<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 1996
REGISTRATION NO. 333-02799
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 10549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEVADA 7993 88-0104066
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification
Incorporation or Classification Code Number)
Organization) Number)
</TABLE>
4380 BOULDER HIGHWAY
LAS VEGAS, NEVADA
(702) 435-4200
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
JOHN W. ALDERFER
CHIEF FINANCIAL OFFICER
4380 BOULDER HIGHWAY
LAS VEGAS, NEVADA 89121
(702) 435-4200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
--------------------------
COPIES TO:
LAWRENCE LEDERMAN, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY
1 CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10005
TELEPHONE (212) 530-5000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective
and all other conditions to the Exchange Offer described in the enclosed
prospectus have been satisfied or waived
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF
SECURITIES BEING REGISTERED BE REGISTERED PER UNIT (1) PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
7 1/2% Convertible Subordinated Debentures
due 2002................................... $85,000,000 100% $85,000,000 $17,587.00(4)
Common Stock, par value $.10 per share...... 15,300,000(2) -- -- (3)
Non-Voting Junior Convertible Special Stock,
Series E, par value $.10 per share......... 1,530,000(2) -- -- (3)
</TABLE>
(1) Calculated pursuant to Rule 457(f)(1), based on the average of the bid and
asked price of the Registrant's 7 1/2% Convertible Subordinated Debentures
due 2003, which will be cancelled in the Exchange Offer, on April 23, 1996.
(2) There are being registered hereunder the number of shares of Common Stock
and Special Stock required at the special conversion rate for conversion of
the Debentures being registered hereunder, assuming that the Automatic
Conversion (as defined) occurs.
(3) Pursuant to Rule 457(i), no registration fee is payable with respect to the
Common Stock or Special Stock since the Common Stock or Special Stock will
be issued for no separate consideration. Common Stock or Special Stock will
be issued only upon the conversion of the Debentures, at a conversion rate
of 180 shares of Common Stock per $1,000 principal amount or 18 shares of
Special Stock per $1,000 principal amount (as the case may be), assuming
that the Automatic Conversion occurs.
(4) Fee paid previously on April 24, 1996 in connection with the initial filing
of this Registration Statement.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ALLIANCE GAMING CORPORATION
CROSS REFERENCE SHEET
FOR
REGISTRATION STATEMENT ON FORM S-4 AND PROSPECTUS
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FORM S-4 - ITEM NUMBER AND CAPTION
- ------------------------------------------------------------------------- LOCATION IN PROSPECTUS
---------------------------------------------------
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................... Facing Page of the Registration Statement;
Cross-Reference Sheet; Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ AVAILABLE INFORMATION; INCORPORATION BY REFERENCE;
TABLE OF CONTENTS
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information............................. OUTSIDE FRONT COVER PAGE OF PROSPECTUS; PROSPECTUS
SUMMARY; RISK FACTORS; THE EXCHANGE OFFER; THE
MERGER AND RELATED FINANCINGS; SELECTED HISTORICAL
FINANCIAL INFORMATION OF ALLIANCE; SELECTED
HISTORICAL FINANCIAL INFORMATION OF BGII; THE
COMPANY; UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION; CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS; GAMING REGULATIONS AND LICENSING
4. Terms of the Transaction........................... PROSPECTUS SUMMARY; THE EXCHANGE OFFER; DESCRIPTION
OF THE NEW CONVERTIBLE DEBENTURES; COMPARISON OF
NEW CONVERTIBLE DEBENTURES AND OLD CONVERTIBLE
DEBENTURES; DESCRIPTION OF CAPITAL STOCK; CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS; THE MERGER AND
RELATED FINANCINGS
5. Pro Forma Financial Information.................... SUMMARY FINANCIAL INFORMATION; UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION; SELECTED
HISTORICAL FINANCIAL INFORMATION OF ALLIANCE;
SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII;
FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING
CASH FLOW
</TABLE>
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FORM S-4 - ITEM NUMBER AND CAPTION
- ------------------------------------------------------------------------- LOCATION IN PROSPECTUS
---------------------------------------------------
6. Material Contacts With the Company Being
Acquired.......................................... PROSPECTUS SUMMARY; THE EXCHANGE OFFER; CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS; THE
COMPANY; MANAGEMENT; THE MERGER AND RELATED
FINANCINGS
7. Additional Information Required For Reoffering by
Persons and Parties Deemed to be Underwriters..... Not Applicable
8. Interests of Named Experts and Counsel............. LEGAL MATTERS; EXPERTS
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... INDEMNIFICATION OF DIRECTORS AND OFFICERS;
UNDERTAKINGS
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3 Registrants........ Not Applicable
11. Incorporation of Certain Information by
Reference......................................... Not Applicable
12. Information With Respect to S-2 or S-3
Registrants....................................... INCORPORATION BY REFERENCE; PROSPECTUS SUMMARY; THE
EXCHANGE OFFER; SELECTED HISTORICAL FINANCIAL
INFORMATION OF ALLIANCE; THE COMPANY; THE MERGER
AND RELATED FINANCINGS; UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
13. Incorporation of Certain Information by
Reference......................................... INCORPORATION BY REFERENCE
14. Information With Respect to Registrants Other Than
S-2 or S-3 Registrants............................ Not Applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information With Respect to S-3 Companies.......... Not Applicable
16. Information With Respect to S-2 or S-3 Companies... Not Applicable
17. Information With Respect to Companies Other Than
S-2 or S-3 Companies.............................. Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
Are to be Solicited............................... Not Applicable
19. Information if Proxies, Consents or Authorizations
Are Not to be Solicited or in an Exchange Offer... SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
AND MANAGEMENT
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 24, 1996
PROSPECTUS
(ALLIANCE GAMING CORPORATION LOGO)
OFFER FOR ALL OUTSTANDING
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
IN EXCHANGE FOR
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
OF ALLIANCE GAMING CORPORATION
Alliance Gaming Corporation ("Alliance") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus (the "Prospectus") and in
the accompanying Letter of Transmittal (the "Letter of Transmittal", which,
together with the Prospectus, constitute the "Exchange Offer") to exchange up to
$85,000,000 aggregate principal amount (the "Exchange Consideration") of 7 1/2%
Convertible Subordinated Debentures due 2002 (the "New Convertible Debentures")
of Alliance for a like principal amount of the issued and outstanding 7 1/2%
Convertible Subordinated Debentures due 2003 (the "Old Convertible Debentures")
of Alliance. The Exchange Offer is part of the financing of the merger (the
"Merger") of a wholly-owned subsidiary of Alliance with and into Bally Gaming
International, Inc. ("BGII"), pursuant to which BGII will become a wholly-owned
subsidiary of Alliance. See "The Merger and Related Financings". The terms of
the New Convertible Debentures are identical in all material respects to the Old
Convertible Debentures, except for maturity, provision for mandatory conversion
upon consummation of the Merger and the absence of certain transfer restrictions
and registration rights relating to the Old Convertible Debentures. See
"Description of the New Convertible Debentures".
The New Convertible Debentures will bear interest from March 15, 1996,
payable on March 15 and September 15 (each, an "Interest Payment Date"). In
addition, the New Convertible Debentures will pay, on the first Interest Payment
Date after issuance of the New Convertible Debentures, an additional amount per
$1,000 principal amount of New Convertible Debentures equal to the amount of
liquidated damages accrued per $1,000 principal amount of the Old Convertible
Debentures from March 15, 1996 through the date of issuance of the New
Convertible Debentures (the "Additional Payment"). See "Description of New
Convertible Debentures". Holders whose Old Convertible Debentures are accepted
for exchange will be deemed to have waived the right to receive any payment in
respect of interest or liquidated damages on the Old Convertible Debentures
accrued through the date of issuance of the New Convertible Debentures. See
"Description of New Convertible Debentures".
The New Convertible Debentures will be convertible into Common Stock of
Alliance, par value $.10 per share (the "Common Stock"), at any time at or prior
to maturity, unless previously redeemed or converted, at a conversion price of
$10.00 per share (equivalent to a conversion rate of 100 shares per $1,000
principal amount of New Convertible Debentures), subject to adjustment under
certain circumstances. On April 23, 1996, the last reported sale price of the
Common Stock on the NASDAQ National Market System (where it is traded under the
symbol ALLY) was $4.00 per share). See "Description of New Convertible
Debentures".
If the Merger is consummated within 60 days after the issuance of the New
Convertible Debentures, then at the effective time of the Merger, the New
Convertible Debentures will be automatically converted (the "Automatic
Conversion") into Common Stock at a conversion rate of 180 shares per $1,000
principal amount of New Convertible Debentures (equivalent to a conversion price
of approximately $5.56). A holder of New Convertible Debentures may elect to
forego receipt of all or any portion of Common Stock that such holder would
otherwise be entitled to receive upon the occurrence of the Automatic Conversion
and to receive in lieu thereof one one-tenth of a share of Alliance's Non-Voting
Junior Convertible Special Stock, Series E, par value $.10 per share (the
"Series E Special Stock"), for each share of Common Stock that such holder would
otherwise have been entitled to receive. Each share of the Series E Special
Stock will be convertible into ten shares of Common Stock and will have the same
rights and preferences as one share of Common Stock, except that the Series E
Special Stock will have no voting rights and will have a $.10 liquidation
preference per share of Series E Special Stock. In the event that the Automatic
Conversion occurs, Alliance will not pay accrued interest or any Additional
Payments that are accrued to the date of the Automatic Conversion with respect
to New Convertible Debentures. See "Description of New Convertible Debentures".
The New Convertible Debentures are redeemable in whole or in part, at the
option of Alliance, for cash at any time prior to September 15, 1996 if the
price of the Common Stock exceeds 250% of the Conversion Price (as defined) for
20 out of any 30 consecutive trading days and at any time on or after September
15, 1996, in each case, at the redemption prices set forth herein, plus accrued
interest to the date of redemption. The New Convertible Debentures are
redeemable at the option of the holder under certain circumstances, including a
Change of Control (as defined), at 101% of the principal amount thereof plus
accrued interest. The Merger will not be a Change of Control for purposes of
this redemption feature. The New Convertible Debentures are unsecured
obligations of Alliance and are subordinated in right of payment to all existing
and future Senior
<PAGE>
Indebtedness (as defined) of Alliance, which excludes all Indebtedness (as
defined) of Alliance's subsidiaries. At April 23, 1996, the total amount of
outstanding Senior Indebtedness of Alliance and Indebtedness of Alliance's
subsidiaries was $15.1 million.
The obligation of Alliance to consummate the Exchange Offer is subject to
certain conditions, including, among others, the requirements that (i) the
stockholders of Alliance shall have approved the issuance of the New Convertible
Debentures and of the Common Stock and Series E Special Stock upon conversion
thereof, (ii) the Nevada Gaming Commission and the Mississippi Gaming Commission
shall each have approved the issuance of the New Convertible Debentures and of
the Common Stock and Series E Special Stock upon conversion thereof and (iii)
each of the foregoing shall have occurred on or prior to , 1996. The
consummation of the Exchange Offer is not conditioned upon any minimum principal
amount of Old Convertible Debentures being tendered. See "The Exchange Offer --
Conditions of the Exchange Offer".
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission"), New Convertible Debentures issued pursuant to the
Exchange Offer in exchange for Old Convertible Debentures may be offered for
resale, resold and otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of Alliance within the meaning of Rule 405 under
the Securities Act of 1933, as amended (the "Securities Act")) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, PROVIDED that such New Convertible Debentures are acquired in
the ordinary course of such holders' businesses and such holders have no
arrangement with any person to participate in the distribution of the New
Convertible Debentures. Each broker-dealer that receives New Convertible
Debentures for its own account pursuant to the Exchange Offer must represent
that the Old Convertible Debentures to be exchanged for the New Convertible
Debentures were acquired as a result of its market-making activities or other
trading activities and must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Convertible Debentures. The Letter of
Transmittal states that by so acknowledging and by delivering a Prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
Alliance will not receive any proceeds from the Exchange Offer. Alliance
will pay all expenses incident to the Exchange Offer. Tenders of Old Convertible
Debentures may be withdrawn at any time prior to the Expiration Date. In the
event Alliance terminates the Exchange Offer and does not accept for exchange
any Old Convertible Debentures, Alliance will promptly return the Old
Convertible Debentures to the holders thereof. See "The Exchange Offer -- Terms
of the Exchange Offer".
SEE "RISK FACTORS" COMMENCING ON PAGE 24 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO ARE DETERMINING WHETHER TO TENDER OLD
CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NEITHER THE NEVADA GAMING COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD,
THE NEW JERSEY CASINO CONTROL COMMISSION NOR THE REGULATORY AUTHORITY OF ANY
OTHER STATE HAS PASSED UPON OR CONFIRMED THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE INVESTMENT MERITS OF THE SECURITIES OFFERED HEREBY.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
, 1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD
CONVERTIBLE DEBENTURES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION
DATE.
The date of this Prospectus is , 1996.
<PAGE>
IMPORTANT
Any holder of Old Convertible Debentures desiring to tender all or any
portion of his Old Convertible Debentures should either (1) complete and sign
the Letter of Transmittal (or a facsimile thereof) in accordance with the
instructions in the Letter of Transmittal and mail or deliver it, together with
the certificates representing tendered Old Convertible Debentures and any other
required documents, to [ ] (the "Exchange Agent") or tender
such Old Convertible Debentures pursuant to the procedure for book-entry
transfer set forth in "The Exchange Offer -- Procedures for Tendering" or (2)
request his broker, dealer, commercial bank, trust company or nominee to effect
the transaction for him. Holders whose Old Convertible Debentures are registered
in the name of a broker, dealer, commercial bank, trust company or other nominee
must contact such person if they desire to tender their Old Convertible
Debentures. Holders who wish to tender Old Convertible Debentures and whose
certificates representing such Old Convertible Debentures are not immediately
available or who cannot comply with the procedures for book entry transfer on a
timely basis may tender such Old Convertible Debentures by following the
procedures for guaranteed delivery set forth in "The Exchange Offer --
Procedures for Tendering".
------------------------
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF
ALLIANCE AS TO WHETHER ANY HOLDER OF OLD CONVERTIBLE DEBENTURES SHOULD TENDER
OLD CONVERTIBLE DEBENTURES PURSUANT TO THE EXCHANGE OFFER. NO PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR
MADE, SUCH RECOMMENDATIONS, INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY ALLIANCE. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF ALLIANCE SINCE
THE DATE HEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES COVERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SUCH SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER ALLIANCE NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATIONS TO ANY
HOLDER OF OLD CONVERTIBLE DEBENTURES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING OLD CONVERTIBLE DEBENTURES PURSUANT TO THE EXCHANGE OFFER. EACH HOLDER
OF OLD CONVERTIBLE DEBENTURES MUST MAKE HIS OR HER OWN DECISION WHETHER TO
TENDER OLD CONVERTIBLE DEBENTURES AND, IF SO, THE PRINCIPAL AMOUNT TO TENDER.
3
<PAGE>
AVAILABLE INFORMATION
Alliance has filed with the Commission a Registration Statement on Form S-4
(together with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act, with respect to the
registration of the New Convertible Debentures and will file with the Commission
a Schedule 13E-4 (together with all amendments, exhibits, schedules and
supplements thereto, the "Schedule 13E-4") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), with respect to the Exchange Offer. This
Prospectus does not contain all the information set forth in the Registration
Statement, to which reference is hereby made for further information about
Alliance and the Exchange Offer.
Alliance is subject to the informational requirements of the Exchange Act
and in accordance therewith files periodic reports, proxy and information
statements and other information with the Commission. The Registration Statement
and all reports, proxy and information statements and other information filed by
Alliance with the Commission may be inspected at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
The Common Stock is listed on The Nasdaq Stock Market, Inc. ("NASDAQ"), and
all reports, proxy and information statements, and other information filed with
the Commission also may be inspected at the offices of NASDAQ, 1735 K Street,
N.W., Washington, D.C. 20006.
INCORPORATION BY REFERENCE
The following documents filed with the Commission by Alliance pursuant to
the Exchange Act are incorporated by reference in this Prospectus:
(1) Alliance's Annual Report on Form 10-K for the fiscal year ended June 30,
1995, as amended and restated by Form 10-K/A Amendment No. 3 dated March
6, 1996; and
(2) Alliance's Quarterly Reports of Form 10-Q for the quarters ended
September 30, 1995 and December 31, 1995, respectively.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents (other than exhibits to documents
unless such exhibits are specifically incorporated by reference) are available,
without charge, to any person to whom this Prospectus is delivered, on written
or oral request, to Alliance Gaming Corporation, 4380 Boulder Highway, Las
Vegas, Nevada 89121 (telephone number (702) 435-4200), Attention: John W.
Alderfer, Senior Vice President -- Finance and Administration, Chief Financial
Officer and Treasurer.
4
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TABLE OF CONTENTS
<TABLE>
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PAGE
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AVAILABLE INFORMATION..................................................................................... 4
INCORPORATION BY REFERENCE................................................................................ 4
PROSPECTUS SUMMARY........................................................................................ 8
The Company............................................................................................. 8
Description of the New Convertible Debentures........................................................... 11
Description of the Exchange Offer....................................................................... 12
Risk Factors............................................................................................ 13
THE MERGER AND RELATED FINANCINGS......................................................................... 14
SOURCES AND USES OF FUNDS................................................................................. 15
PRO FORMA BUSINESS STRUCTURE OF THE COMPANY............................................................... 16
SUMMARY FINANCIAL INFORMATION............................................................................. 17
RISK FACTORS.............................................................................................. 24
High Leverage and Fixed Charges after the Merger; Holding Company Structure; Working Capital............ 24
Restrictions on Certain Activities...................................................................... 25
Operating History -- Recent Losses...................................................................... 25
Implementation of the Merger............................................................................ 26
Financial Forecast...................................................................................... 26
Change of Control....................................................................................... 26
Competition............................................................................................. 27
Product Development..................................................................................... 28
Customer Financing...................................................................................... 28
Sales to Non-traditional Gaming Markets................................................................. 29
Investment in Minority-Owned Subsidiary................................................................. 29
Foreign Operations...................................................................................... 29
Key Personnel........................................................................................... 29
Strict Regulation by Gaming Authorities................................................................. 29
Ownership Limitations on Securities of the Company...................................................... 30
Ongoing BGII Regulatory Investigations.................................................................. 31
Certain Litigation; Bally Trade Name.................................................................... 31
Gaming Taxes and Value Added Taxes...................................................................... 31
Absence of Public Market; Volatility of Market Prices................................................... 32
Dilution; Outstanding Options and Convertible Securities................................................ 32
Impact on Non-Tendering Holders......................................................................... 33
Subordination of Old Convertible Debentures to Senior Notes............................................. 34
Shorter Maturity of New Convertible Debentures.......................................................... 34
Limitations on Net Operating Losses; Discharge of Debt Income........................................... 34
Hart-Scott-Rodino Filing................................................................................ 34
THE EXCHANGE OFFER........................................................................................ 35
General................................................................................................. 35
Terms of the Exchange Offer............................................................................. 35
Conditions to the Exchange Offer........................................................................ 35
Expiration; Extension; Termination; Amendment........................................................... 37
Procedures For Tendering................................................................................ 38
Withdrawal of Tenders................................................................................... 40
Acceptance of Old Convertible Debentures; Delivery of New Convertible Debentures........................ 41
Exchange Agent and Information Agent.................................................................... 41
Fees and Expenses....................................................................................... 41
DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES............................................................. 42
General................................................................................................. 42
</TABLE>
5
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PAGE
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Conversion at Election of Holder........................................................................ 42
Mandatory Conversion Upon Consummation of Merger........................................................ 43
Interest on New Convertible Debentures.................................................................. 43
Subordination........................................................................................... 44
Redemption at Alliance's Option......................................................................... 45
Redemption at Holder's Option........................................................................... 45
Certain Covenants....................................................................................... 46
Events of Default....................................................................................... 47
Merger and Consolidation................................................................................ 48
Modification and Waiver................................................................................. 48
Satisfaction and Discharge of the Indenture............................................................. 48
Control by Debentureholders............................................................................. 49
Mandatory Disposition Pursuant to Gaming Laws........................................................... 49
COMPARISON OF NEW CONVERTIBLE DEBENTURES AND OLD CONVERTIBLE DEBENTURES................................... 49
Maturity................................................................................................ 49
Mandatory Conversion Upon Consummation of Merger........................................................ 50
Registration Rights; Liquidated Damages................................................................. 51
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................................................. 51
Consideration Allocable to Interest..................................................................... 52
The Transaction......................................................................................... 52
Market Discount......................................................................................... 53
Common Stock and Series E Special Stock................................................................. 54
Backup Withholding...................................................................................... 54
Holders of Old Convertible Debentures Who Do Not Participate in the Exchange Offer...................... 54
INTEREST IN OLD CONVERTIBLE DEBENTURES.................................................................... 54
CONTRACTS, ARRANGEMENT, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE OLD CONVERTIBLE DEBENTURES.... 54
USE OF PROCEEDS........................................................................................... 54
LEGAL MATTERS............................................................................................. 54
THE MERGER AND RELATED FINANCINGS.........................................................................
