be designated as "Non-Voting Junior
Convertible Special Stock, Series B" (herein the "Convertible
Special Stock,"), shall consist of 6,666,667 shares and shall
have the following voting powers, preferences and relative,
participating, optional and other special rights, and
qualifications, limitations and restrictions thereof as follows:
<PAGE>
ARTICLE I
Certain Definitions
Unless the context otherwise requires, the terms defined
in this Article I shall have, for all purposes of this
resolution, the meanings herein specified:
Common Stock. The term "Common Stock" shall mean the
common stock, par value $.10 per share, of the corporation.
Conversion Condition. The term "Conversion Condition"
shall mean that the stockholders of the Corporation, at a duly
held annual or special meeting, or by action by written consent
in lieu thereof, have taken all action necessary or required
under Section 5(i)(1) of the "Non-Quantitative Designation
Criteria" of the NASDAQ National Market System to approve the
issuance of Common Stock on conversion as contemplated by this
Certificate.
Conversion Ratio. The term "Conversion Ratio" shall
initially mean the issuance, upon conversion as herein provided,
of one share of Common Stock for each share of Convertible
Special Stock surrendered for conversion and thereafter shall be
subject to adjustment from time to time pursuant to the terms of
Article IV below.
Exchange Date. The term "Exchange Date" shall have the
meaning set forth in subparagraph 4.2 below.
Initial Issue Date. The term "Initial Issue Date" shall
mean the date that shares of Convertible Special Stock are first
issued by the Corporation.
Liquidation Preference. The term "Liquidation
Preference,, shall mean $.01 per share of Convertible Special
Stock.
Person. The term "Person" shall mean an individual,
partnership,, joint venture, corporation, trust or unincorporated
organization, a government or any department, agency or political
subdivision thereof or other entity,
Quoted Price. The term "Quoted Price" shall mean, with
respect to the Common Stock, the last reported sales price as
reported by the NASDAQ National Market System, or if such
security is listed on a securities exchange, the last reported
sales price on such exchange which shall be for consolidated
trading if applicable to such exchange, or if neither so reported
or listed, the last reported bid price. In the absence of such
<PAGE>
quotations on one or more such trading days, the Board of
Directors shall determine the Quoted Price for such trading days
on the basis of such quotations as it in good faith considers
appropriate.
Senior Stock. The term "Senior Stock" shall mean any
class or series of stock of the Corporation authorized after the
Initial Issue Date ranking senior to the Convertible Special
Stock in respect of the right to receive dividends or in respect
of the right to participate in any distribution upon liquidation,
dissolution or winding up of the affairs of the Corporation.
Trading Day. The term "Trading Day" shall mean, with
respect to the Common Stock, any day on which any market in which
the applicable security is then traded and in which a Quoted
Price may be ascertained is open for business.
ARTICLE II
Dividends or Other Distributions of Property
2.1 General. The holders of Convertible Special Stock
shall not be entitled to receive dividends unless and until
expressly declared by the Board of Directors of the Corporation
with respect to the Convertible Special Stock, or to otherwise
participate in any manner in the earnings of the Corporation;
provided, however, that in the event the Corporation pays a
dividend or makes any other distribution, whether in cash,
property or otherwise, including, without limitation, any rights,
options, or warrants to acquire securities or other securities
(but excluding a stock dividend, stock split or other similar
distribution consisting solely of shares of Common Stock which
results in an adjustment to the Conversion Ratio pursuant to
Article IV), pro rata to the holders of its Common Stock
generally, then the record holders of the Convertible Special
Stock outstanding on the applicable record date of such dividend
or other distribution shall be entitled to receive dividends or
such other distributions, out of funds legally available
therefor, in an amount per share of Convertible Special Stock
equal to the dividend or other distribution receivable had such
record holder(s) converted their Convertible Special Stock into
Common Stock immediately prior to the record date for such
dividend or other distribution pursuant to the terms of this
resolution, whether or not such Convertible Special Stock was at
such time convertible.