MARKET PRICE DATA AND DIVIDEND POLICY.....................................................................
DILUTION..................................................................................................
CAPITALIZATION............................................................................................ A-6
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.............................................. A-7
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION..................................... A-13
SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW..................................................... A-18
FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW............................................. A-22
SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES FOR THE FORECAST............................... A-24
SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE..................................................... A-34
SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII......................................................... A-36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... A-37
Introduction............................................................................................ A-37
Liquidity and Capital Resources of Alliance............................................................. A-37
Liquidity and Capital Resources of the Company (Pro Forma).............................................. A-39
Alliance Results of Operations.......................................................................... A-40
BGII Results of Operations.............................................................................. A-45
THE COMPANY............................................................................................... A-52
Overview................................................................................................ A-52
</TABLE>
6
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business Strategy....................................................................................... A-52
Business Units.......................................................................................... A-53
Gaming Machine Manufacturing and Systems................................................................ A-54
German Operations....................................................................................... A-60
Gaming Machine Management Operations.................................................................... A-63
Casino Operations....................................................................................... A-66
Business Development Activity........................................................................... A-67
Patents, Copyrights and Trade Secrets................................................................... A-68
Employees and Labor Relations........................................................................... A-69
Litigation Relating to the Merger....................................................................... A-69
Other Litigation........................................................................................ A-71
Environmental Matters................................................................................... A-72
GAMING REGULATION AND LICENSING........................................................................... A-73
Nevada.................................................................................................. A-73
Louisiana............................................................................................... A-77
Mississippi............................................................................................. A-78
New Jersey.............................................................................................. A-80
Additional Domestic Jurisdictions....................................................................... A-80
Germany................................................................................................. A-81
MANAGEMENT................................................................................................ A-83
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT........................................... A-86
Stockholders Agreement.................................................................................. A-88
Outstanding Options and Convertible Securities.......................................................... A-88
BGII.................................................................................................... A-89
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................ A-90
DESCRIPTION OF CAPITAL STOCK.............................................................................. A-91
Common Stock............................................................................................ A-91
Special Stock........................................................................................... A-92
Non-Voting Convertible Special Stock, Series E.......................................................... A-93
Provisions Applicable to Certain Holders................................................................ A-93
EXPERTS................................................................................................... A-97
INDEX TO FINANCIAL STATEMENTS.............................................................................
</TABLE>
7
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. AS USED
HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, (I) THE TERM "ALLIANCE" MEANS
ALLIANCE GAMING CORPORATION AND ITS SUBSIDIARIES TAKEN AS A WHOLE PRIOR TO THE
MERGER, (II) THE TERM THE "COMPANY" MEANS ALLIANCE GAMING CORPORATION AND ITS
SUBSIDIARIES, INCLUDING BGII, TAKEN AS A WHOLE, UPON CONSUMMATION OF THE MERGER,
AND INFORMATION WITH RESPECT TO THE COMPANY IN THIS PROSPECTUS IS PRESENTED
AFTER GIVING EFFECT TO THE MERGER, THE EXCHANGE OFFER, THE OFFERINGS (AS DEFINED
BELOW) AND THE PRIVATE PLACEMENT (AS DEFINED BELOW), (III) THE TERM "BGII" MEANS
BALLY GAMING INTERNATIONAL, INC. AND ITS SUBSIDIARIES, TAKEN AS A WHOLE, PRIOR
TO THE MERGER AND (IV) THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE OVER-ALLOTMENT OPTION IN THE PREFERRED STOCK OFFERING (AS DEFINED BELOW).
HOLDERS OF OLD CONVERTIBLE DEBENTURES ARE URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING INFORMATION THAT INVOLVES
RISKS AND UNCERTAINTIES AND THAT IS SUBJECT TO THE ASSUMPTIONS SET FORTH IN
CONNECTION THEREWITH AND THE INFORMATION CONTAINED HEREIN.
THE COMPANY
BACKGROUND
Alliance is a diversified gaming company that currently operates through its
subsidiaries approximately 6,000 electronic gaming machines (primarily video
poker machines and slot machines) and also owns and operates a small casino in
each of Vicksburg, Mississippi and Sparks/Reno, Nevada. Alliance is the largest
gaming machine management operator in Nevada and is the exclusive operator of
video poker devices at the only racetrack and ten associated off-track betting
parlors ("OTBs") in the greater New Orleans area.
As part of its long-term growth strategy, Alliance entered into an Agreement
and Plan of Merger in October 1995, as amended in January 1996 (the "Merger
Agreement"), with BGII pursuant to which BGII will become a wholly-owned
subsidiary of Alliance. BGII, through subsidiaries in the United States and
Germany, is a leading designer, manufacturer and distributor of electronic
gaming machines. BGII also designs, assembles and sells computerized monitoring
systems for slot and video gaming machines which provide casino operators with
on-line real time player tracking, security and maintenance capabilities.
BGII is currently the second largest manufacturer of casino-style electronic
gaming machines in North America and since 1993 has made significant inroads in
recapturing a portion of its once dominant market share of the late 1970s. Unit
sales of electronic gaming machines by BGII's domestic subsidiary have
approximately doubled from the level of unit sales in 1993. Although BGII sells
electronic gaming machines to most of the major participants in the United
States casino industry, the Company hopes to continue to increase its
penetration in such casinos by capitalizing on Alliance's and BGII's
managements' relationships within the gaming industry together with the
performance capabilities of its current products.
Alliance believes that the Merger represents an opportunity to acquire an
established electronic gaming machine manufacturer with a well-recognized
presence in the gaming industry and a significant base of assets and experience.
Management estimates that the installed base of casino-style electronic gaming
machines (for these purposes, primarily slot and video machines) is
approximately 650,000 units, of which approximately 50% are located in North
America, and that annual sales in North America have grown from approximately
30,000 units in 1991 to approximately 89,000 units in 1995, reflecting a period
of accelerated growth in the number and size of casinos in North America.
Historically, growth in the gaming machine market has been principally fueled by
sales to new casinos and to a lesser degree by replacement of machines (which
have an average replacement cycle of three to seven years) and the application
of new technology. In the future, management believes that annual sales growth
resulting from replacement requirements and the application of new technology
should outpace growth in demand generated by new casino openings, which growth
rate is expected to decline. Management believes that the Merger provides
Alliance with an avenue for entering a business historically characterized by
effective barriers to entry in that the BGII assets being acquired are difficult
to replicate and would require significant time and investment to develop
successfully.
8
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For the twelve-month period ended December 31, 1995, on a pro forma basis
after giving effect to the Merger and the related transactions described herein,
the Company would have had revenues and Adjusted Operating Cash Flow (as
defined: see the introduction to "Summary Financial Information") of
approximately $401.0 million and $47.3 million, respectively.
BUSINESS STRATEGY
The Company's strategic objective is to build a pre-eminent gaming
entertainment company to capitalize on what management believes to be gaming's
continuing growth within the entertainment industry. In addition to continuing
the development of the Company's existing business units, the Company's
strategic focus will be on BGII's domestic subsidiary, key elements of which
include:
- to capitalize on BGII's strong product line and current sales momentum as
represented by unit sales of electronic gaming machines by BGII's domestic
subsidiary which have approximately doubled from the level of unit sales
in 1993;
- to develop and market premier gaming entertainment products employing
available information technology currently in common use in other segments
of the entertainment industry, but not yet prevalent in the gaming
industry;
- to reduce costs through enhanced operating efficiencies while improving
the quality of products and services; and
- to capitalize on relationships and enter into alliances with technology
and entertainment companies, with a particular focus on the application of
technology in the gaming entertainment business.
The Company believes it has assembled a strong and experienced management
team to implement its strategy and capitalize on the opportunities in the gaming
industry. Steve Greathouse, Chairman of the Board of Directors, President and
Chief Executive Officer of Alliance, has over 20 years of experience in the
gaming industry and has strong relationships with many casino operators. Prior
to joining Alliance in 1994, Mr. Greathouse was President of the Harrah's Casino
Hotels Division of The Promus Companies Incorporated. Craig Fields, Vice
Chairman of the Board of Directors of Alliance, who will assume a senior
management position upon consummation of the Merger, has over 20 years of
experience with advanced information technology from his work with several
leading companies and government agencies including Perot Systems Corp. and the
United States Department of Defense. Dr. Fields has been active in developing
the Company's strategic focus on the application of technology to gaming
entertainment products. In addition, Hans Kloss, currently the President and
Chief Operating Officer of BGII and long-time managing director of BGII's German
operations, will, if the Merger occurs, join the senior management team and
continue to oversee the BGII operations. Since becoming President of BGII in
1993, Mr. Kloss has been instrumental in implementing changes in BGII's United
States-based operations which have contributed to improvements in the results of
such operations. See "Management."
BUSINESS UNITS
Following the Merger, the Company will operate through four business units:
(i) casino-style electronic gaming machine manufacturing and systems, (ii)
German operations (consisting of the manufacture and distribution of
wall-mounted gaming machines and the distribution of other recreational and
amusement machines), (iii) gaming machine management operations and (iv) casino
operations. The business units described in clauses (i) and (ii) are currently
operated by BGII, and the business units described in clauses (iii) and (iv) are
currently operated by Alliance.
GAMING MACHINE MANUFACTURING AND SYSTEMS. BGII's United States subsidiary,
Bally Gaming, Inc., currently has two components: a domestic-based electronic
gaming machine manufacturing unit ("Gaming") and a data systems and software and
hardware support service unit ("Systems"). Gaming designs, manufactures and
distributes a variety of slot machines and video gaming machines. Gaming is the
second largest electronic gaming machine manufacturer in North America, and has
significantly increased its penetration in the gaming machine market with the
successful introduction of its ProSeries-TM- and Game
Maker-Registered Trademark- lines in 1993 and 1994, respectively. In the United
States, Gaming historically has marketed electronic gaming machines, primarily
to casinos in Atlantic City and Nevada and more recently has
9
<PAGE>
marketed such machines in other jurisdictions. Gaming also distributes
electronic gaming machines outside the United States, principally in Europe
through Bally Gaming International GmbH ("GmbH") and, to a lesser extent, in
Canada, the Far East, Latin America and the Caribbean. Systems designs,
assembles and sells, primarily to casino operators in the United States,
computerized player tracking, cash monitoring, accounting and security data
systems for electronic gaming machines. Since the introduction of its SDS 6000
system in the first quarter of 1993 and subsequent upgrades, Systems has rapidly
expanded its presence in casino properties. By the end of 1993, Systems had
40,000 of its game monitoring units ("GMUs") installed in 33 casino properties.
This has since increased to 59,000 GMUs installed in 56 casino properties as of
April 1, 1996. For the twelve-month period ended December 31, 1995, EBITDA (as
defined: see footnote (1) to "Summary Historical Financial Information --
Alliance Gaming Corporation") for the gaming machine manufacturing and systems
unit was approximately $11.7 million.
GERMAN OPERATIONS. BGII's German subsidiaries, which operate under the name
Bally Wulff (collectively, "Wulff"), design, manufacture and distribute
coin-operated, wall-mounted, electronic gaming machines known as wall machines.
Management estimates that Wulff has approximately 25% of the installed base of
the wall machine market which exists almost exclusively in Germany and that
Wulff and the two other major competitors have a greater than 90% market share.
Wulff markets its own wall machines as well as wall machines and other
recreational and amusement machines manufactured by third parties, including
pool tables, air-hockey and pinball machines, jukeboxes and arcade games, to
operators of arcades, taverns, hotels and restaurants primarily in Germany. For
the twelve-month period ended December 31, 1995, EBITDA for the German
operations unit was approximately $15.2 million.
GAMING MACHINE MANAGEMENT OPERATIONS. Alliance's Nevada gaming machine
management operations, which are the largest in Nevada, involve the selection,
ownership, installation, operation and maintenance of video poker devices,
reel-type slot machines and other electronic gaming machines in local
establishments such as taverns, restaurants, supermarkets, drug stores and
convenience stores operated by third parties. Alliance enters into contracts
with these parties whereby Alliance either receives a portion of the revenue
generated by the machines or pays rent and receives all of the revenues
generated by the machines. In Nevada, Alliance operated approximately 5,357
units installed in 528 locations as of April 1, 1996. Alliance's customer and
machine base has remained relatively stable over the last five years. These
operations target local residents who generally frequent establishments close to
their homes. In December 1995, Alliance launched Gambler's Bonus, a proprietary
product which brings large casino gaming amenities to local establishments, such
as multi-location progressive jackpots, bigger jackpot payouts and traditional
players' club enhancements. Since launching Gambler's Bonus, the gaming machines
linked to Gambler's Bonus have experienced an increase in average net win per
day per machine. As of April 1, 1996, Alliance had the Gambler's Bonus system
installed in 23 locations representing approximately 360 machines, and
management expects to have Gambler's Bonus installed in approximately 88
locations or a total of 980 machines by June 1996. In 1992, Alliance expanded
its machine management operations to Louisiana, where it has an exclusive
10-year contract (seven years remaining, plus a five-year right of first refusal
thereafter) to operate approximately 700 video poker devices at the only
racetrack and 10 associated OTBs in the greater New Orleans area. For the
twelve-month period ended December 31, 1995, EBITDA for the gaming machine
management operations unit was $18.3 million.
CASINO OPERATIONS. Alliance owns and operates two small full-service
casinos. In Mississippi, the Company's Rainbow Casino is part of the Vicksburg
Landing facility which opened in July 1994 and is the only casino/family
entertainment complex of its kind in Mississippi. The Rainbow Casino currently
has approximately 589 electronic gaming machines and 28 table games. In addition
to the approximately 24,000-square foot Rainbow Casino, Vicksburg Landing opened
an 89-room hotel and a 10-acre indoor/ outdoor amusement park in May 1995.
Although the hotel and amusement park are not owned or operated by Alliance,
management believes that such facilities have contributed significantly to the
recent strong financial results of the Rainbow Casino. Alliance's Plantation
Station Casino located in Reno/Sparks, Nevada is a 20,000-square foot casino
which currently contains approximately 453 electronic gaming machines, keno and
10 table games in addition to a 300-seat restaurant owned by Alliance. For the
twelve-month period ended December 31, 1995, EBITDA for the casino operations
unit was $10.5 million.
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Alliance is a Nevada corporation organized in 1968. Alliance's principal
executive offices are located at 4380 Boulder Highway, Las Vegas, Nevada 89121,
and its telephone number is (702) 435-4200.
DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES
<TABLE>
<S> <C>
Securities Offered................ Up to $85,000,000 aggregate principal amount of New
Convertible Debentures. The terms of the New Convertible
Debentures and the Old Convertible Debentures are
identical in all material respects, except for maturity,
provision for mandatory conversion upon consummation of
the Merger and the absence of certain transfer
restrictions and registration rights relating to the Old
Convertible Debentures. See "Description of New
Convertible Debentures".
Interest Rate..................... 7 1/2% per annum, accruing from March 15, 1996.
Interest Payment Dates............ March 15 and September 15, commencing September 15,
1996.
Maturity.......................... September 15, 2002.
Conversion Rights................. The New Convertible Debentures are convertible into
shares of Common Stock at any time prior to maturity,
unless previously redeemed, at a conversion price of $10
per share, subject to adjustment under certain
circumstances. Accordingly, each $1,000 principal amount
of New Convertible Debentures is convertible into 100
shares of Common Stock or an aggregate of 8,500,000
shares of Common Stock, subject to adjustment.
Mandatory Conversion Upon
Occurrence of Merger............. If the Merger is consummated within 60 days after the
issuance of the New Convertible Debentures, then at the
effective time of the Merger, the New Convertible
Debentures will be automatically converted into Common
Stock at the conversion rate of 180 shares of Common
Stock per $1,000 principal amount of New Convertible
Debentures (equivalent to a conversion price of ap-
proximately $5.56). A holder of New Convertible
Debentures may elect to forego receipt of all or any
portion of the Common Stock that such holder would
otherwise receive, to receive in lieu thereof one
one-tenth of a share of Series E Special Stock for each
share of Common Stock that such holder would otherwise
have been entitled to receive. Each share of Series E
Special Stock will be convertible into ten shares of
Common Stock, and each one-tenth of a share of Series E
Special Stock will have the same rights and preferences
as one share of Common Stock, except that Series E
Special Stock will have no voting rights and will have a
$.10 liquidation preference per share of Series E
Special Stock. See "Description of New Convertible
Debentures -- Mandatory Conversion Upon Occurrence of
Merger".
Optional Redemption............... The New Convertible Debentures are redeemable in whole
or in part at the option of Alliance for cash (i) at any
time prior to September 15, 1996 at 105.63% of the
principal amount thereof, plus accrued interest, in the
event that the trading price of the Common Stock exceeds
250% of the Conversion Price for 20 trading days during
any period of 30 consecutive trading days after such
date, and (ii) at any time after September 14, 1996 at
the redemption prices set forth herein, plus accrued
interest.