2.2 No Limitations on Dividends. No provision of this
resolution shall be deemed to limit or otherwise restrict or
qualify the right of the Corporation to declare, pay or set
apart,
<PAGE>
for payment on any of its capital stock (whether outstanding on
the date hereof or issued in the future) any dividends, whether
in cash, property or otherwise, or to otherwise make any
distribution in respect of or purchase, redeem or otherwise
acquire any such capital stock, subject only to the right of the
holders Of Convertible Special Stock, pursuant to Section 2.1
hereof, to receive certain dividends and other distributions
payable in respect of Common Stock.
ARTICLE III
Distributions Upon Liquidation, Dissolution or Winding Up
3.1 Preference on Liquidation, Etc. In the event of
any voluntary or involuntary liquidation, dissolution or other
winding up of the affairs of the Corporation, subject to the
prior preferences and other rights of any Senior Stock as to
liquidation preferences, the holders of Convertible Special Stock
shall be entitled to be paid out of the assets of the Corporation
in cash or property at its fair market value as determined, in
good faith, by the Board of Directors of the Corporation the
Liquidation Preference per share prior to any payment to the
holders of Common Stock. After payment in full of the
Liquidation Preference per share of the Convertible Special
Stock, the holders of the Convertible Special Stock and the
Common Stock (as defined in Section 4.6 hereof) shall share pro
rata based upon (i) the number of shares of Common Stock into
which the Convertible Special Stock was convertible immediately
prior to such liquidation, dissolution or winding up (assuming,
for purposes of such calculation, conversion of the outstanding
shares of Convertible Special Stock whether or not such
Convertible Special Stock was at such time convertible) and (ii)
the number of shares of Common Stock (as defined in Section 4.6
hereof) outstanding. Except as provided in this Section 3.1,
holders of Convertible Special Stock shall not be entitled to any
distribution in the event of liquidation, dissolution or winding
up of the affairs of the Corporation.
3.2 Liquidation Pro-rata if Assets Inadequate, If, upon
any such liquidation, dissolution or other winding up of the
affairs of the Corporation, the assets of the Corporation shall
be insufficient to permit the payment in full of the Liquidation
Preference per share of the Convertible Special Stock, then the
assets of the Corporation remaining after the distributions to
holders of any Senior Stock of the full amounts to which they may
be entitled shall be ratably distributed among the holders of
Convertible Special Stock in proportion to the full amounts to
which they would otherwise be respectively entitled if all
amounts thereon were paid in full. Neither the consolidation or
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merger of the Corporation into or with another corporation or
corporations, nor the sale, lease, transfer or conveyance of all
or substantially all of the assets of the Corporation to another
corporation or any other entity shall be deemed a liquidation,
dissolution or winding up of the affairs of the Corporation
within the meaning of this resolution.
ARTICLE IV
Conversion
4.1 Conversion. Upon the occurrence of the Conversion
Condition, all shares of Convertible Special Stock shall convert
into Common Stock. Subject to the adjustments to the Conversion
Ratio provided for in this Article IV, each share of Convertible
Special Stock shall be convertible into one share of Common
Stock. Immediately following such conversion, the rights of the
holders of converted Convertible Special Stock shall cease and
the persons entitled to receive the Common Stock upon the
conversion of Convertible Special Stock shall upon compliance
with the requirements of Section 4.2 hereof be treated for all
purposes as having become the owners of such Common Stock.
4.2 Procedures. To receive certificates evidencing
Common Stock issuable on conversion of Convertible Special Stock,
a holder must (i) surrender the certificate or certificates
evidencing the shares of Convertible Special Stock to be
converted, duly endorsed in a form reasonably satisfactory to the
Corporation, at the office of the Corporation or transfer agent
for the Convertible Special Stock, (ii) state in writing the name
or names in which he wishes the certificate or certificates for
shares of Common Stock to be issued, and (iii) pay any transfer
or similar tax if required by Section 4.4 hereof. The date on
which the holder satisfies all those requirements is the
"Exchange Date". The person in whose name the Common Stock
certificate is registered shall be treated as the stockholder of
record on and after the Exchange Date. As soon as practicable,
but in any event within 10 business days, the Corporation shall
deliver, through the transfer agent, a certificate for the number
of full shares of Common Stock issuable upon the conversion and a
check for any fractional share. The number of full shares of
Common stock issuable to any holder of Convertible Special Stock
upon conversion shall be based on the total number of shares of
Convertible Special Stock held by such holder.
4.3 Fractional Shares. The Corporation will not issue
a fractional share of Common Stock upon conversion of Convertible
Special Stock. Instead the Corporation will deliver its check
for the current market value of the fractional share. The
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current market value of a fraction of a share is determined an
follows: Multiply the current market price of a full share by the
fraction and round the result to the nearest cent. The current
market price of a share of Common stock is the Quoted Price of
the Common Stock on the last Trading Day prior to the Conversion
Date.
4.4 Transfer Taxes. The Corporation will pay all
documentary stamp taxes attributable to the initial issuance of
shares of Common Stock upon the conversion of Convertible Special
Stock; provided, however,, that the Corporation shall not be
required to pay any tax or taxes which may be payable in respect
of any registration or transfer involved in the loans or delivery
of any shares of Common Stock in a name other than that of the
registered holder of the Convertible Special Stock surrendered
upon the conversion thereof, and the Corporation shall not be
required to issue or deliver such shares of Common Stock unless
or until the person or persons requesting the issuance thereof
shall have paid to the corporation the amount of such tax or
shall have established to the reasonable satisfaction of the
Corporation that such tax has been paid.
4.5 obtaining Stock Exchange Listings. The Corporation
will from time to time take all action, if any, which may be
necessary so that the shares of Common Stock issued upon
conversion of the Convertible Special Stock, immediately upon
their issuance in accordance with this resolution, will be listed
or quoted on the principal securities exchanges and markets,
within the United States of America, if any, on which other
shares of Common Stock are then listed or quoted.
4.6 Adjustments of Conversion Ratio.
(a) General. The Conversion ratio is subject to
adjustment from time to time upon the occurrence of the events
enumerated in this Section 4.6. For purposes of this Section 4.6,
"Common Stock" means shares (other than the Convertible Special
Stock) now or hereafter authorized of any class of common stock
of the Corporation and any other stock of the Corporation,
however designated, that has the right (subject to any prior
rights of any class or series of preferred stock) to participate
in any distribution of the assets or consolidated earnings of the
Corporation without limit as to per share amount.
(b) Adjustment for Changes in Common Stock. If the
Corporation:
(i) subdivides its outstanding shares of Common Stock
into a greater number of shares;
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(ii) combines its outstanding shares of Common Stock
into a smaller number of shares;
(iii) issues by reclassification of its Common stock
any shares of its capital stock; or
(iv) declares a stock dividend, stock split or effects
any other similar distribution consisting solely of shares of
Common Stock payable in respect of Common Stock;
then the Conversion Ratio in effect immediately prior to such
action shall be proportionately adjusted so that the holder of
Convertible Special Stock thereafter converted may receive the
aggregate number and kind of shares of capital stock of the
Corporation which he would have owned immediately following such
action if such Convertible Special Stock had been converted
immediately prior to such action (whether or not the Convertible
Special Stock was at such time convertible); provided, however.,
that no adjustment shall be made hereunder if the cash,
securities or property which would be the source of such
adjustment were distributed to the holders of the Convertible
Special Stock pursuant to Section 2.1 hereof. The adjustment
shall become effective immediately after the record date, if one
is declared, or immediately after the effective date in the case
of a subdivision, combination or reclassification. Such
adjustment shall be made successively whenever any event listed
above shall occur.
(c) When De Minimis Adjustment May Be Deferred. No
adjustment in the Conversion Ratio need to be made unless the
adjustment would require an increase or decrease of at least 1%
in the Conversion Ratio. Any adjustments that are not made shall
be carried forward and taken into account in any subsequent
adjustments. All calculations under this Section shall be made
to the nearest cent or to the nearest 1/100th of a share, as the
case may be.