</TABLE>
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<TABLE>
<S> <C>
Redemption at the Option of the
Holder........................... If a Redemption Event (as defined) occurs, subject to
certain conditions, each holder of New Convertible
Debentures will have the right to require Alliance to
purchase all or any part of such holder's New
Convertible Debentures at 101% of the principal amount
thereof, plus accrued interest to the date of purchase.
Change in Control................. If a Change in Control (other than in connection with
the Kirkland Investment (as defined)) occurs, subject to
certain conditions, each holder of New Convertible
Debentures will have the right to require Alliance to
purchase all or any part of such holder's New
Convertible Debentures at 101% of the principal amount
thereof, plus accrued interest to the date of purchase.
Interest and Additional Payment... The New Convertible Debentures will bear interest from
March 15, 1996. In addition, the New Convertible
Debentures will pay, on the first Interest Payment Date
after issuance of the New Convertible Debentures, the
Additional Payment, which is an amount per $1,000
principal amount of New Convertible Debentures equal to
the amount of liquidated damages accrued per $1,000
principal amount of the Old Convertible Debentures from
March 15, 1996 through the date of issuance of the New
Convertible Debentures. See "Description of New
Convertible Debentures". Holders whose Old Convertible
Debentures are accepted for exchange will be deemed to
have waived the right to receive any payment in respect
of interest or liquidated damages on the Old Convertible
Debentures accrued through the date of issuance of the
New Convertible Debentures.
</TABLE>
DESCRIPTION OF THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The New Convertible Debentures are being offered in
exchange for a like principal amount of Old Convertible
Debentures. See "The Exchange Offer -- Terms of the
Exchange Offer."
Tenders; Expiration Date.......... The Exchange Offer will expire at 12:00 midnight, New
York City time, on 1996, unless extended by
Alliance. Any Old Convertible Debentures not accepted
for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the
Exchange Offer. See "The Exchange Offer -- Expiration;
Extension; Termination; Amendment".
Withdrawal of Tenders............. Tenders of Old Convertible Debentures may be withdrawn
at any time prior to the expiration of the Exchange
Offer. Thereafter, such tenders are irrevocable, except
that they may be withdrawn at any time after the
expiration of 40 business days from the commencement of
the Exchange Offer, unless accepted for exchange prior
to that date. See "The Exchange Offer -- Withdrawal
Rights".
Acceptance of Old Convertible
Debentures and Delivery of New
Convertible Debentures........... Alliance will accept for exchange any and all Old
Convertible Debentures that are properly tendered and
not withdrawn prior to the Expiration Date. The New
Convertible Debentures to be issued pursuant to the
Exchange Offer will be delivered as
</TABLE>
12
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<TABLE>
<S> <C>
promptly as practicable following the Expiration Date.
See "The Exchange Offer -- Acceptance of Old Convertible
Debentures; Delivery of New Convertible Debentures".
Procedures for Tendering Old
Convertible Debentures........... Each holder of Old Convertible Debentures wishing to
accept the Exchange Offer must complete and sign the
Letter of Transmittal (or a facsimile thereof), in
accordance with the instructions contained herein and
therein, and deliver such Letter of Transmittal,
together with any signature guarantees and any other
documents required by the Letter of Transmittal,
including certificates representing the tendered Old
Convertible Debentures or confirmations of book-entry
transfers of such Old Convertible Debentures, to the
Exchange Agent, which must receive such information on
or prior to the Expiration Date at one of its addresses
set forth on the back cover page of this Prospectus. Any
beneficial owner of Old Convertible Debentures whose
securities are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee
is urged to contact the registered holder(s) of such
securities promptly to instruct the registered holder(s)
whether to tender such beneficial owner's securities.
Holders whose certificates representing their Old
Convertible Debentures are not immediately available or
who cannot deliver their certificates or any other
required documents to the Exchange Agent prior to the
Expiration Date may tender their Old Convertible
Debentures pursuant to the guaranteed delivery pro-
cedure set forth herein. See "The Exchange Offer --
Procedures for Tendering".
Conditions........................ The obligation of Alliance to consummate the Exchange
Offer is subject to certain conditions, including, among
others, the requirements that (i) the stockholders of
Alliance shall have approved the issuance of the New
Convertible Debentures and of the Common Stock and
Series E Special Stock upon conversion thereof, (ii) the
Nevada Gaming Commission and the Mississippi Gaming
Commission shall each have approved the issuance of the
New Convertible Debentures and of the Common Stock and
Series E Special Stock upon conversion thereof and (iii)
each of the foregoing shall have occurred on or prior to
, 1996. See "The Exchange Offer -- Conditions
to the Exchange Offer".
Certain Federal Income Tax
Considerations................... For a discussion of certain federal income tax
consequences of the Exchange Offer to holders of Old
Convertible Debentures, see "Certain Federal Income Tax
Considerations".
Use of Proceeds................... Alliance will not receive any proceeds from the exchange
pursuant to the Exchange Offer. See "Use of Proceeds".
Exchange Agent.................... [ ]. See "The Exchange Offer --
Exchange Agent and Information Agent".
Information Agent................. [ ]. See "The Exchange Offer -- Exchange
Agent and Information Agent".
</TABLE>
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RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with deciding whether to tender Old Convertible
Debentures in the Exchange Offer.
THE MERGER AND RELATED FINANCINGS
Pursuant to the Merger Agreement and subject to the terms and conditions set
forth therein, Alliance will acquire all of the stock of BGII as set forth
below. In addition, the Company will generally assume BGII's obligations with
respect to each outstanding BGII stock option and warrant, subject to certain
modifications approved by BGII stockholders, and will retire approximately $67.6
million of outstanding debt of BGII (including prepayment premium and original
issue discount), plus accrued interest.
The Merger and related transactions will be financed through (i) the
Exchange Offer and the Automatic Conversion, (ii) a private placement of an
aggregate of $5.0 million of equity of Alliance (the "Private Placement"), (iii)
the issuance of an aggregate of $15.0 million of 15% Non-voting Junior
Pay-in-Kind Special Stock, Series B, liquidation value $100 per share (the
"Preferred Stock"), through a public offering (the "Preferred Stock Offering")
and (iv) the issuance of $140 million aggregate principal amount of % Senior
Secured Notes due 2003 (the "Senior Notes") through a public offering (the "Note
Offering" and, together with the Preferred Stock Offering, the "Offerings"). The
Offerings are contingent upon and will close simultaneously with the Merger. The
Merger, the Exchange Offer, the Private Placement, the Preferred Stock Offering
and the Note Offering are sometimes referred to herein collectively as the
"Transaction". See "The Merger and Related Financings".
The Preferred Stock Offering and the Note Offering are each being made by
the Company exclusively pursuant to separate prospectuses. A financial
institution has agreed to purchase privately at the time of consummation of the
Merger $5.0 million of the equity of Alliance at a price equal to the lower of
$4.56 (the average trading price of the Common Stock for the five trading day
period immediately preceding the agreement) and the closing sales price of the
Common Stock on the day of pricing of the Offerings. The Private Placement would
be in the form of Common Stock to the extent of 4.9% of the total Common Stock
outstanding at the time, taking into account Common Stock to be issued in the
Merger, with the remainder to be in the form of non-voting special stock
convertible into Common Stock. The Company anticipates, and it is assumed for
all purposes herein, that all of the $5.0 million will be issued in the form of
Common Stock. The Private Placement will close simultaneously with the Merger.
The consummation of the Exchange Offer is contingent on Alliance obtaining
requisite stockholder approval, and the consummation of the Merger is contingent
on Alliance obtaining requisite regulatory approval. In the event that the
Merger is consummated, all of the New Convertible Debentures will be
automatically converted into Common Stock or Series E Special Stock, at the
election of the holder.
14
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SOURCES AND USES OF FUNDS
The following table sets forth the anticipated sources and uses of funds to
be used to consummate the Merger and related transactions, based on the
Company's cash and debt balances as of December 31, 1995. The actual balances
and number of shares outstanding will vary based on the date of consummation of
the Transaction.
(IN MILLIONS)
<TABLE>
<S> <C> <C> <C>
ANTICIPATED SOURCES OF FUNDS ANTICIPATED USES OF FUNDS
CASH SOURCES: CASH USES:
</TABLE>
<TABLE>
<S> <C> <C> <C>
Notes................................... $ 140.0 Cash to BGII Stockholders(a)............ $ 77.2
Retire BGII Debt (includes prepayment
premium and original issue
Preferred Stock......................... 15.0 discount)(b)............................ 67.6
Employee Contract Termination Costs and
Common Stock (Private Placement)........ 5.0 Performance Unit Awards(c).............. 7.6
Available Cash.......................... 12.4 Fees and Expenses(d).................... 20.0
--------- ---------
Total Cash Sources.................. 172.4 Total Cash Uses......................... 172.4
--------- ---------
NON-CASH SOURCES: NON-CASH USES:
Preferred Stock to BGII
Preferred Stock......................... 35.7 Stockholders(e)......................... 35.7
Common Stock............................ 2.9 Common Stock to BGII Stockholders(f).... 2.9
Common Stock Issued in Partial Common Stock Issued in Partial
Satisfaction of Employee Contract Satisfaction of Employee Contract
Termination Costs and Performance Unit Termination Costs and Performance Unit
Awards(c).............................. 4.0 Awards(c)............................... 4.0
--------- ---------
Total Non-Cash Sources................ 42.6 Total Non-Cash Uses..................... 42.6
--------- ---------
Total Sources....................... $ 215.0 Total Uses.............................. $ 215.0
--------- ---------
--------- ---------
</TABLE>
- --------------------------
(a) Represents the cash consideration to be paid to BGII stockholders in the
Merger consisting of $7.83 per share of BGII common stock plus interest
accruing at a rate of 5.5% per annum from May 3, 1996 to the Effective Time
(as defined; but not later than June 18, 1996 for the purposes hereof),
calculated in accordance with the terms of the Merger Agreement.
(b) Represents retirement of the following debt of BGII outstanding at December
31, 1995:
(i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a
prepayment premium of 101% plus original issue discount of $0.3 million;
(ii) $15.9 million under Wulff bank lines of credit;
(iii) $9.4 million under Bally Gaming Inc.'s bank revolving line of credit;
and
(iv) Other notes of BGII payable, aggregating $1.9 million.
Accrued and unpaid interest on such debt is not reflected as such amounts
are not considered material.
(c) Includes $5.0 million payable in cash to Richard Gillman, Chairman of the
Board and Chief Executive Officer of BGII, and $1.3 million payable to Neil
Jenkins, Executive Vice President and Secretary of BGII, consisting of $0.8
million in cash and $0.5 million in Common Stock, all pursuant to agreements
with Alliance in connection with the termination of their respective
employment agreements and performance unit awards. Additionally, Hans Kloss,
President and Chief Operating Officer of BGII and Managing Director of
Wulff, who will remain with the Company, will receive a total of $4.5
million consisting of $1.5 million in cash and $3.0 million in Common Stock,
and Robert Conover, President of Systems, who will remain with the Company,
will receive a total of $0.7 million consisting of $0.2 million in cash and
$0.5 million in Common Stock, in connection with their employment agreements
and
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
15
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performance unit awards. The Common Stock portion of each of such payments
will be valued at the Alliance Average Trading Price (as defined) but in no
event more than $6.00 nor less than $4.25 per share. See "The Merger and
Related Financings."
(d) Total estimated Alliance and BGII Transaction-related fees and expenses are
$32.0 million, of which $12.0 million has been paid through December 31,
1995.
(e) Represents the Preferred Stock consideration to be paid to BGII stockholders
in the Merger consisting of $3.57 per share of BGII common stock plus
dividends accruing at a rate of 15% per annum from May 3, 1996 to the
Effective Time, calculated in accordance with the terms of the Merger
Agreement to equate to the value per share of Preferred Stock obtained in
the Preferred Stock Offering.
(f) Represents the Common Stock consideration to be paid to BGII stockholders in
the Merger consisting of $0.30 per share of BGII common stock valued at the
Alliance Average Trading Price (as defined).
PRO FORMA BUSINESS STRUCTURE OF THE COMPANY
The following chart presents the principal elements of the business
structure of the Company as management currently intends to operate following
the Merger, but does not reflect the legal structure of Alliance or BGII.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Alliance
Gaming
Corporation
Gaming Machine German Machine Casino
Manufacturing Operations Management Operations
and Systems Operations
Bally Bally Gaming Wulff Nevada: Louisiana: Nevada: Mississippi:
Gaming, Inc. International United Coin Video Plantation Rainbow
Services,
(including GmbH Machine Co. Inc. Station Casino Casino
Systems
Division)
</TABLE>
(1) Not wholly-owned. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
16
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth a Summary Forecast of Operating Income and
Adjusted Operating Cash Flow (the "Summary Forecast") based on the expected
combined operating data for the Company for the twelve-month period ending
December 31, 1996, to the best of management's knowledge and belief. The Summary
Forecast, which consists of forward-looking statements, is qualified by, and
subject to, the assumptions set forth below and the other information contained
in this Prospectus, and should be read in conjunction with the "Forecast of
Operating Income and Adjusted Operating Cash Flow," including the Summary of
Significant Assumptions and Accounting Policies for the Forecast.
The following Summary Historical Financial Information tables set forth
summary consolidated financial information of Alliance, and has been derived
from the audited consolidated financial statements of Alliance, including the
notes thereto, for the fiscal years ended June 30, 1993, 1994 and 1995, and the
unaudited interim condensed consolidated financial statements of Alliance,
including the notes thereto, as of December 31, 1995 and for the six month
periods ended December 31, 1994 and 1995, which are included elsewhere in this
Prospectus. The following Summary Historical Financial Information tables also
set forth summary consolidated financial information of BGII, which has been
derived from the audited consolidated financial statements of BGII, including
the notes thereto, as of December 31, 1995 and for the years ended December 31,
1993, 1994 and 1995, which are included elsewhere in this Prospectus.
The following tables also set forth Summary Unaudited Pro Forma Condensed
Combined Financial Information. The Pro Forma Statements of Operations Data
presents results of operations of the Company assuming the Transaction occurred
on July 1, 1994 for the statements for the twelve months ended June 30, 1995 and
December 31, 1995 and for the six months ended December 31, 1995, and on July 1,
1993 for the statements for the six months ended December 31, 1994, and further
assuming that the Rainbow Casino operations were consolidated. The detailed
presentation of revenues is derived from internally prepared supporting
schedules not otherwised presented or incorporated herein. The Pro Forma Balance
Sheet Data present the financial position of the Company assuming the
Transaction occurred on December 31, 1995. The Summary Unaudited Pro Forma
Condensed Combined Financial Information does not purport to present the
financial position or results of operations of the Company had the Transaction
and events assumed therein occurred on the dates specified, nor is it
necessarily indicative of the results of operations of the Company as they may
be in the future or as they may have been had the Transaction and the
consolidation of the Rainbow Casino operating results been consummated on the
dates described above. The Summary Unaudited Pro Forma Condensed Combined
Financial Information is based on certain assumptions and adjustments described
in the Notes to Unaudited Pro Forma Condensed Combined Financial Information and
should be read in conjunction therewith.
The following tables also set forth Summary Supplemental Analysis of
Adjusted Operating Cash Flow (as defined), which is based on combining Alliance
and BGII historical information. Alliance management has made certain
adjustments to the combined operating income and has made further adjustments
thereto to arrive at a measure of adjusted operating cash flow ("Adjusted
Operating Cash Flow"). As is more fully described below, such adjustments
consist of the elimination of certain charges that management has determined to
be non-recurring or unusual, as well as adjustments made to reflect the most
recent operating results of the Rainbow Casino by annualizing the most recent
six month operating results after considering seasonality, which was immaterial,
and presenting such results as if they had occurred for each period presented.
In making these adjustments, management considered all items it deemed to be
non-recurring, revenues as well as expenses.
The tables should be read in conjunction with "Unaudited Pro Forma Condensed
Combined Financial Information," "Supplemental Analysis of Adjusted Operating
Cash Flow," "Forecast of Operating Income and Adjusted Operating Cash Flow,"
"Selected Historical Financial Information of Alliance," "Selected Historical
Financial Information of BGII," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the audited consolidated
financial statements of Alliance, including the notes thereto, the unaudited
interim condensed consolidated financial statements of Alliance, including the
notes thereto, and the audited consolidated financial statements of BGII,
including the notes thereto, and other financial and operating information
included elsewhere in this Prospectus.
17
<PAGE>
SUMMARY FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW (1)
<TABLE>
<CAPTION>
COMPARATIVE ANALYSIS OF
OPERATING INCOME AND
ADJUSTED OPERATING CASH
FLOW (2)
---------------------------
TWELVE MONTHS FORECASTED OPERATING INCOME
ENDED DECEMBER 31, AND ADJUSTED OPERATING CASH
--------------------------- FLOW FOR THE TWELVE MONTHS
1994 1995 ENDING DECEMBER 31, 1996
------------ ------------- ------------------------------
<S> <C> <C> <C>
(IN THOUSANDS)
STATEMENTS OF OPERATIONS INFORMATION:
Total Revenues..................................... $ 373,031 $ 400,964 $ 425,957
Total Operating Costs.............................. 361,888(3) 381,855(3) 398,889(3)
------------ ------------- --------
Operating Income................................. 11,143 19,109 27,068
------------ ------------- --------
SUPPLEMENTAL INFORMATION:
Depreciation and Amortization...................... 22,618 22,719 23,192
Casino Royalty..................................... (1,670) (3,674) (4,368)
Minority Interest.................................. (675) (504) (920)
------------ ------------- --------
Subtotal......................................... 31,416 37,650 44,972
Adjustments:
Rainbow Operations............................... -- 1,912(4) --
Unusual or Non-recurring
Charges......................................... 2,856(5) 7,783(5) 1,000(6)
Direct Merger Costs.............................. -- -- 8,944(7)
------------ ------------- --------
Adjusted Operating Cash Flow....................... $ 34,272(8) $ 47,345(8) $ 54,916(8)
------------ ------------- --------
------------ ------------- --------
OTHER DATA:
Net Interest Expense............................. $ 20,600
--------
--------
Mandatory Principal Payments..................... $ 4,657(9)
--------
--------
Capital Expenditures............................. $ 13,485(10)
--------
--------
</TABLE>
- --------------------------
(1) The Summary Forecast, which consists of forward-looking statements, is based
upon a number of estimates and assumptions that, while presented with
numerical specificity and considered reasonable by management of the
Company, are inherently subject to significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of
which are difficult to predict and many of which are beyond the control of
the Company. The Summary Forecast is necessarily speculative in nature, and
it is usually the case that one or more of the assumptions do not
materialize. The Summary Forecast and actual results will vary, and those
variations may be material. Accordingly, the inclusion of the Summary
Forecast herein should not be regarded as a representation by the Company or
any other person (including the Underwriters) that the Summary Forecast will
be achieved. In addition, because the Summary Forecast has been prepared on
a consolidated basis, the Summary Forecast does not account for the
Company's holding company structure, which may result in cash flows earned
at some subsidiaries being unavailable for distribution to the Company
including to service indebtedness of the Company. Prospective investors are
cautioned not to place undue reliance on the Summary Forecast.
(2) See Note 2--Presentation of Supplemental Comparative Information of the
"Summary of Significant Assumptions and Accounting Policies for the
Forecast" elsewhere in the Prospectus.
(3) Includes selling, general and administrative costs for the twelve months
ended December 31, 1994 and 1995 net of the following: the direct Merger
costs, the business development costs over the $3.0 million budgeted amount
totaling $4.7 million and $12.1 million in 1994 and 1995, respectively and
net synergy cost savings totaling $5.0 million in 1994 and 1995, and $4.0
million in 1996. See note (6) below for one-time $1.0 million costs to
implement synergy cost savings. See note (7) below for the 1996 presentation
which includes direct Merger costs.
(4) Represents adjustment to reflect management's derivation of Rainbow Casino's
annualized results for the period, net of incremental royalty.
(5) Reflects items determined by management to be unusual or non-recurring
(which are also included in Total Operating Costs). The concepts of
non-recurring or unusual charges are not defined in generally accepted
accounting principles ("GAAP").
(6) For 1996, the non-recurring charges consist of the $1.0 million of one-time
charges (which are included in Total Operating Costs) to implement the
expected annual synergy cost savings (which are reflected in Total Operating
Costs as well).
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
18
<PAGE>
(7) Direct Merger costs for 1996 have been included in Total Operating Costs
and presented as an adjustment in computing the Adjusted Operating Cash
Flow. See note (3) above for the presentation of direct Merger costs in 1994
and 1995.
(8) The following is a reconciliation of the historical EBITDA (as defined) by
business unit to the combined Adjusted Operating Cash Flow:
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
EBITDA by Business Unit:
Gaming...................................................... $ 7,004(a) $ 5,905(a) $ 10,750
Systems..................................................... 3,593 5,788 6,303
Wulff....................................................... 15,575 15,172 16,836
Gaming Machine Management................................... 17,159 18,260 19,957
Casinos..................................................... 2,927 10,546 14,958
Alliance Corporate Administrative Expense..................... (10,609) (8,912) (5,800)
Alliance Development Expense.................................. (7,694) (15,072) (10,944)
BGII Corporate Administrative Expense......................... (4,520) (3,732) (4,800)
Discontinued Operations....................................... (1,378) (933) --
Casino Royalty................................................ -- (2,718) (4,368)
Minority Interests............................................ (675) (504) (920)
BGII Unusual Charges.......................................... -- (5,816) (2,000)
--------- --------- ------------
Combined EBITDA................................................. 21,382 17,984 39,972
Adjustments:
Direct Merger Costs........................................... -- 13,106(b) 8,944(b)
Alliance Development Expense Reductions....................... 4,694 966 --
Rainbow Operations............................................ 340(c) 2,506(c) --
Unusual or Nonrecurring Charges............................... 2,856(d) 7,783(e) 1,000(f)
Synergy Cost Savings.......................................... 5,000 5,000 5,000
--------- --------- ------------
Adjusted Operating Cash Flow.................................... $ 34,272 $ 47,345 $ 54,916
--------- --------- ------------
--------- --------- ------------
</TABLE>
----------------------------
(a)Includes certain charges incurred by Gaming and not reflected as "BGII
Unusual Charges" above, consisting of costs relating to a regulatory
investigation and legal proceedings in Louisiana totalling $0.3 million
and $1.4 million for the years ended December 31, 1994 and 1995
respectively.
(b)For the twelve months ended December 31, 1995, $11.1 million of direct
Merger costs are included in Alliance Development Expense and $2.0
million in BGII Unusual Charges. For the Forecasted Twelve Months Ending
December 31, 1996, $6.9 million of direct Merger costs are included in
Alliance Development Expense and $2.0 million in BGII Unusual Charges.
(c)To adjust to reflect the operating results of the Rainbow Casino as if
owned during all of 1994 and 1995 and, for the twelve-months ended
December 31, 1995, to reflect the most recent operating results of the
Rainbow Casino, as if such results had occurred for all of 1995
(including an adjustment for additional casino royalty expense of
approximately $1.7 million and $1.0 million, respectively).
(d)Includes legal costs included as BGII Corporate Administrative Expense
related to a former executive totalling $0.5 million and $0.3 million
incurred by Gaming relating to a regulatory investigation and legal
proceedings in Louisiana and a reserve for discontinued operations of
$2.0 million for Alliance included in Alliance Corporate Administrative
Expense.
(e)Includes one-time charges included in Alliance Corporate Administrative
Expense consisting of an executive signing bonus of $1.3 million paid in
Common Stock and $1.1 million of termination costs for certain officers
and directors, which were incurred during the quarter ended June 30,
1995. Also includes $1.4 million incurred by Gaming relating to a
regulatory investigation and legal proceedings in Louisiana, and $0.2
million included in BGII Corporate Administrative Expense for legal costs
related to the "Bally" trade name litigation. Also includes BGII unusual
charges of $2.0 million in costs related to the merger agreement with
WMS, a provision of $0.8 million at Wulff to writedown to net realizable
value the carrying value of a building to be sold and a provision of $1.0
million to increase Wulff's tax reserves primarily for V.A.T.
(f)Includes $1.0 million of one-time charges to implement the expected
annual synergy cost savings.
(9) All of such mandatory principal payments relate to indebtedness of
subsidiaries of the Company.
(10) See Note 3 -- Operating Assumptions -- Capital Expenditures of the Summary
of Significant Assumptions and Accounting Policies for the Forecast.
19
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
ALLIANCE GAMING CORPORATION
<TABLE>
<CAPTION>
FISCAL YEARS SIX MONTHS
ENDED JUNE 30, ENDED DECEMBER 31,
------------------------------- --------------------
1993 1994 1995 1994 1995
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net Revenues................................................... $ 113,091 $ 123,054 $ 131,988 $ 62,338 $ 76,229
Operating Loss................................................. (52) (7,468) (4,261) (1,861) (3,524)
Net Interest Expense........................................... (4,048) (4,746) (5,335) (2,411) (3,470)
Net Loss....................................................... $ (3,650) $ (13,128) $ (10,751) $ (5,017) $ (9,431)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Loss per Common Share...................................... $ (0.38) $ (1.28) $ (0.95) $ (0.45) $ (0.79)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Gaming Machine Management:
Units................................................. 5,868 5,889 5,902 5,976 5,951
Locations............................................. 518 506 526 528 531
Casinos:
Tables................................................ 9 9 37 9 38
Slots Operated........................................ 428 434 1,005 433 1,042
Revenues:
Gaming Machine Management............................. $ 96,282 $ 102,830 $ 106,827 $ 52,511 $ 52,621
Casinos............................................... 11,286 12,046 19,668 6,612 22,352
Discontinued Operations............................... 5,523 8,178 5,493 3,215 1,256
--------- --------- --------- --------- ---------
Total Revenues...................................... $ 113,091 $ 123,054 $ 131,988 $ 62,338 $ 76,229
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EBITDA (1):
Gaming Machine Management............................. $ 14,564 $ 16,820 $ 18,562 $ 8,800 $ 8,498
Casinos (2)........................................... 1,963 2,190 5,359 1,713 6,900
Corporate Development Expenses (3).................... (900) (1,192) (7,843) (3,508) (10,737)
Corporate Administrative Expenses (4)................. (6,191) (7,882) (10,177) (4,252) (2,987)
Discontinued Operations (5)........................... (770) (7,874) (642) (1) (292)
Casino Royalty........................................ -- -- (810) -- (1,908)
Minority Interest..................................... -- (506) (397) (169) (276)
--------- --------- --------- --------- ---------
Total EBITDA (1).................................... $ 8,666 $ 1,556 $ 4,052 $ 2,583 $ (802)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Depreciation and Amortization........................... $ 8,718 $ 9,530 $ 9,520 $ 4,613 $ 4,906
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Capital Expenditures.................................... $ 5,092 $ 7,022 $ 7,880 $ 3,338 $ 7,478
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents and Securities Available for Sale ..................................... $ 29,468
Working Capital.................................................................................. 20,109
Total Assets..................................................................................... 116,872
Long-term Debt, Including Current Maturities..................................................... 100,106
Stockholders' Deficiency......................................................................... (717)
</TABLE>
- --------------------------
(1) EBITDA is defined as earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA"). When presented for each business
unit, EBITDA excludes corporate expenses, casino royalty and minority
interest. EBITDA should not be construed as an alternative to net income or
any other GAAP measure of performance as an indicator of Alliance's
performance or to cash flows generated by operating, investing and financing
activities as an indicator of cash flows or a measure of liquidity.
Management believes that EBITDA is a useful adjunct to net income and other
measurements under GAAP and is a conventionally used financial indicator.
(2) Since March 29, 1995, the Rainbow Casino operations have been consolidated
with Alliance.
(3) Includes direct Merger costs of $1.7 million and $9.4 million for the fiscal
year ended June 30, 1995 and the six months ended December 31, 1995,
respectively.
(4) Includes one-time charges incurred by Alliance consisting of an executive
signing bonus of $1.3 million paid in Common Stock and $1.1 million of
termination costs for certain officers and directors, which were incurred
during the quarter ended June 30, 1995.
(5) Includes businesses now or previously considered as discontinued operations.
20
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................................... $168,707 $236,192 $ 249,312(1)
-------- -------- ----------
-------- -------- ----------
Operating Income (Loss).......................... (18,536)(2) 13,381 3)(4) 8,364(1 )(4)(5)(6)
Interest Expense................................. 4,424 6,768 6,853
Net Income (Loss)................................ $(23,443) $ 3,793 $ (3,393)
-------- -------- ----------
-------- -------- ----------
Income (Loss) per Share Before Extraordinary
Gain............................................ $ (2.54) $ 0.35 $ (0.31)
-------- -------- ----------
-------- -------- ----------
OTHER DATA:
Unit Sales:
Gaming......................................... 10,156 21,625 18,084
Wulff.......................................... 12,552 13,100 12,000
Revenues:
Gaming (7)..................................... $ 49,298 $118,659 $ 111,849(1)
Systems........................................ 12,748 13,386 20,681
-------- -------- ----------
Gaming Machine Manufacturing and Systems..... 62,046 132,045 132,530
Wulff.......................................... 106,661 104,147 116,782
-------- -------- ----------
Total Revenues............................... $168,707 $236,192 $ 249,312
-------- -------- ----------
-------- -------- ----------
EBITDA (8):
Gaming (7)..................................... $(24,747)(2) $ 7,004(3) $ 5,905(1)(3)(5)
Systems........................................ 3,829 3,593 5,788
-------- -------- ----------
Gaming Machine Manufacturing and Systems..... (20,918)(2) 10,597(3) 11,693(1)(3)(5)
Wulff.......................................... 15,959 15,575 15,172
Parent (7)..................................... (5,473) (4,520)(4) (3,732)(4)
Unusual Charges................................ -- -- (5,816)(6)
-------- -------- ----------
Total EBITDA (8)............................. $(10,432) $ 21,652 $ 17,317
-------- -------- ----------
-------- -------- ----------
Depreciation and Amortization.................... $ 8,103 $ 8,271 $ 8,953
-------- -------- ----------
-------- -------- ----------
Capital Expenditures............................. $ 6,467 $ 9,537 $ 8,240
-------- -------- ----------
-------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents........................................................................ $ 5,526
Working Capital.................................................................................. 97,357
Total Assets..................................................................................... 194,316
Long-term Debt, Including Current Maturities..................................................... 69,944
Stockholders' Equity............................................................................. 88,410
</TABLE>
- ------------------------
(1) Includes the impact of sales returns of $0.3 million by Gaming related to
two riverboats at the River City Complex in New Orleans which filed for
bankruptcy.
(2) Includes $6.2 million in charges to increase inventory valuation reserves in
1993 principally related to inventory originally intended for sale in the
Louisiana video lottery terminal market. Includes $1.2 million in charges
related to a management reorganization at Gaming in 1993. Includes a
provision for doubtful receivables totaling $5.1 million recorded by Gaming
in 1993 related to a former distributor who filed for bankruptcy during the
second quarter of 1993.
(3) Includes certain charges incurred by Gaming, and not reflected as "Unusual
Charges" under Other Data consisting of costs relating to a regulatory
investigation and legal proceedings in Louisiana totalling $0.3 million and
$1.4 million for the years ended December 31, 1994 and 1995, respectively.
(4) Includes legal costs related to a former executive totaling $0.5 million
during the year ended December 31, 1994 and legal costs related to the
"Bally" trade name litigation totaling $0.2 million during the year ended
December 31, 1995.
(5) Includes a provision for doubtful receivables of $0.9 million related to the
bankruptcy described in Note (1) above.
(6) Includes $2.0 million in Merger transaction costs and related litigation
expenses, $2.0 million in costs related to the merger agreement with WMS
Industries, Inc. ("WMS"), a provision of $0.8 million at Wulff to write-down
to net realizable value the carrying value of a building to be sold and a
provision of $1.0 million to increase Wulff's tax reserves primarily for
German value added taxes ("V.A.T.").
(7) Includes results of GmbH and BGI Australia Pty Limited in Gaming's results,
along with certain reclassifications from historical presentation.
(8) See footnote (1) to "Summary Historical Financial Information -- Alliance
Gaming Corporation."
21
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED TWELVE MONTHS
ENDED DECEMBER 31, ENDED
JUNE 30, ---------------------- DECEMBER 31,
1995 1994 1995 1995
----------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues..................................................... $ 400,821 $ 187,863 $ 188,006 $ 400,964
Operating Income............................................. 22,458 8,419 5,070 19,109
Net Interest Expense......................................... (19,578) (9,786) (10,097) (19,889)
Casino Royalty............................................... (3,431) (1,665) (1,908) (3,674)
Minority Interest............................................ (397) (169) (276) (504)
Other, net................................................... 418 (213) 535 1,166
----------- ---------- ---------- --------------
Loss Before Taxes............................................ (530) (3,414) (6,676) (3,792)
Provisions for Income Taxes.................................. (2,555) (1,202) (1,289) (2,642)
----------- ---------- ---------- --------------
Net Loss..................................................... $ (3,085) $ (4,616) $ (7,965) $ (6,434)
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
Preferred Stock Dividend (1)................................. $ (8,039) $ (3,872) $ (3,872) $ (8,039)
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
OTHER DATA:
Depreciation and Amortization................................ $ 22,861 $ 12,105 $ 11,963 $ 22,719
Capital Expenditures......................................... 16,742 7,769 11,287 20,260
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents and Securities Available for Sale...................................... $ 14,476
Working Capital.................................................................................. 115,079
Total Assets..................................................................................... 343,630
Long-term Debt, Including Current Maturities..................................................... 193,255
Stockholders' Equity............................................................................. 49,433
</TABLE>
- ------------------------
(1) Dividends on the Preferred Stock are compounded quarterly at a rate of 15%
per annum; however, such dividends are permitted to be paid in kind for the
first five years after issuance and partially in kind for the next two
years.
22
<PAGE>
SUMMARY SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED TWELVE MONTHS
ENDED DECEMBER 31, ENDED
JUNE 30, ---------------------- DECEMBER 31,
1995 1994 1995 1995
----------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HISTORICAL COMBINED INFORMATION (1):
Operating Income (Loss) (2)(3)(4)(5)......................... $ 13,701 $ 4,822 $ (6,439) $ 2,440
Depreciation and Amortization................................ 18,002 9,221 9,985 18,766
Minority Interest............................................ (397) (169) (276) (504)
Casino Royalty............................................... (810) -- (1,908) (2,718)
----------- ---------- ---------- --------------
Subtotal................................................. $ 30,496 $ 13,874 $ 1,362 $ 17,984
----------- ---------- ---------- --------------
ADJUSTMENTS TO HISTORICAL COMBINED INFORMATION:
Direct Merger Costs (4)...................................... $ 1,919 $ -- $ 11,187 $ 13,106
Rainbow Operations (6)....................................... 6,121 3,615 -- 2,506
Unusual or Non-recurring Charges (2)(3)...................... 4,317 800 4,266 7,783
Alliance Development Expense Reductions (5).................. 3,174 2,008 (200) 966
Synergy Cost Savings......................................... 5,000 2,500 2,500 5,000
----------- ---------- ---------- --------------
Adjusted Operating Cash Flow (7)............................. $ 51,027 $ 22,797 $ 19,115 $ 47,345
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
Pro Forma Net Interest Expense (8)........................... $ 19,578 $ 9,786 $ 10,097 $ 19,889
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
</TABLE>
- --------------------------
(1) The information is derived from the historical financial information of
Alliance and BGII, which has been combined for purposes of this summary.
(2) Includes certain charges incurred by BGII consisting of costs relating to a
regulatory investigation and legal proceedings in Louisiana, legal costs
related to a former executive, legal costs related to the "Bally" trade name
litigation that were directly caused by the investigation, and certain
unusual charges consisting of costs related to the merger agreement with
WMS, a reserve for German V.A.T. and the write-down of a building in
Germany. There can be no assurance that other unusual charges will not occur
in the future.
(3) Includes one-time charges incurred by Alliance consisting of an executive
signing bonus of $1.3 million paid in Common Stock and $1.1 million of
termination costs for certain directors, which charges were incurred during
the quarter ended June 30, 1995.
(4) Includes direct costs related to the Merger consisting of legal, accounting,
and investment banking fees and related costs.
(5) Reflects the reduction of Alliance Development Expense, which relates to
mergers, acquisitions and joint ventures, to $3.0 million annually. The
reduction to $3.0 million reflects the anticipated elimination of expenses
that were being incurred prior to Alliance's accomplishment of its strategic
plan to acquire a major gaming machine manufacturing company. The adjustment
to eliminate direct costs related to the Merger is shown in note (4) above.
For the six months ended December 31, 1995, Alliance Development Expense was
below the $3.0 million annual rate.
(6) For purposes of this summary the Rainbow Casino is presented as if owned
from the beginning of each period presented. Also, as the final elements of
the Rainbow Casino facility were not completed until July 1995, Alliance
management believes that the results of operations for the six months ended
December 31, 1995 after considering seasonality (which was immaterial), are
more reflective of the property's ongoing results of operations.
Accordingly, such results have been annualized based on the actual results
for the six months ended December 31, 1995, as Alliance management believes
that such results better portray the Rainbow Casino's expected contribution
to Adjusted Operating Cash Flow. This annualization constitutes
forward-looking statements that involve risks and uncertainties, including
the risks of competition, gaming regulation and other risks detailed in this
Prospectus, including under "Risk Factors."
(7) Adjusted Operating Cash Flow should not be construed as an alternative to
net income or any other GAAP measure of performance as an indicator of the
Company's performance or to cash flows generated by operating, investing and
financing activities as an indicator of cash flows or a measure of
liquidity. Management believes that Adjusted Operating Cash Flow is a useful
adjunct to net income and other GAAP measurements.