(d) When No Adjustment Required. No adjustment need be
made for a change in the par value of the Common Stock (including
a change from par value to no par value or from no par value to
par value).
(e) Notice of Adjustment. Whenever the Conversion
Ratio is adjusted, the Corporation shall provide the notices
required by Section 4.7 hereof.
(f) Reorganization of Corporation. If the Corporation
shall at any time consolidate or merge with one or more
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Persons (other than a merger or consolidation in which the
corporation is the continuing Person and which does not result in
any reclassification, change or exchange of the outstanding
shares of Common Stock), or sell, lease, transfer, or convey all
or substantially all of its assets, the record holders of the
Convertible Special Stock shall have the right thereafter to
receive, upon the surrender of a certificate or certificates
representing Convertible Special Stock, the cash, securities or
other property to which the record holder would have been
entitled upon such consolidation, merger, sale, lease, transfer
or conveyance (to the extent permitted by applicable law) if the
record holder had held the shares of Common Stock issuable upon
any conversion thereof immediately prior to any such transaction,
whether or not the Convertible Special Stock was at such time
convertible. The Corporation shall take such steps in connection
with such consolidation or merger or sale, lease, transfer or
conveyance as may be necessary to assure that the provisions
hereof shall thereafter be applicable, as nearly as reasonably
may be, in relation to any cash, securities or other property
thereafter deliverable upon any conversion or redemption hereof.
The provisions of this Section 4.6(f) shall similarly apply to
successive consolidations, mergers, sales, leases, transfers or
conveyances.
(g) When Issuance or Payment May Be Deferred. In any
case in which this Section 4.6 shall require that an adjustment
in the Conversion Ratio be made effective as of a record date for
a specified event, the Corporation may elect to defer until the
occurrence of such event (i) issuing to the holder of any shares
of Convertible Special Stock converted after such record date the
Common Stock and other capital stock of the Corporation, if any,
issuable upon such conversion over and above the Common Stock and
other capital stock of the Corporation, if any, issuable upon
such conversion on the basis of the Conversion Ratio and (ii)
paying to such holder any amount in cash in lieu of a fractional
share pursuant to Section 4.3; provided, however,, that the
Corporation shall deliver to such holder a due bill or other
appropriate instrument evidencing such holders right to receive
such additional shares of Common Stock, other capital stock and
cash upon the occurrence of the event requiring such adjustment.
4.7 Notice to Holders. Upon any adjustment of the
Conversion Ratio pursuant to Section 4.6, the Corporation shall
promptly thereafter (i) cause to filed with the Corporation a
certificate of a firm of independent public accountants of
recognized standing selected by the Board of Directors (who may
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be the regular auditors of the Corporation) setting forth the
Conversion Ratio after such adjustment and setting forth in
reasonable detail the method of calculation and the facts upon
which such calculations are based and setting forth the number of
shares of Common Stock (or portion thereof) issuable after such
adjustment in the Conversion Ratio, upon conversion of a share of
Convertible Special Stock which certificate shall be conclusive
evidence of the correctness of the matters set forth therein, and
(ii) cause to be given to each of the registered holders of the
Convertible Special Stock at its address appearing on the
transfer agent's register written notice of such adjustments by
first-class mail, postage prepaid.
4.8 Treatment of converted Shares. All shares of
Convertible Special Stock converted pursuant to this resolution
shall be retired and shall be restored to the status of
authorized and unissued shares of special stock, without
designations as to series and may thereafter be reissued as
shares of any series of special stock.
ARTICLE V
Voting Rights
5.1 Voting Rights of Holders of Convertible Special
Stock. Except as provided by law to the contrary, the
Convertible Special Stock shall be non-voting stock and no holder
of Convertible Special Stock shall be entitled (in such capacity)
to vote at any meeting of shareholders or otherwise.