(8) The information is derived from the Unaudited Pro Forma Condensed Combined
Financial Information, and is included here to provide potential investors
with additional comparative information.
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RISK FACTORS
PRIOR TO DECIDING WHETHER TO TENDER OLD CONVERTIBLE DEBENTURES IN THE
EXCHANGE OFFER, HOLDERS OF THE OLD CONVERTIBLE DEBENTURES SHOULD CAREFULLY
CONSIDER ALL OF THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, ESPECIALLY THE CONSIDERATIONS DESCRIBED OR REFERRED TO IN THE
FOLLOWING PARAGRAPHS.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS BEFORE
PURCHASING THE SECURITIES OFFERED HEREBY.
HIGH LEVERAGE AND FIXED CHARGES; HOLDING COMPANY STRUCTURE; WORKING CAPITAL
The Company will have a substantial amount of indebtedness after the
Transaction. As of December 31, 1995, on a pro forma basis after giving effect
to the Transaction, the Company would have had outstanding debt of approximately
$193.3 million and a long-term debt to equity ratio of 3.9 to 1. If the
Preferred Stock is included in debt the long-term debt to equity ratio would be
4.9 to 1. See "The Merger and Related Financings", "Use of Proceeds,"
"Capitalization" and "Unaudited Pro Forma Condensed Combined Financial
Information". In addition, if the maximum amount of dividends on the Preferred
Stock were paid in kind, as is anticipated, the liquidation value of the
Preferred Stock would accrete to $124.0 million after seven years. The high
level of indebtedness and amount of Preferred Stock of the Company outstanding
following the Transaction will have important consequences, including without
limitation the following: (i) significant interest expense, cash dividend
requirements (after five years), principal repayment (primarily after seven
years) and Preferred Stock redemption obligations (after eight years) resulting
in substantial annual fixed charges and significant repayment and redemption
obligations; (ii) significant limitations on the Company's ability to obtain
additional financing, make capital expenditures, make acquisitions and take
advantage of other business opportunities that may arise; and (iii) increased
vulnerability to adverse general economic and industry conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources of the Company (Pro Forma)".
On a pro forma basis after giving effect to the Transaction and the use of
proceeds thereof, the Company's earnings would have been inadequate to cover
fixed charges by approximately $0.5 million for the year ended June 30, 1995 and
would have been inadequate to cover fixed charges by approximately $6.4 million
for the six-month period ended December 31, 1995. On a pro forma basis after
giving effect to the Transaction, the Company would have fixed charges of
approximately $43.6 million (which includes the imputed fixed charges for
contingent rental expense related to revenue-sharing agreements in its Nevada
gaming machine management operation operations of approximately $18.0 million
annually), plus $8.0 million of dividends on the Preferred Stock (permitted to
be paid in kind for the first five years after issuance and partially in kind
for the next two years) for the 12-month period ended December 31, 1995. Future
operating results are subject to significant business, economic, regulatory and
competitive uncertainties and contingencies, many of which are beyond the
control of the Company. There can be no assurance that the Company will be able
to generate the cash flow necessary to permit the Company to meet its fixed
charges and repayment obligations. If the Company is unable to generate
sufficient cash flow from operations in the future, it may be required to
refinance all or a portion of its existing debt or to obtain additional
financing. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained on terms that are favorable
or acceptable to the Company. Any inability of the Company to service its fixed
charges and repayment obligations would have a significant adverse effect on the
Company and the market value and marketability of the Common Stock, the Series E
Special Stock, the Preferred Stock, the Senior Notes, the Old Convertible
Debentures and the New Convertible Debentures. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources of the Company (Pro Forma)".
Alliance is a holding company, the only material assets of which are equity
interests in its subsidiaries (including, after the Merger, BGII and its
subsidiaries). The ability of Alliance to make interest and principal payments
on its obligations, including the Senior Notes, Old Convertible Debentures and
New Convertible Debentures, or to pay cash dividends, will depend on the
subsidiaries' ability to generate sufficient cash flow from operations and
distribute such amounts to Alliance. Such entities' ability to make these
distributions is restricted by, among other things, the indebtedness of
Alliance's Video Services, Inc. ("VSI") subsidiary and
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Rainbow Casino-Vicksburg Partnership, L.P. ("RCVP") subsidiaries, and may be
restricted by other obligations which may be incurred in the future and by
restrictions imposed by gaming authorities on licensed enterprises.
The Company believes that its consolidated cash flow needs for the next 12
months will increase as a result of an increase in accounts receivable relating
to the introduction of new machines and the expected increases in production and
sales levels from recent historical levels. The Company expects that cash flow
generated by operations and other available cash will be sufficient to satisfy
the Company's normal working capital needs, although there can be no assurance
the Company will generate such available cash. See
"-- Implementation of the Merger". In order to be competitive in meeting the
growing customer demand for financing of gaming equipment in emerging gaming
markets, the Company also plans to continue to involve third-party finance
companies and secure additional financing; however, there can be no assurances
that such additional financing will be obtained. Failure to obtain such
financing on terms acceptable to the Company could impair the Company's
operations and ability to pursue its business strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
RESTRICTIONS ON CERTAIN ACTIVITIES
The indenture pursuant to which the Senior Notes will be issued (the "Senior
Indenture") will impose restrictions on Alliance and its subsidiaries, in
addition to restrictions imposed by existing instruments, including the
indenture for the Old Convertible Debentures (the "Old Convertible Indenture"),
and the restrictions imposed by the indenture for the New Convertible Debentures
(the "New Convertible Indenture"). Generally, the restrictions contained in
these instruments relate to the incurrence of additional indebtedness, the
distribution of cash and/or property to shareholders, the repayment or
repurchase of pari passu or junior securities, investments, mergers and sales of
assets and the creation of liens. These restrictions and requirements could
limit the ability of the Company to respond to changing business and economic
conditions. A failure to comply with any of these obligations could also result
in an event of default under the Senior Indenture, which could permit
acceleration of the Senior Notes and acceleration of certain other indebtedness
of the Company under other instruments which may contain cross-acceleration or
cross-default provisions.
OPERATING HISTORY--RECENT LOSSES
Alliance incurred net losses of $3.7 million, $13.1 million and $10.8
million during its fiscal years ended June 30, 1993, 1994 and 1995,
respectively, and a net loss of $9.4 million during the six months ended
December 31, 1995, whereas BGII had net income of $5.3 million, a net loss of
$23.4 million, net income of $3.8 million and a net loss of $3.4 million for its
fiscal years ended December 31, 1992, 1993, 1994 and 1995, respectively.
Alliance's net losses include business development and Merger costs of $0.9
million, $1.2 million, $7.8 million and $10.7 million incurred during its fiscal
years ended June 30, 1993, 1994 and 1995 and the six months ended December 31,
1995, respectively. On a pro forma basis after giving effect to the Transaction,
for the 12-month period ended June 30, 1995 the Company would have had a net
loss, prior to accruing dividends on the Preferred Stock, of $3.1 million and
for the six months ended December 31, 1995 the Company would have had a net loss
of $8.0 million. Dividends on the Preferred Stock will be approximately $8.0
million in the first 12-month period. Management believes that of the losses of
Alliance during its fiscal years ended June 30, 1993, 1994 and 1995,
approximately $0.9 million, $6.4 million and $2.4 million, respectively, were
attributable to items that management considers to be non-recurring, primarily
reflecting the discontinuance of certain businesses and prior management
strategies. Of BGII's loss for its fiscal year ended December 31, 1995, $5.8
million was attributable to certain unusual charges incurred by BGII related to
a reserve for German value-added tax ("V.A.T."), the write-down of a building in
Germany to be sold to its estimated net realizable value, and transaction costs
relating to the Merger, the previous tender offer and consent solicitation by
Alliance, and a former proposed merger between BGII and WMS Industries, Inc.
("WMS"). Nevertheless, there can be no assurance that the Company will be
profitable in the future, that there will not be similar or other unusual or
non-recurring charges in the future, or that future results will improve as a
result of the Merger. See "Unaudited Pro Forma Condensed Combined Financial
Information", "Selected Historical Financial Information of Alliance" and
"Selected Historical Financial Information of BGII".
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The new wall machine unit sales of Wulff decreased by approximately 8% in
the year ended December 31, 1995 as compared to the year ended December 31,
1994. Management believes new wall machine revenues for the last six months of
1995 were adversely affected by an industry downturn caused by regulations
imposed in Germany limiting the number of wall machines per square meter in
arcade locations effective January 1, 1996, thereby reducing sales opportunities
and by increased foreign competition in Germany. Management expects the adverse
impact of such regulations to continue during the first six months of 1996;
however, there can be no assurance that this impact will only be temporary. The
foreign competition may also continue to have an adverse impact on wall machine
revenues.
IMPLEMENTATION OF THE MERGER
The Company's future operations and earnings will be largely dependent upon
the Company's ability to integrate the businesses separately conducted by
Alliance and BGII prior to the Merger. Alliance and BGII currently operate in
different areas of the gaming entertainment industry, with only modest overlap
in their activities. There can be no assurance that the Company will
successfully integrate the businesses of Alliance and BGII, and a failure to do
so would have a material adverse effect on the Company's financial position,
results of operations and cash flows. Additionally, although the Company does
not currently have any specific acquisition plans other than the Merger, the
need to focus management's attention on integration of the separate businesses
may limit the Company's ability to successfully pursue acquisitions or other
opportunities related to its business for the foreseeable future. Although the
Company plans to introduce more sophisticated technology into BGII's electronic
gaming machines, there is no assurance that it will succeed in doing so or that
it will be able to enter into alliances with technology and entertainment
companies. In addition, although management cannot precisely quantify future
cost savings, the Company expects to realize cost savings of approximately $5.0
million on an annual basis (primarily through the reduction of duplicative
costs, such as facility, legal, accounting and compensation costs) as a result
of the Merger. In order to achieve these cost savings, the Company believes it
will incur one-time costs of approximately $1.0 million. The achievement of
these savings is dependent on, among other things, the successful integration of
the businesses of Alliance and BGII. There can be no assurance, however, that
such savings will be achieved or sustained. See "Unaudited Pro Forma Condensed
Combined Financial Information."
BGII currently supplies electronic gaming machines to certain customers
which are in competition with Alliance. It is possible that, because of such
competition, certain of these customers may cease purchasing electronic gaming
machines from BGII after the Merger. Alliance and BGII do not believe that such
discontinuations, if at all, will be material. BGII sales to machine management
operators have historically been, and are likely to remain, insignificant.
Nevertheless, discontinuance of purchases by customers could adversely affect
the Company's sales.
FINANCIAL FORECAST
The Company was the sole preparer of the Forecast set forth under "Forecast
of Operating Income and Adjusted Operating Cash Flow". While such Forecast is
presented with numerical specificity, it is based on the Company's current best
estimates of expected results given the forecasted assumptions described in the
Summary of Significant Assumptions and Accounting Policies for the Forecast for
the period presented. The Forecast, which consists of forward-looking
statements, is qualified by and subject to the assumptions set forth therein and
the other information contained in this Prospectus. The Company does not intend
to update or otherwise revise the Forecast to reflect events or circumstances
existing or arising after the date of this Prospectus or to reflect the
occurrence of unanticipated events. The Forecast necessarily is based upon a
number of estimates and assumptions, that, while presented with numerical
specificity and considered reasonable by the Company, are inherently subject to
significant business, economic, competitive, regulatory and other uncertainties
and contingencies, all of which are difficult to predict and many of which are
beyond the control of the Company. Financial forecasts are necessarily
speculative in nature, and it is usually the case that one or more of the
assumptions underlying such projections do not materialize. The Forecast and
actual results will vary, and those variations may be material. The inclusion of
the Forecast herein should not be regarded as a representation by the Company or
any other person that the Forecast will be achieved. Prospective investors are
cautioned not to place undue reliance on the Forecast or the other
forward-looking information contained herein.
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CHANGE OF CONTROL
Following consummation of the Transaction, Alliance's two largest
shareholders, Alfred Wilms and Kirkland Investment Corporation ("KIC"), who
currently beneficially own approximately 46.9% and 10.3%, respectively, of the
outstanding shares of Common Stock, will beneficially own approximately 25.3%
and 5.2%, respectively, of the outstanding shares of Common Stock. Accordingly,
following the Transaction, no one person or group will hold a majority interest
in the Company, and it is possible that the Company could be subject to a change
in control, either pursuant to a takeover attempt or otherwise, to a greater
degree than has been the case. Mr. Wilms is contractually obligated until
September 21, 1997 to vote his shares of Common Stock in favor of four nominees
of KIC to Alliance's seven-member Board of Directors. See "Security Ownership of
Certain Beneficial Holders and Management".
If a Change of Control (as defined in the Senior Indenture, the Old
Convertible Indenture or the New Convertible Indenture) should occur, the
Company will be required, subject to certain conditions, to offer to purchase
all outstanding Senior Notes, Old Convertible Debentures and New Convertible
Debentures, as applicable, at a price equal to 101% of the then outstanding
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. The Transaction will not constitute a Change of Control under the
Old Convertible Indenture. On a pro forma basis after giving effect to the
Transaction, the Company will not have sufficient funds available to purchase
all of the outstanding Senior Notes, Old Convertible Debentures and/or New
Convertible Debentures were they to be tendered in response to an offer made as
a result of a Change of Control. There can be no assurance that the Company
would be able to obtain such funds through a refinancing of the Senior Notes,
Old Convertible Debentures and New Convertible Debentures to be repurchased or
otherwise. Also, the requirement that the Company offer to repurchase the Senior
Notes, Old Convertible Debentures and New Convertible Debentures in the event of
a Change of Control may have the effect of deterring a third party from
effecting a transaction that would constitute a Change of Control.
COMPETITION
GAMING MACHINE MANUFACTURING AND SYSTEMS. The market for gaming machines is
extremely competitive, and there are a number of established, well-financed and
well-known companies producing machines that compete with each of the Company's
product lines in each of the markets for the Company's gaming machine
manufacturing operations. The domestic market for gaming machines is dominated
by a single competitor, International Game Technology ("IGT"), with a number of
smaller competitors in the field. In addition, certain technology-oriented
companies have recently announced plans to enter the gaming machine market.
Management believes that some of these competitors have greater capital
resources than the Company. Competition among gaming product manufacturers,
particularly with respect to sales of gaming machines into new and emerging
markets, is based on competitive customer pricing and financing terms, appeal to
the player and quality of the product, and having an extensive distribution and
sales network. Sales to established casinos in Nevada normally require
completion of a successful trial period for the machines in the casino.
The competition for the computerized monitoring systems designed and sold by
Systems currently consists of IGT, Casino Data Systems ("CDS"), and, to a lesser
extent, Gaming Systems International, Inc. and Acres Gaming, Inc. Competition is
keen in this market due to the number of providers and the limited number of
casinos and the jurisdictions in which they operate. Pricing, product feature
and function, accuracy, and reliability are all main factors in determining a
provider's success in selling its system. Systems believes the future success of
its operations will be determined by its ability to bring new and innovative
products to the marketplace while at the same time maintaining the base of loyal
existing customers.
GERMAN OPERATIONS. Germany's wall machine manufacturing industry is
dominated by Wulff, and two of its competitors. These three entities are
believed collectively to account for more than 90% of the entire market for wall
machines (which exists almost exclusively in Germany). Wulff's two major
competitors have greater resources than the Company and own and operate a
significant number of arcades, which may give them a competitive advantage
arising from a built-in market for their games and the ability to test market
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new games in their own arcades. In addition, wall machines compete for floor
space in arcades with token machines, the sales of which have expanded rapidly
in the last several years, in part as a result of low price competitors from
outside Germany.
GAMING MACHINE MANAGEMENT OPERATIONS. The competition for obtaining and
renewing gaming machine routes in Nevada is high and continues to intensify.
Such competition has, over time, reduced Alliance's gross profit margins for
such operations. In addition, such competition has required Alliance to provide
substantial financial incentives and incur financial risks to retain or obtain
certain gaming machine route locations. Such incentives include long-term lease
commitments, guarantees of leases in favor of owners of local establishments,
substantial advance deposits, payments of lease rentals in advance and loans for
buildings and tenant-improvement costs. Although Alliance believes that it now
has adequate procedures for evaluating and managing such risks, historically
substantial losses have been incurred in connection with such transactions
reflecting, in part, former management's willingness to accept higher levels of
risk to further its policy of emphasizing market share. Notwithstanding the
change in the Company's business strategy to one emphasizing profitability
rather than market share, the future success of the Company's machine management
operations will continue to be dependent to some extent on its ability and
willingness to provide such financial inducements. Although Alliance has
historically generated sufficient new machine management contracts to offset the
loss of old machine management contracts, due to increased competition, the
increased sophistication and bargaining power of customers and possibly other
factors not yet known, there can be no assurance that the Company will be able
to obtain new machine management contracts or renew or extend its current space
leases or revenue-sharing arrangements upon their expiration or termination, or
that, if renewed or extended, the terms will be favorable to the Company. In
Louisiana, the Company is subject to extensive competition for contracts to
operate video poker machines, and the Company's racetrack and OTBs compete with
various truck stops and locations with liquor licenses throughout the New
Orleans area, as well as riverboat gaming and one land-based casino which may
re-open in New Orleans.
CASINO OPERATIONS. The operation of casinos 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. In Sparks/Reno, Nevada, the principal competition for the Company's
operations comes from larger casinos focusing on the local market. The Company's
one dockside casino in Vicksburg, Mississippi faces substantial direct
competition from other dockside gaming facilities in the region.
PRODUCT DEVELOPMENT
The future success of the Company depends to a large extent upon its ability
to design, manufacture and market technologically sophisticated products that
achieve high levels of player acceptance. The development of a successful new
product or product design by a competitor could adversely affect sales of the
Company's products and force it to respond quickly with its own competing
products. The Company's plans with respect to the introduction of more
sophisticated technology into the electronic gaming machine market are designed
to lead to an increase in market share and profitability for the Company. See
"Business." However, no products incorporating such technology have reached the
development stage, and there is no assurance that any such products will be
developed, or that if developed they will receive necessary regulatory approvals
or be commercially successful.
CUSTOMER FINANCING
Management believes that customer financing terms have become an
increasingly important competitive factor in certain emerging markets.
Competitive conditions sometimes require Gaming to grant extended payment terms
on electronic gaming machines and other gaming equipment. Approximately 75% of
Gaming's slot and video gaming machine customers pay within 90 days or less.
Approximately 25% of Gaming's sales, primarily in certain emerging gaming
markets such as riverboat casinos and Indian gaming casinos, are financed over
extended periods as long as 36 months and bear interest at rates ranging from 8%
to 14%. While customer financings are normally collateralized by such equipment,
the resale value of the collateral in the event of a default may be less than
the amount financed. Accordingly, Gaming has greater
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exposure to the financial condition of its customers in emerging markets than
has historically been the case in established markets like Nevada and Atlantic
City. In addition, in certain situations, Gaming has participated in the
financing of other gaming-related equipment manufactured by third parties in the
emerging North American gaming markets. International sales by Gaming are
generally consummated on a cash basis or financed over a period of one year or
less.
Wulff provides customer financing for approximately 20% of its sales, and
management expects this practice to increase during the latter half of 1996. See
"Business--German Operations--Operations of Wulff--Sales and Marketing".
SALES TO NON-TRADITIONAL GAMING MARKETS
The continued growth of the non-traditional markets outside of Nevada and
Atlantic City, New Jersey for electronic gaming machines is contingent upon the
public's acceptance of these markets and an ongoing regulatory approval process
by Federal, state and local governmental authorities. The Company cannot predict
which new jurisdictions or markets, if any, will approve the operation of
electronic gaming machines, the timing of any such approval or the level of the
Company's participation in any such markets or that jurisdictions currently
permitting gaming will continue to do so in the future.
INVESTMENT IN MINORITY-OWNED SUBSIDIARY
Alliance invested $1,580,000 for a 50% interest in Kansas Financial
Partners, L.L.C. ("KFP") in 1994. KFP owns a second mortgage in the amount of
$3,205,000, plus accrued interest, secured by a greyhound racing facility in
Frontenac, Kansas owned by Camptown Greyhound Racing, Inc. ("Camptown").
Camptown filed for protection under Chapter 11 of the U.S. Bankruptcy Code in
January of 1996. KFP intends to pursue its rights to protect its collateral,
including foreclosing on the second mortgage, which would require KFP to assume
or pay the first mortgage of approximately $2,000,000. There can be no assurance
that KFP will be able to gain control of the greyhound racing facility and
obtain a license to operate the facility, or that Alliance will be able to
recover its investment in KFP. Additionally, Alliance owns a 50% interest in
Kansas Gaming Partners, LLC ("KGP") which owns the rights to operate gaming
machines and/or casino style gaming at the greyhound racing facility if and when
such gaming becomes legal in Kansas. The Kansas legislature has considered
gaming bills during the 1996 session although none have passed. There can be no
assurance that gaming of any type will ever be legalized in Kansas and
management intends to continue to evaluate the recoverability of its investment.
FOREIGN OPERATIONS
The Company's business in foreign markets is subject to the risks
customarily associated with such activities. These risks include fluctuations in
foreign currency exchange rates and controls, expropriation, nationalization and
other economic, tax and regulatory policies of local governments as well as the
laws and policies of the United States affecting foreign trade and investment.
BGII does not generally enter into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations.
KEY PERSONNEL
The success of the Company will be dependent, to a significant extent, upon
the continued services of a relatively small group of executive personnel. The
loss or unavailability of one or more of such executive officers or the
inability to attract or retain key employees in the future could have an adverse
effect upon the Company's operations. See "Management".
STRICT REGULATION BY GAMING AUTHORITIES
The manufacture and distribution of gaming machines and the conduct of
gaming operations is subject to extensive Federal, state, local and foreign
regulation by various gaming authorities (each, a "Gaming Authority"). Although
the laws and regulations of the various jurisdictions in which the Company
operates vary in their technical requirements and are subject to amendment from
time to time, virtually all of these jurisdictions require licenses, permits,
documentation of the qualification, including evidence of integrity and
financial stability, and other forms of approval for companies engaged in the
manufacture and distribution of gaming machines and gaming operations as well as
for the officers, directors, major stockholders and key personnel of such
companies. Alliance and BGII and their key personnel have obtained, or applied
for,
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all government licenses, registrations, finding of suitability, permits and
approvals necessary for the manufacture and distribution, and operation where
permitted, of their gaming machines in the jurisdictions in which Alliance and
BGII currently do business. However, there can be no assurance that such
licenses, registrations, finding of suitability, permits or approvals will be
given or renewed in the future or that the Company will obtain the licenses
necessary to operate in emerging markets.
The Company was pursuing a permanent manufacturer's license for Gaming as it
relates to the land-based casino in New Orleans. However, in November 1995, the
operator of the land-based casino in New Orleans filed for bankruptcy
reorganization and ceased operations. That action resulted in the termination of
funding for the regulatory operations of the Louisiana Economic Development
Gaming Corporation ("LEDGC") and, shortly thereafter, the Attorney General of
Louisiana took control of the agency and effectively closed its operations and
dismissed its President and employees. The foregoing occurred prior to
completion of review of Gaming's pending application. In addition, the Company's
application for renewal of Gaming's license as a gaming-related casino service
industry in New Jersey is pending before the New Jersey Casino Control
Commission (the "New Jersey Commission"). See "--Ongoing BGII Regulatory
Investigations" and "Gaming Regulation and Licensing".
The Company currently has an agreement with Fair Grounds Corporation,
Jefferson Downs Corporation and Finish Line Management Corporation
(collectively, "Fair Grounds") to be the exclusive operator of video poker
machines at the only racetrack and ten associated OTBs in the greater New
Orleans area. The Louisiana legislature which convened March 25, 1996 has passed
a bill which would allow each parish to decide whether to disallow video poker
devices, riverboat casinos and, in Orleans parish, land-based casinos. If any
parish in which the Company operates elects to disallow video poker devices, the
Company would have to cease its video poker operations there by June 30, 1999.
The Company cannot predict which parishes will so elect; however, if all of the
parishes in which the Company operates so elect, the cessation of the Company's
video poker operations would have a material adverse effect on the operations of
the Company.
OWNERSHIP LIMITATIONS ON SECURITIES OF THE COMPANY
The Gaming Authorities may, in their discretion, require the holder of any
security of the Company, such as the Common Stock, Old Convertible Debentures,
New Convertible Debentures or Series E Special Stock, to file applications, be
investigated and be found suitable to own such security of the Company. If a
record or beneficial owner of Common Stock, Old Convertible Debentures, New
Convertible Debentures or Series E Special Stock is required by a Gaming
Authority to be found suitable, such owner will be required to apply for a
finding of suitability within 30 days after request by such Gaming Authority, or
within such earlier time as required by such Gaming Authority. As a general
matter, assuming a passive investment intent, only owners of specified
percentages of the Company's securities are required to be found suitable,
absent unusual circumstances, which percentage is typically between 10% to 15%.
The applicant for a finding of suitability generally must pay all costs of the
investigation for such finding of suitability and in Nevada, must provide an
initial deposit as determined by the Nevada State Gaming Control Board to pay
the anticipated costs and charges incurred in the investigation and deposit such
additional sums as are required by the Nevada State Gaming Control Board to pay
final costs and charges. If a Gaming Authority determines that a holder is
unsuitable to own the Common Stock, Old Convertible Debentures, New Convertible
Debentures or Series E Special Stock or to have any other relationship with the
Company, then the Company can be sanctioned, including the loss of its
approvals, if without the prior approval of the Gaming Authorities, it: (i) pays
to the unsuitable person any dividend, interest, or any distribution whatsoever;
(ii) recognizes any voting right by such person in connection with such
securities; (iii) pays the unsuitable person remuneration in any form; (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction; or (v) fails to
pursue all lawful efforts to require such person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securites for cash at fair market value.
Any person who fails or refuses to apply for a finding of suitability within
the period of time required or prescribed by a Gaming Authority 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 holder of the Common
Stock, Old
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Convertible Debentures, New Convertible Debentures or Series E Special Stock
found unsuitable and who holds, directly or indirectly, any beneficial ownership
of the Common Stock, Old Convertible Debentures, New Convertible Debentures or
Series E Special Stock beyond such period of time prescribed by a Gaming
Authority may be guilty of a criminal offense. See "Gaming Regulation and
Licensing".
ONGOING BGII REGULATORY INVESTIGATIONS
In May 1994, an investigation of BGII's former VLT Louisiana distributor
culminated in the indictment by a United States grand jury and subsequent
conviction in New Orleans of 18 individuals including certain of the former
distributor's officers, directors, employees and others. In addition, Alan
Maiss, a former director and president of BGII, pled guilty to misprision of a
felony in connection with such investigation. BGII, its subsidiaries and its
current employees were not subject to such investigation. BGII's activities with
regard to its former VLT distributor in Louisiana have been the subject of
current inquiries by gaming regulators. The gaming authorities in Ontario,
Canada, who have investigated the matter, issued a gaming registration to Bally
Gaming, Inc. on February 8, 1996. The New Jersey Commission is currently
reviewing such proceedings in connection with Gaming's application for a license
renewal. An adverse determination by a Gaming Authority in any jurisdiction
could result in the loss of the Company's ability to do business in that
jurisdiction and could have the effect of discouraging gaming operators from
doing business with the Company. In addition, further regulatory scrutiny in
other jurisdictions may follow any such adverse determination. See
"Business--Other Litigation" and "Gaming Regulation and Licensing".
CERTAIN LITIGATION; BALLY TRADE NAME
Bally Entertainment Corporation ("BEC"), the licensor of the "Bally" trade
name, has claimed that a merger between BGII and the Merger Subsidiary will
result in the loss of BGII's right to use such trade name. The "Bally" trade
name is an important component of the Company's marketing strategy. On November
20, 1995, Alliance, the Merger Subsidiary and BGII commenced an action against
BEC in Federal District Court in Delaware seeking a declaratory judgment that
the Company will be permitted to use the "Bally" trade name subsequent to the
Merger. On November 28, 1995, BEC commenced an action against BGII, Gaming,
Alliance and the Merger Subsidiary in Federal District Court in New Jersey
seeking to enjoin such parties from using the "Bally" trade name. On February
16, 1996 BGII received notice from BEC alleging that BGII had violated the
license agreement relating to such trade name by, among other things, granting
to Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which
provides Bally Gaming, Inc.'s revolving line of credit, a security interest in
general intangibles. In such notice, BEC also stated that as a result of the
foregoing, it was immediately terminating the License Agreement. Loss of the
"Bally" trade name, should such loss occur, may have a material adverse effect
on the business, results of operations and financial condition of the Company,
taken as a whole.
WMS has instituted a lawsuit in New York State Court against BGII alleging,
among other things, that $4.8 million is due and payable from BGII to WMS as a
result of the termination of BGII's merger agreement with WMS. Pursuant to the
Merger Agreement, Alliance has agreed to indemnify BGII against such a claim
under certain circumstances.
Prospective purchasers should read the description of these and other
litigation proceedings currently pending against Alliance and BGII, as well as
certain purported class actions, under the captions "Business--Litigation
Relating to the Merger" and "--Other Litigation".
GAMING TAXES AND VALUE ADDED TAXES
Gaming operators are typically subject to significant taxes and fees in
addition to corporate income taxes, and such taxes and fees are subject to
increase at any time. Any material increase in these taxes or fees, which could
occur prospectively or retroactively, would adversely affect the Company. Sales
of Wulff's products in Germany are generally subject to V.A.T. The operations of
Wulff had benefitted from a special tax rebate that was phased out from January
1, 1992 to January 1, 1994. See "Gaming Regulation and Licensing--Germany". In
addition, during 1995, Wulff increased the amount of V.A.T. reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to
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$5.0 million. The Company pays and expects to continue to pay substantial taxes
and fees in Nevada, Louisiana and Mississippi and expects to pay substantial
taxes and fees in any other jurisdiction in which it conducts gaming operations.
ABSENCE OF PUBLIC MARKET; VOLATILITY OF MARKET PRICES
The New Convertible Debentures are being offered to the holders of Old
Convertible Debentures. The Old Convertible Debentures were issued in September
1993 and are eligible for trading in the Private Offerings, Resale and Trading
through Automatic Linkages ("PORTAL") market. The New Convertible Debentures are
newly issued securities for which there is currently no market. Alliance does
not currently intend to list the New Convertible Debentures on any securities
exchange or to seek approval for quotation through any automated quotation
system, nor is there any assurance that the New Convertible Debentures will be
eligible for trading in the PORTAL market. Accordingly, there can be no
assurance as to the development or liquidity of any trading market for the New
Convertible Debentures.
There can be no assurance with respect to the prices at which the Common
Stock will trade after the date hereof. On April 23, 1996, the closing price of
the Common Stock as reported on the NASDAQ National Market System ("NASDAQ NMS")
was $4.00 per share. The trading price of the Common Stock could be subject to
wide fluctuations in response to quarter-to-quarter variations in operating
results and other events or factors, including the success of the Company's
development activities, legislation approving or defeating gaming, other
governmental actions, developments in the gaming industry generally and
announcements by the Company or by competitors. Historical trading volumes for
the Common Stock have been relatively low and research coverage for the Common
Stock is limited. See "Market Price Data and Dividend Policy". In addition, the
stock market, and the gaming industry in particular, have experienced extreme
price and volume fluctuations in a manner which has often been unrelated to the
operating performance of the companies within the gaming industry. These broad
market fluctuations may adversely affect the market price of the Old Convertible
Debentures, New Convertible Debentures, Common Stock, and Series E Special
Stock. A shift away from investor interest in gaming in general could adversely
affect the trading price of the Old Convertible Debentures, New Convertible
Debentures, Common Stock and Series E Special Stock.
DILUTION; OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES
The shares of Common Stock to be issued upon Automatic Conversion of the New
Convertible Debentures will be issued at a price significantly above book value
per share, so the holders of New Convertible Debentures will, upon the Automatic
Conversion, suffer immediate substantial dilution. See "Dilution". Moreover,
Alliance has outstanding options, warrants and convertible securities, many of
which are held by management and principal stockholders, which can be exercised
for or converted into in the aggregate approximately 18,200,000 shares of Common
Stock, and within 30 days of the consummation of the Merger, Alliance will issue
additional options exercisable for 150,000 shares of Common Stock. In addition,
the Company will assume BGII's obligations with respect to each outstanding
stock option and warrant to purchase shares of BGII common stock, which options
and warrants will represent an aggregate of 552,500 shares (based on the
assumption that all eligible employees other than Messrs. Gillman, Jenkins and
Kloss elect to have their BGII options exercisable for the number of shares of
Common Stock equal to the number of shares of BGII common stock subject thereto)
and 112,500 shares of Common Stock, respectively (assuming each BGII warrant
will be exercisable for the Merger consideration per share of BGII common stock
subject to such warrant at the exercise price per share of such BGII warrant in
effect immediately prior to the Effective Time and further assuming a price of
$4.00 per share of Common Stock). Further, warrants exercisable for an
additional 2,500,000 shares of Common Stock will be issued to Alliance
affiliates in connection with the Merger, and warrants exercisable for an
additional 250,000 shares of Common Stock have been issued and will vest when
the price of the Common Stock reaches $13 per share following consummation of
the Merger or any similar transaction. Additionally, approximately 1,018,000
shares of Common Stock remain available for issuance under the Alliance 1984
Stock Option Plan and the Alliance 1991 Stock Option Plan. To the extent such
outstanding options, warrants and other rights to purchase Common Stock are
exercised, there will be further significant dilution to the shareholders of the
Company. Additionally, if the Company consummates further acquisitions or other
transactions utilizing the
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Company's securities, significant dilution to the Company's shareholders may
result. See "Dilution", "Security Ownership of Certain Beneficial Holders and
Management" and "Certain Relationships and Related Transactions."
IMPACT ON NON-TENDERING HOLDERS
Holders of Old Convertible Debentures who do not exchange their Old
Convertible Debentures pursuant to the Exchange Offer will continue to be
subject to the restrictions on transfer of such Old Convertible Debentures as
set forth in the legend thereon as a consequence of the issuance of the Old
Convertible Debentures pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act and applicable
state securities laws. Pursuant to a registration rights agreement between
Alliance and the holders of the Old Convertible Debentures, Alliance is required
to maintain an effective shelf registration statement with respect to the Old
Convertible Debentures at all times prior to September 21, 1996, and in the
event that Alliance fails in this obligation for a period exceeding 90 days in
the aggregate per year, Liquidated Damages accrue daily and become payable on
each Interest Payment Date to the holders of the Old Convertible Debentures. The
amount of Liquidated Damages accrued and unpaid to the date hereof is $ per
$1,000 principal amount of Old Convertible Debentures, and additional Liquidated
Damages are currently accruing at the rate of $.05 per $1,000 principal amount
per week. See "Comparison of New Convertible Debentures and Old Convertible
Debentures -- Registration Rights; Liquidated Damages". Based on interpretations
of the staff of the Commission, New Convertible Debentures issued pursuant to
the Exchange Offer in exchange for Old Convertible Debentures may be offered for
resale, resold or otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of Alliance within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, PROVIDED that such New Convertible
Debentures are acquired in the ordinary course of such holders' businesses and
such holders have no arrangement with any person to participate in the
distribution of such New Convertible Debentures. However, to comply with the
securities laws of certain jurisdictions, if applicable, the New Convertible
Debentures may not be offered or sold unless they have been registered or
qualified for sale in such jurisdictions or an exemption from registration or
qualification is available and complied with. Holders of New Convertible
Debentures will be entitled to receive the Additional Payment on the first
Interest Payment Date after issuance of the New Convertible Debentures, but will
not be entitled to any Liquidated Damages.
The Old Convertible Debentures are not traded in an established market.
After the consummation of the Exchange Offer, it is anticipated that the
outstanding principal amount of Old Convertible Debentures may be significantly
reduced. To the extent that any such Old Convertible Debentures are tendered in
the Exchange Offer, any trading market for such Old Convertible Debentures may
be significantly more limited. A security with a smaller outstanding principal
amount available for trading may command a lower price than would a comparable
security with a larger outstanding principal amount. Therefore, to the extent
that Old Convertible Debentures are tendered and accepted pursuant to the
Exchange Offer, the reduced outstanding principal amount may adversely affect
the liquidity and market price of the unpurchased Old Convertible Debentures.
SUBORDINATION OF OLD CONVERTIBLE DEBENTURES TO SENIOR NOTES
The Senior Notes to be issued in the Senior Notes Offering will be
considered "Senior Indebtedness" as defined in the Old Convertible Indenture.
Therefore, the payment of the principal of (and premium, if any), interest on,
Liquidated Damages with respect to, and redemptions at the option of the holders
of Old Convertible Debentures will be subordinated in right of payment to prior
payment in full of all holders of the Senior Notes. In addition, upon any
payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, receivership, reorganization, assignment for the
benefit of creditors, marshalling of assets and liabilities or any bankruptcy,
insolvency or similar proceedings of Alliance, the holders of all Senior Notes
will first be entitled to receive payment in full in cash of all amounts due or
to become due thereon before the holders of the Old Convertible Debentures will
be entitled to receive any applicable payments. The Senior Notes will also be
Senior Indebtedness as defined in the New Convertible Indenture; however, as the
Senior Notes are expected to be issued only upon the consummation of the Merger
(in which event the New Convertible Debentures would be automatically converted
into Common Stock or Series E
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Special Stock), the holders of New Convertible Debentures should not be affected
by this subordination. For further information with respect to the subordination
of Old Convertible Debentures and New Convertible Debentures to Senior
Indebtedness, see "Terms of the New Convertible Debentures -- Subordination".
SHORTER MATURITY OF NEW CONVERTIBLE DEBENTURES
The New Convertible Debentures will mature on September 15, 2002, while the
Old Convertible Debentures will mature on September 15, 2003. While the shorter
maturity of the New Convertible Debentures may enhance the value of the debt
element of the New Convertible Debentures compared to the Old Convertible
Debentures, the shorter maturity will also result in a decreased value of the
conversion feature of the New Convertible Debentures relative to the Old
Convertible Debentures.