ARTICLE VI
Redemption
6.1 Redemption. If the initial Condition shall not
have occurred within six months following the Initial Issue Date,
the Corporation shall immediately make an offer to each holder of
the convertible Special Stock by registered mail to redeem, out
of funds legally available therefor, on a date specified in such
offer (which shall not be less than 30 nor more. than 60 days
after the date of such notice), all such holder's Convertible
Special Stock at a cash price equal to the greater of (i) the
Quoted Price of the Common Stock on the date notice is sent and
(ii) 125% of the original issue price of the Convertible Special
stock, upon the acceptance of such offer received by the
Corporation at least 10 days prior to the redemption date
specified in the Corporation's offer. If the holder of any share
of Convertible Special Stock shall accept such offer, and upon
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surrender of the certificates evidencing such Convertible Special
Stock such holder shall receive the redemption price therefor.
ARTICLE VII
Miscellaneous
7.1 Exclusion of Other Rights. Except as may otherwise
be required by law, the shares of Convertible Special Stock shall
not have any powers, preferences and relative, participating,
optional or other special rights, other than those specifically
set forth in this resolution and in the Articles of
Incorporation. The shares of Convertible Special Stock shall
have the same preemptive or subscription rights, if any, as
provided for the holders of the Common Stock.
7.2 Headings of Subdivisions. The headings of the
various subdivisions hereof are for convenience of reference only
and shall not affect the interpretation of any of the provisions
hereof.
7.3 Severability of Provisions. If any voting powers,
preferences and relative, participating, optional and other
special rights of the Convertible Special Stock and
qualifications, limitations and restrictions thereof set forth in
this resolution is invalid, unlawful or incapable of being
enforced by reason of any rule of law or public policy, all other
voting powers, preferences and relative, participating, optional
and other special rights of the Convertible Special Stock and
qualifications, limitations and restrictions thereof set forth in
this resolution (as so amended) which can be given effect without
the invalid, unlawful or unenforceable voting powers, preferences
and relative, participating, optional and other special rights of
the Convertible Special Stock and qualifications, limitations and
restrictions thereof shall, nevertheless, remain in full force
and effect, and no voting powers, preferences and relative,
participating, optional or other special rights of the
Convertible special Stock and qualifications, limitations and
restrictions thereof herein act forth shall be deemed dependent
upon any other such voting powers, preferences and relative,
participation, optional or other special rights of the
Convertible Special Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.
<PAGE>
ANNEX B
LEGAL OPINIONS OF COUNSEL TO THE COMPANY
1. The company is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Nevada.
2. The company has all requisite corporate power to
enter into the Purchase Agreement and to sell the Shares and to
carry out and perform its obligations under the Purchase
Agreement and has taken all requisite corporate action on the
part of the Company necessary for the authorization, execution,
delivery and performance by the Company of the Purchase Agreement
and for the authorization, issuance and delivery of the
Conversion Shares upon conversion of the Shares, other than
receiving stockholder approval for such conversion. The
Certificate of Designations establishing the Special Stock has
been filed with the Secretary of State of the State of Nevada and
is effective under Nevada law and the terms of the Special Stock
are valid under the laws of the State of Nevada. The execution,
delivery and performance of the Purchase Agreement will not
conflict with nor constitute a breach of any provision contained
in the Company's Articles or Certificate of Incorporation or By-
laws or, to the knowledge of such counsel, in any material
agreement to which the Company is a party or by which its
properties or assets may be bound.
3. The Shares have been duly authorized and, upon
payment of the purchase price therefor as contemplated in the
Purchase Agreement, will be validly issued, fully paid and non-
assessable. The Conversion Shares have been duly authorized and,
upon conversion as contemplated in the Certificate of
Designations, will be validly issued, fully paid and non-
assessable.
4. The Purchase Agreement has been duly and validly
authorized, executed and delivered by the Company and, assuming
due execution and delivery by the Purchasers, constitutes a valid
and binding obligation of the Company, enforceable in accordance
with its terms except as may be limited by bankruptcy,
insolvency, or other similar laws affecting the enforcement of
creditors' rights generally and general principles of equity and
except that such counsel expresses no opinion as to the
enforceability of indemnification or contribution provisions
contained in the Purchase Agreement.
5. The issuance of the Shares by the Company is exempt
from the registration requirements of the Securities Act.