LIMITATIONS ON NET OPERATING LOSSES; DISCHARGE OF DEBT INCOME
Alliance had net operating loss carryovers ("NOLs") into 1996 of
approximately $46 million, which Alliance believes are not currently subject to
an annual limitation on their utilization under Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). There is a material risk that the
Merger and the related financings will result in an "ownership change" under
Section 382 of the Code, in which event the use of these NOLs will likely be
subject to an annual limitation of approximately $5 million on their
utilization.
HART-SCOTT-RODINO FILING
Any person acquiring New Convertible Debentures pursuant to the Exchange
Offer may be required to file a Premerger Notification and Report Form (an "HSR
Form") pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act") with respect to the Automatic Conversion or any optional
conversion of the New Convertible Debentures into Common Stock. In general, if
(i) a person acquiring New Convertible Debentures pursuant to the Exchange Offer
would hold, upon consummation of the Automatic Conversion or any optional
conversion, Common Stock exceeding $15 million in value, (ii) certain
jurisdictional requirements are met and (iii) no exemption applies, then the HSR
Act would require that such person file an HSR Form and observe the applicable
waiting period under the HSR Act prior to acquiring such Common Stock. If such
waiting period has not expired or been terminated at the date of the Automatic
Conversion or any optional conversion, Alliance may be required to deliver such
recipient's Common Stock into an escrow facility pending the expiration or
termination of such waiting period.
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THE EXCHANGE OFFER
GENERAL
Alliance hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange an aggregate principal amount of up to $85,000,000 of New Convertible
Debentures for a like principal amount of the issued and outstanding Old
Convertible Debentures. Alliance proposes to consummate the Exchange Offer on or
before , 1996. It is Alliance's intention to exchange all Old
Convertible Debentures tendered to and accepted by Alliance pursuant to the
Exchange Offer for New Convertible Debentures and to retire all such Old
Convertible Debentures.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, Alliance will accept for exchange
Old Convertible Debentures which are properly tendered on or prior to the
Expiration Date and not withdrawn as permitted below.
As of the date of this Prospectus, $85,000,000 aggregate principal amount of
Old Convertible Debentures was outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about , 1996, to all
holders of Old Convertible Debentures known to Alliance. Alliance's obligation
to accept Old Convertible Debentures for exchange pursuant to the Exchange Offer
is subject to certain conditions as set forth in "-- Conditions to the Exchange
Offer."
Although Alliance has no present intention to do so, it reserves the right,
subject to applicable law and any restrictions imposed by applicable debt
instruments, to purchase or make offers for any Old Convertible Debentures that
remain outstanding subsequent to the Expiration Date. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
Tendering holders of Old Convertible Debentures will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the conversion of Old Convertible
Debentures pursuant to the Exchange Offer. Alliance will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer.
CONDITIONS TO THE EXCHANGE OFFER
The obligation of Alliance to consummate the Exchange Offer is subject to
certain conditions, including, among others, the requirements that (i) the
stockholders of Alliance shall have approved the issuance of the New Convertible
Debentures and of the Common Stock and Series E Special Stock upon conversion
thereof, (ii) the Nevada Gaming Commission and the Mississippi Gaming Commission
shall each have approved the issuance of the New Convertible Debentures and of
the Common Stock and Series E Special Stock upon conversion thereof and (iii)
each of the foregoing shall have occurred on or prior to , 1996.
Furthermore, notwithstanding any other provision of the Exchange Offer, Alliance
shall not be required to accept for exchange, or to issue New Convertible
Debentures in exchange for, any Old Convertible Debentures, subject to any
applicable rules or regulations of the Commission, and may terminate or amend
the Exchange Offer, if at any time before the acceptance of such Old Convertible
Debentures for exchange, any of the following events shall have occurred:
(1) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, in
connection with the Exchange Offer or any other aspect of the Transaction
that is, or is reasonably likely to be, in the reasonable judgment of
Alliance, materially adverse to the business, operations, properties,
condition (financial or otherwise), assets, liabilities or prospects of the
Company;
(2) there shall have occurred any material adverse development, in the
reasonable judgment of Alliance, with respect to any action or proceeding
concerning the Company;
(3) an order, statute, rule, regulation, executive order, notice,
ruling, stay, decree, judgment or injunction shall have been proposed,
enacted, entered, issued, promulgated, enforced or deemed
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applicable by an court or governmental, regulatory or administrative agency
or instrumentality that, in the reasonable judgment of Alliance, would or
might prohibit, prevent, restrict or delay consummation of the Transaction
or that is, or is reasonably likely to be, materially adverse to the
business, operations, properties, condition (financial or otherwise),
assets, liabilities or prospects of the Company;
(4) there shall have occurred or be likely to occur any event affecting
the business or financial affairs of the Company or which, in the reasonable
judgment of Alliance, would or might prohibit, prevent, restrict or delay
consummation of the Exchange Offer or any other part of the Transaction, or
that will, or is reasonably likely to, materially impair the contemplated
benefits to Alliance or the Company of the Transaction, including the
Exchange Offer, or otherwise result in the consummation of the Transaction,
including the Exchange Offer, not being or not reasonably likely to be in
the best interests of Alliance and the Company;
(5) the trustee under the New Convertible Indenture (the "Trustee")
shall have objected in any respect to, or taken any action that could, in
the reasonable judgment of Alliance, adversely affect the consummation of,
the Exchange Offer or any other part of the Transaction, or shall have taken
any action that challenges the validity or effectiveness of the procedures
used by Alliance in the making of the Exchange Offer or the acceptance of,
or payment for, any of the Old Convertible Debentures or any other part of
the Transaction;
(6) Alliance shall not have received from any federal, state or local
governmental, regulatory or administrative agency or instrumentality, any
approval, authorization or consent that, in the reasonable judgment of
Alliance, is necessary to effect the Exchange Offer or any other part of the
Transaction, including without limitation the approval of the Nevada Gaming
Commission and the Mississippi Gaming Commission for the issuance of the New
Convertible Debentures;
(7) there shall have occurred (a) any general suspension of, or
limitation on prices for, trading in securities in the United States
securities or financial markets, (b) any significant adverse change in the
price of the Old Convertible Debentures or Common Stock in the United States
securities or financial markets, (c) a material impairment in the trading
market for debt or equity securities, (d) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States, (e) any limitation (whether or not mandatory) by any government or
governmental, administrative or regulatory authority or agency, domestic or
foreign, on, or other event that, in the reasonable judgment of Alliance,
might affect, the extension of credit by banks or other lending
institutions, (f) a commencement of a war or armed hostilities or other
national or international calamity directly or indirectly involving the
United States, (g) any imposition of a general suspension of trading or
limitation of prices on the New York Stock Exchange or NASDAQ, or (h) in the
case of any of the foregoing existing on , 1996, a material
acceleration or worsening thereof; or
(8) any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus is a part.
All the foregoing conditions are for the sole benefit of Alliance and may be
asserted by Alliance regardless of the circumstances giving rise to such
conditions and may be waived by Alliance (except for any required approvals of
the Nevada Gaming Commission and the Mississippi Gaming Commission), in whole or
in part, at any time and from time to time, in the reasonable discretion of
Alliance. The failure by Alliance at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any such right, and each such right shall
be deemed an ongoing right which may be asserted at any time and from time to
time.
If any of the conditions set forth in this section shall not be satisfied,
Alliance may, subject to applicable law, (i) terminate the Exchange Offer and
return all Old Convertible Debentures tendered pursuant to the Exchange Offer to
tendering holders; (ii) extend the Exchange Offer and retain all tendered Old
Convertible Debentures, subject to the right of a tendering holder to withdraw
his or her Old Convertible Debentures, until the Expiration Date for the
extended Exchange Offer; (iii) amend the terms of the Exchange Offer or modify
the consideration to be paid by Alliance pursuant to the Exchange Offer; or (iv)
waive the unsatisfied
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conditions (except for any required approvals of the Nevada Gaming Commission
and the Mississippi Gaming Commission) with respect to the Exchange Offer and
accept all Old Convertible Debentures tendered pursuant to the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Convertible Debentures being tendered.
EXPIRATION; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 12:00 midnight, New York City time, on
, 1996. Alliance expressly reserves the right, in its reasonable
discretion, at any time or from time to time, to extend the period of time
during which the Exchange Offer is open by giving oral or written notice of such
extension to the Exchange Agent and making a public announcement thereof prior
to 9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. There can be no assurance that Alliance will exercise
its right to extend the Exchange Offer or that the Exchange Offer will be
otherwise extended. During any extension of the Exchange Offer, all Old
Convertible Debentures previously tendered pursuant thereto and not exchanged or
withdrawn will remain subject to the Exchange Offer and may be accepted for
exchange by Alliance at the expiration of the Exchange Offer subject to the
right of a tendering holder to withdraw his Old Convertible Debentures. See "The
Exchange Offer -- Withdrawal of Tenders". Alliance will not pay accrued interest
or Liquidated Damages with respect to Old Convertible Debentures that are
tendered and accepted in the Exchange Offer, and under no circumstances will
interest be paid by Alliance by reason of any extension of the Exchange Offer.
Alliance also expressly reserves the right, subject to applicable law, to
delay acceptance for exchange of any Old Convertible Debentures or, regardless
of whether such Old Convertible Debentures were theretofore accepted for
exchange, to delay the exchange of any Old Convertible Debentures pursuant to
the Exchange Offer or to terminate the Exchange Offer and not accept for
exchange any Old Convertible Debentures, by giving oral or written notice of
such delay or termination to the Exchange Agent, if any of the conditions to the
Exchange Offer specified herein fail to be satisfied . The reservation by
Alliance of the right to delay exchange or acceptance for exchange of Old
Convertible Debentures is subject to the provisions of Rule 13e-4(f)(5) under
the Exchange Act, which requires that Alliance pay the consideration offered or
return the Old Convertible Debentures deposited by or on behalf of holders
thereof promptly after the termination or withdrawal of the Exchange Offer.
Any extension, delay, termination or amendment of the Exchange Offer will be
followed as promptly as practicable by a public announcement thereof. Without
limiting the manner in which Alliance may choose to make a public announcement
of any extension, delay, termination or amendment of the Exchange Offer,
Alliance shall have no obligation to publish, advertise or otherwise communicate
any such public announcement, other than by issuing a release to the Dow Jones
News Service, except in the case of an announcement of an extension of the
Exchange Offer, in which case Alliance shall have no obligation to publish,
advertise or otherwise communicate such announcement, other than by issuing a
notice of such extension by press release or other public announcement no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
If Alliance increases or decreases or otherwise materially changes the
amount of consideration currently offered, the Exchange Offer will remain open
at least ten business days from the date that Alliance first publishes, sends or
gives notice, by public announcement or otherwise, of such increase or decrease.
Alliance has no current intention to increase or decrease or otherwise
materially changes the amount of consideration currently offered.
If Alliance materially changes the terms of the Exchange Offer or the
information concerning the Exchange Offer, Alliance will extend the Exchange
Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(2) promulgated
under the Exchange Act. These rules provide that the minimum period during which
an offer must remain open following a material change in the terms of the offer
or information concerning the offer (other than a change in consideration
offered or a change in percentage of securities sought) will depend on the facts
and circumstances, including the relative materiality of such terms or
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information. The Commission has stated that, as a general rule, it is of the
view than an offer should remain open for a minimum of five business days from
the date that notice of such a material change is first published, sent or
given.
PROCEDURES FOR TENDERING
TENDERS OF OLD CONVERTIBLE DEBENTURES. For a holder validly to tender Old
Convertible Debentures pursuant to the Exchange Offer, a properly completed and
validly executed Letter of Transmittal (or a facsimile thereof), together with
any signature guarantees and any other documents required by the instructions to
the Letter of Transmittal, must be received by the Exchange Agent on or prior to
the Expiration Date at one of its addresses set forth on the back cover page of
this Prospectus. In addition, either (i) the Exchange Agent must receive
certificates for tendered Old Convertible Debentures at any of such addresses or
(ii) such Old Convertible Debentures must be transferred pursuant to the
procedures for book-entry transfer described below and a confirmation of such
book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date. A holder who desires to tender Old Convertible Debentures and
who cannot comply with the procedures set forth herein for tender on a timely
basis or whose Old Convertible Debentures are not immediately available must
comply with the procedures for guaranteed delivery set forth below. LETTERS OF
TRANSMITTAL, CERTIFICATES REPRESENTING OLD CONVERTIBLE DEBENTURES AND
CONFIRMATIONS OF BOOK-ENTRY TRANSFER SHOULD BE SENT ONLY TO THE EXCHANGE AGENT,
AND NOT TO ALLIANCE, THE TRUSTEE OR THE INFORMATION AGENT.
DELIVERY OF LETTERS OF TRANSMITTAL. If the certificates for Old Convertible
Debentures are registered in the name of a person other than the signer of the
Letter of Transmittal relating thereto, then in order to tender such Old
Convertible Debentures pursuant to the Exchange Offer, the certificates
evidencing such Old Convertible Debentures must be endorsed or accompanied by
appropriate bond powers signed exactly as the name or names of the registered
owner or owners appear on the certificates, with the signatures on the
certificates or bond powers guaranteed as provided below.
Any beneficial owner whose Old Convertible Debentures are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender Old Convertible Debentures should contact such registered
holder promptly and instruct such registered holder to tender the Old
Convertible Debentures on such beneficial owner's behalf. If any beneficial
owner wishes to tender Old Convertible Debentures himself or herself, that
beneficial owner must, prior to completing and executing the Letter of
Transmittal and, where applicable, delivering his or her Old Convertible
Debentures, either make appropriate arrangements to register ownership of the
Old Convertible Debentures in such beneficial owner's name or follow the
procedures described in the immediately preceding paragraph. The transfer of
record ownership may take a considerable amount of time.
THE METHOD OF DELIVERY OF OLD CONVERTIBLE DEBENTURES, LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER TENDERING THE OLD CONVERTIBLE DEBENTURES. IF DELIVERY IS TO
BE MADE BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
BOOK-ENTRY TRANSFER. Promptly after the commencement of the Exchange Offer,
the Exchange Agent will seek to establish a new account or utilize an existing
account with respect to the Old Convertible Debentures at each of The Depository
Trust Company, the Midwest Securities Trust Company and the Philadelphia
Depository Trust Company (each of the foregoing, a "Book-Entry Transfer
Facility"). Any financial institution that is a participant in the Book-Entry
Transfer Facility system and whose name appears on a security position listing
as the owner of Old Convertible Debentures may make book-entry delivery of such
Old Convertible Debentures by causing the Book-Entry Transfer Facility to
transfer such Old Convertible Debentures into the Exchange Agent's account in
accordance with the Book-Entry Transfer Facility's procedures for such transfer.
However, although delivery of Old Convertible Debentures may be effected through
book-entry transfer at a Book-Entry Transfer Facility, the applicable Letter of
Transmittal (or a facsimile thereof), properly completed and validly executed,
with any required signature guarantees and any other required documents, must,
in any case, be received by the Exchange Agent at one of its addresses set
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<PAGE>
forth on the back cover page of this Prospectus on or prior to the Expiration
Date, or the tendering holder must comply with the guaranteed delivery
procedures described below. Delivery of the Letter of Transmittal and any other
required documents to a Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
SIGNATURE GUARANTEES. Signatures on the Letter of Transmittal must be
guaranteed by a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., or by a
commercial bank or trust company having an office or correspondent in the United
States or by any other "eligible guarantor institution" as defined in Rule
17Ad-15 under the Exchange Act (each of the foregoing being an "Eligible
Institution") unless (a) the Letter of Transmittal is signed by the registered
holder of the Old Convertible Debentures tendered therewith (or by a participant
in one of the Book-Entry Transfer Facilities whose name appears on a security
position listing as the owner of such Old Convertible Debentures) and neither
the "Special Payment Instructions" box nor the "Special Delivery Instructions"
box of the Letter of Transmittal is completed or (b) the Old Convertible
Debentures tendered therewith are tendered for the account of an Eligible
Institution. Signatures must also be guaranteed by an Eligible Institution on
any notice of withdrawal with respect to Old Convertible Debentures tendered
pursuant to a Letter of Transmittal with signature guarantees.
GUARANTEED DELIVERY. If a holder desires to tender Old Convertible
Debentures pursuant to the Exchange Offer and (a) certificates representing such
Old Convertible Debentures are not immediately available, (b) time will not
permit such holder's Letter of Transmittal, certificates evidencing such Old
Convertible Debentures or other required documents to reach the Exchange Agent
on or prior to the Expiration Date or (c) such holder cannot complete the
procedures for book-entry transfer on or prior to the Expiration Date, a tender
may be effected if all the following are complied with:
(a) such tender is made by or through an Eligible Institution;
(b) on or prior to the Expiration Date, the Exchange Agent has received
from such Eligible Institution, at one of the addresses of the Exchange
Agent set forth on the back cover page of this Prospectus, a properly
completed and validly executed Notice of Guaranteed Delivery (by telegram,
telex, facsimile transmission, mail or hand delivery) in substantially the
form accompanying this Prospectus, setting forth the name and address of the
registered holder and the principal amount or number of Old Convertible
Debentures being tendered and stating that the tender is being made thereby
and guaranteeing that, within three New York Stock Exchange trading days
after the date of the Notice of Guaranteed Delivery, the Letter of
Transmittal (or a facsimile thereof), properly completed and validly
executed, together with certificates evidencing the Old Convertible
Debentures in proper form for transfer (or confirmation of book-entry
transfer of such Old Convertible Debentures into the Exchange Agent's
account with a Book-Entry Transfer Facility), and any other documents
required by the Letter of Transmittal and the instructions thereto, will be
deposited by such Eligible Institution with the Exchange Agent; and
(c) the Letter of Transmittal (or a facsimile thereof), properly
completed and validly executed, together with certificates evidencing the
Old Convertible Debentures in proper form for transfer (or confirmation of
book-entry transfer of such Old Convertible Debentures into the Exchange
Agent's account with a Book-Entry Transfer Facility) and any other documents
required by the Letter of Transmittal and the instructions thereto, are
received by the Exchange Agent within three New York Stock Exchange trading
days after the date of such Notice of Guaranteed Delivery.
LOST OR MISSING CERTIFICATES. If a holder desires to tender Old Convertible
Debentures pursuant to the Exchange Offer but the certificates evidencing such
Old Convertible Debentures have been mutilated, lost,
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<PAGE>
stolen or destroyed, such holder should write to or telephone the Trustee, at
the address or telephone number listed below, about procedures for obtaining
replacement certificates for such Old Convertible Debentures or arranging for
indemnification or any other matter that requires handling by the Trustee:
The Bank of New York
101 Barclay Street
New York, New York 10286
((212) 495-1784)
OTHER MATTERS. Notwithstanding any other provision of the Exchange Offer,
delivery of the New Convertible Debentures for Old Convertible Debentures
tendered and accepted pursuant to the Exchange Offer will occur only after
timely receipt by the Exchange Agent of certificates representing such Old
Convertible Debentures in proper form for transfer (or confirmation of
book-entry transfer of such Convertible Debentures into the Exchange Agent's
account with a Book-Entry Transfer Facility), together with properly completed
and validly executed Letters of Transmittal (or a facsimile thereof) and any
other required documents.
Tenders of Old Convertible Debentures pursuant to any of the procedures
described above and acceptance thereof by Alliance will constitute a binding
agreement between Alliance and the tendering holder upon the terms and subject
to the conditions of the Exchange Offer.
All questions as to the form of all documents, the validity (including time
of receipt) and acceptance of tenders of the Old Convertible Debentures will be
determined by Alliance, in its reasonable discretion, and Alliance's
determination shall be final and binding. Alternative, conditional or contingent
tenders of Old Convertible Debentures will not be valid. Alliance reserves the
absolute right to reject any or all tenders of Old Convertible Debentures that
are not in proper form or the acceptance of which, in Alliance's opinion, would
be unlawful. Alliance also reserves the absolute right to waive any defects,
irregularities or conditions of tender as to particular Old Convertible
Debentures. If Alliance waives its right to reject a defective, irregular or
conditional tender of Old Convertible Debentures, the holder will be entitled to
New Convertible Debentures in exchange for such Old Convertible Debentures.
Alliance's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding. Any defect or irregularity in connection with tenders of Old
Convertible Debentures must be cured within such time as Alliance determines,
unless waived by Alliance. Tenders of Old Convertible Debentures shall not be
deemed to have been made until all defects and irregularities have been waived
by Alliance or cured. None of Alliance, the Exchange Agent, the Information
Agent, the Trustee or any other person will be under any duty to give notice of
any defects or irregularities in tenders of Old Convertible Debentures, or will
incur any liability to holders for failure to give any such notice.
WITHDRAWAL OF TENDERS
Tenders of Old Convertible Debentures may be withdrawn at any time until the
Expiration Date. Thereafter, such tenders are irrevocable, except that they may
be withdrawn at any time after , 1996 unless accepted for exchange
prior to that date.
Holders who wish to exercise their right of withdrawal with respect to the
Exchange Offer must give written notice of withdrawal, delivered by mail or hand
delivery or facsimile transmission, to the Exchange Agent at one of its
addresses set forth on the back cover page of this Prospectus on or prior to the
Expiration Date or at such other time as otherwise provided for herein. In order
to be effective, a notice of withdrawal must specify the name of the person who
deposited the Old Convertible Debentures to be withdrawn (the "Depositor"), the
name in which the Old Convertible Debentures are registered, if different from
that of the Depositor and the principal amount of the Old Convertible Debentures
to be withdrawn. If tendered Old Convertible Debentures to be withdrawn have
been delivered or identified through confirmation of book-entry transfer to the
Exchange Agent, the notice of withdrawal also must specify the name and number
of the account at the Book-Entry Transfer Facility to be credited with the
withdrawn Old Convertible Debentures. The notice of withdrawal must be signed by
the registered holder of such Old Convertible Debentures in the same manner as
the applicable Letter of Transmittal (including any required signature
guarantees), or be accompanied by evidence satisfactory to Alliance that the
person withdrawing the tender has succeeded to
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<PAGE>
the beneficial ownership of such Old Convertible Debentures. Withdrawals of
tenders of Old Convertible Debentures may not be rescinded, and any Old
Convertible Debentures withdrawn will be deemed not validly tendered thereafter
for purposes of the Exchange Offer. However, properly withdrawn Old Convertible
Debentures may be tendered again at any time prior to the Expiration Date by
again following the procedures for tendering Old Convertible Debentures
described herein.
All questions as to the form and validity (including time of receipt) of any
withdrawal of tendered Old Convertible Debentures will be determined by
Alliance, in its sole discretion, and Alliance's determination shall be final
and binding. None of Alliance, the Exchange Agent, the Trustee, the Information
Agent or any other person will be under any duty to give notification of any
defect or irregularity in any withdrawal of tendered Old Convertible Debentures,
or will incur any liability for failure to give any such notification.
If Alliance is delayed in its acceptance for conversion of any Old
Convertible Debentures or is unable to accept for conversion or convert any Old
Convertible Debentures pursuant to the Exchange Offer for any reason, then,
without prejudice to Alliance's rights hereunder, tendered Old Convertible
Debentures may be retained by the Exchange Agent on behalf of Alliance and may
not be withdrawn (subject to Rule 13e-4(f)(5) under the Exchange Act, which
requires that an issuer making a tender offer pay the consideration offered, or
return the tendered securities, promptly after the termination or withdrawal of
a tender offer), except as otherwise permitted hereby.
ACCEPTANCE OF OLD CONVERTIBLE DEBENTURES; DELIVERY OF NEW CONVERTIBLE DEBENTURES
The acceptance of Old Convertible Debentures validly tendered and not
withdrawn will be made as promptly as practicable after the Expiration Date. For
purposes of the Exchange Offer, Alliance will be deemed to have accepted for
exchange validly tendered Old Convertible Debentures if, as and when Alliance
gives oral or written notice thereof to the Exchange Agent. Such notice of
acceptance shall constitute a binding contract between Alliance and the
tendering holder pursuant to which Alliance will be obligated to exchange the
Old Convertible Debentures into a like principal amount of New Convertible
Debentures, and upon such notice of acceptance the tendered Old Convertible
Debentures will cease to be treated as outstanding indebtedness of Alliance.
Subject to the terms and conditions of the Exchange Offer, delivery of
certificates representing the New Convertible Debentures issued in respect of
Old Convertible Debentures accepted and exchanged pursuant to the Exchange Offer
will be made by the Exchange Agent as soon as practicable after receipt of such
notice. The Exchange Agent will act as agent for the tendering holders of Old
Convertible Debentures for the purposes of receiving the New Convertible
Debentures from Alliance and transmitting the New Convertible Debentures to the
tendering holders. Tendered Old Convertible Debentures not accepted for exchange
by Alliance, if any, will be returned without expense to the tendering holder of
such Old Convertible Debentures (or, in the case of Old Convertible Debentures
tendered by book-entry transfer into the Exchange Agent's account at a
Book-Entry Transfer Facility, such Old Convertible Debentures will be credited
to an account maintained at a Book-Entry Transfer Facility) as promptly as
practicable following the Expiration Date.
EXCHANGE AGENT AND INFORMATION AGENT
[ ] has been appointed Exchange Agent for the
Exchange Offer. All deliveries and correspondence sent to the Exchange Agent
should be directed to one of its addresses set forth on the back cover page of
this Prospectus. Requests for assistance or additional copies of this Prospectus
and the Letter of Transmittal should be directed to [ ], as
Information Agent, at its address set forth on the back cover page of this
Prospectus. Alliance has agreed to pay the Exchange Agent and the Information
Agent customary fees for their services and to reimburse the Exchange Agent and
the Information Agent for their reasonable out-of-pocket expenses in connection
therewith. Alliance also has agreed to indemnify the Exchange Agent and the
Information Agent for certain liabilities, including certain liabilities under
the federal securities laws.
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DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES
The New Convertible Debentures are a new issue of securities and will be
issued under the New Convertible Indenture. The terms of the New Convertible
Debentures include those stated in the New Convertible Indenture and those made
part of the New Convertible Indenture by the Trust Indenture Act of 1939, as
amended (the "TIA"). The New Convertible Debentures are subject to all such
terms and the holders of the New Convertible Debentures are referred to the New
Convertible Indenture and the TIA for a statement of those terms. The following
summary of certain provisions of the New Convertible Debentures and the New
Convertible Indenture does not purport to be complete, and is subject to, and is
qualified in its entirety by reference to, all the provisions of the New
Convertible Indenture, including the definitions therein of certain capitalized
terms which are used but not defined herein. The terms of the New Convertible
Debentures are identical in all material respects to the terms of the Old
Convertible Debentures, except for maturity, provision for mandatory conversion
in the event of the Merger and absence of certain transfer restrictions and
registration rights relating to the Old Convertible Debentures. See "Comparison
of New Convertible Debentures and Old Convertible Debentures".
GENERAL
The New Convertible Debentures are unsecured subordinated obligations of
Alliance, are limited to $85,000,000 aggregate principal amount and will mature
on September 15, 2002. The New Convertible Debentures bear interest at the rate
of 7 1/2% per annum from the most recent interest payment date to which interest
has been paid or provided for. Interest on the New Convertible Debentures is
payable semi-annually on March 15 and September 15 of each year, to the holders
of record of the New Convertible Debentures at the close of business on the
preceding March 1 or September 1, as the case may be. Principal of (and premium,
if any) and interest on the New Convertible Debentures are payable, the transfer
of the New Convertible Debentures is registerable, and the New Convertible
Debentures are convertible, at the office of The Bank of New York, 101 Barclay
Street, New York, New York 10286. Interest is computed on the basis of a 360-day
year of twelve 30-day months.
CONVERSION AT ELECTION OF HOLDER
The New Convertible Indenture provides that the New Convertible Debentures
or portions thereof (which are $1,000 or integral multiples thereof) are
convertible into shares of Common Stock at any time prior to the close of
business on the second Business Day prior to maturity, initially at a conversion
price of $10 per share, subject to adjustment as provided below (the "Conversion
Price"). The right to convert New Convertible Debentures called for redemption
will expire at the close of business on the fifth Business Day prior to the
redemption date, except that in the case of redemption at the option of the
holder as a result of a Redemption Event (as defined below), such right will
terminate upon receipt by Alliance of written notice of the exercise of such
option unless Alliance subsequently fails to pay the Redemption Price (as
defined below). The holders of New Convertible Debentures who convert their New
Convertible Debentures after a record date but prior to the date which is five
business days prior to an Interest Payment Date are entitled to receive the
interest payment made on such interest payment date if the conversion is made
following the issuance by Alliance of a notice of redemption. Otherwise, holders
of New Convertible Debentures converted after a record date but prior to an
interest payment date will not be entitled to receive such interest payment. For
information as to notices of redemption, see "Redemption at Alliance's Option".
The Conversion Price is subject to adjustment in certain events, including
(i) dividends (and other distributions) payable in shares of Common Stock on any
class of capital stock of Alliance, (ii) the issuance to all holders of shares
of Common Stock or rights or warrants entitling them to subscribe for or
purchase shares of Common Stock at less than the current market price (as
defined in the New Convertible Indenture), (iii) subdivisions, combinations and
reclassifications of shares of Common Stock, (iv) certain tender offers by
Alliance or any subsidiary of Alliance for shares of Common Stock and (v)
distributions by Alliance to all holders of shares of Common Stock of evidences
of indebtedness, securities other than shares of Common Stock or other assets
(including securities but excluding those dividends, rights, warrants and
distributions referred to above and excluding dividends and distributions paid
in cash or other property out of the retained earnings of Alliance), provided
that, in the event that the fair market value of the assets,
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<PAGE>
evidences of indebtedness or other securities so distributed applicable to one
share of Common Stock equals or exceeds such current market price per share of
Common Stock or such current market price exceeds such fair market value by less
than $0.10 per share, the conversion price will not be adjusted until such time
as the cumulative amount of all such distributions exceed $0.10 per share.
In addition to the foregoing adjustments, Alliance is permitted to make such
reductions in the Conversion Price as it considers to be advisable in order that
any event treated for Federal income tax purposes as a dividend of stock or
stock rights will not be taxable to the holders of the shares of Common Stock.
In case of certain reclassifications, consolidations or mergers to which
Alliance is a party or the transfer of all or substantially all of the assets of
Alliance, each New Convertible Debenture then outstanding would, without the
consent of any holders of New Convertible Debentures, become convertible only
into the kind and amount of securities, cash and other property receivable upon
the reclassification, consolidation, merger or transfer by a holder of the
number of shares of Common Stock into which such New Convertible Debentures
might have been converted immediately prior to such reclassification,
consolidation, merger or transfer (assuming such holder of shares of Common
Stock failed to exercise any rights of election and received per share the kind
and amount received per share by a plurality of non-electing shares).
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, Alliance will pay a cash adjustment based upon market price (as
determined in accordance with the New Convertible Indenture). New Convertible
Debentures surrendered for conversion between the record date for an interest
payment and the interest payment date (except New Convertible Debentures called
for redemption on a redemption date within such period) must be accompanied by
payment of an amount equal to the interest thereon which the registered holder
is to receive on such interest payment date. A New Convertible Debenture
converted on an interest payment date need not be accompanied by any payment and
the interest on the principal amount of the New Convertible Debentures being
converted will be paid on such interest payment date to the registered holder of
such New Convertible Debenture on the immediately preceding record date. Except
where New Convertible Debentures surrendered for conversion must be accompanied
by payment as described above, no interest on converted New Convertible
Debentures will be payable by Alliance on any interest payment date subsequent
to the date of conversion. No other payment or adjustment for interest or
dividends is to be made upon conversion.
MANDATORY CONVERSION UPON CONSUMMATION OF MERGER
The New Convertible Indenture provides that if the Merger is consummated
within 60 days after the issuance of the New Convertible Debentures, then at the
effective time of the Merger, the New Convertible Debentures will be
automatically converted into Common Stock at a conversion rate of 180 shares per
$1,000 principal amount of New Convertible Debentures (equivalent to a
conversion price of approximately $5.56). The Conversion Price pursuant to the
Mandatory Conversion will not be adjusted under any circumstances whatsover,
including, without limitation the circumstances which would give rise to an
adjustment in the Conversion Price, as described in "Description of the New
Convertible Debentures -- Conversion at Election of Holder." A holder of New
Convertible Debentures may elect to forego receipt of all or any portion of
Common Stock that such holder would otherwise be entitled to receive upon the
occurrence of the Automatic Conversion, to receive in lieu thereof one one-tenth
of a share of Series E Special Stock for each share of Common Stock that such
holder would otherwise have been entitled to receive. Each share of Series E
Special Stock will be convertible into ten shares of Common Stock, and each one
one-tenth of a share of Series E Special Stock will have the same rights and
preferences as one share of Common Stock, except that the Series E Special Stock
will have no voting rights and will have a $.10 liquidation preference per share
of Series E Special Stock. In the event that the Automatic Conversion occurs,
Alliance will not pay accrued interest or any Additional Payment with respect to
New Convertible Debentures that are accrued to the date of the Automatic
Conversion.
INTEREST ON NEW CONVERTIBLE DEBENTURES
The New Convertible Debentures will bear interest from March 15, 1996
payable on the Interest Payment Dates. In addition, the New Convertible
Debentures will pay, on the first Interest Payment Date after issuance of the
New Convertible Debentures, the Additional Payment. Holders whose Old
Convertible
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Debentures are accepted for exchange will be deemed to have waived the right to
receive any payment in respect of interest or Liquidated Damages on the Old
Convertible Debentures accrued through the date of issuance of the New
Convertible Debentures.
SUBORDINATION
The payment of the principal of (and premium, if any), interest on and
redemptions at the option of holders of the New Convertible Debentures will, to
the extent set forth in the New Convertible Indenture, be subordinated in right
of payment to the prior payment in full of all Senior Indebtedness (as defined).
Upon any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, receivership, reorganization, assignment for the
benefit of creditors, marshalling of assets and liabilities or any bankruptcy,
insolvency or similar proceedings of Alliance, the holders of all Senior
Indebtedness will first be entitled to receive payment in full in cash of all
amounts due or to become due thereon before the holders of the New Convertible
Debentures will be entitled to receive any payment in respect of the principal
of (and premium, if any), interest on, Additional Payment in respect of, or
redemptions at the option of holders of, the New Convertible Debentures. In the
event of the acceleration of the principal amount due on the New Convertible
Debentures, the holders of all Senior Indebtedness will first be entitled to
receive payment in full in cash of all amounts due or to become due thereon
before the holders of, the New Convertible Debentures will be entitled to
receive any payment of the principal of (and premium, if any), interest on,
Additional Payment in respect of, or redemptions at the option of holders of the
New Convertible Debentures. No payments on account of principal (and premium, if
any), interest on, Additional Payment in respect of, or redemptions at the
option of holders of, the New Convertible Debentures may be made if there shall
have occurred and be continuing a default in any payment with respect to Senior
Indebtedness permitting the holders thereof to accelerate the maturity thereof,
or if any judicial or other proceeding shall be pending with respect to any such
default. In addition, upon the occurrence of any other default with respect to
Senior Indebtedness permitting the holders thereof to accelerate the maturity
thereof and receipt by Alliance of written notice of such occurrence (a
"Blockage Notice"), no payment or distribution to the Trustee or any holder of
the New Convertible Debentures (other than in the form of securities that are
subordinated to a greater extent than the New Convertible Debentures are to
Senior Indebtedness) will be permitted to be made by Alliance for a period
commencing on the date of receipt of such Blockage Notice by Alliance and ending
179 days thereafter (unless such default is cured or waived). During any
consecutive 360-day period, only one 179-day period may commence during which
payment of principal of or interest on the New Convertible Debentures may not be
made and the duration of such period may not exceed 179 days. Only a holder of
in excess of $5,000,000 of Senior Indebtedness or an agent for any syndicate of
lenders which syndicate in the aggregate holds in excess of $5,000,000 of Senior
Indebtedness may initiate such a payment blockage. Because Alliance operates
largely through subsidiaries, the New Convertible Debentures are structurally
subordinated to the Indebtedness of such subsidiaries, including the trade
payables and other indebtedness of such subsidiaries.
"Senior Indebtedness" is defined in the New Convertible Indenture to mean
(i) all indebtedness of Alliance, including the principal of and premium, if
any, and interest on such indebtedness, whether outstanding currently or
hereafter created, for borrowed money, including certain guarantees, for
indebtedness incurred in connection with acquisitions, and for money owed or
reimbursement obligations under letters of credit or under any lease of any real
or personal property, which obligations are capitalized on Alliance's books,
(ii) all currency hedging obligations of Alliance, (iii) all interest on any of
the foregoing that would accrue but for the filing of a bankruptcy or similar
proceeding at the rate specified in the instrument governing such indebtedness,
whether or not such interest is an allowable claim in such proceeding and (iv)
any modifications, refundings, deferrals, renewals or extensions of any such
indebtedness or securities, notes or other evidences of indebtedness issued in
exchange for such indebtedness (collectively, "Indebtedness"), unless, by the
terms of the instrument creating or evidencing such Indebtedness, it is provided
that such Indebtedness is not superior in right of payment to the New
Convertible Debentures or to other Indebtedness which is pari passu with or
subordinated to, the New Convertible Debentures and except for the Old
Convertible Debentures.
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The New Convertible Indenture provides that the New Convertible Debentures
will not be superior in right of payment to the Old Convertible Debentures or to
any other Indebtedness which is pari passu with, or subordinated to, the Old
Convertible Debentures.
At April 23, 1996 Alliance had approximately $15.1 million of Senior
Indebtedness and Indebtedness of subsidiaries and did not have any Indebtedness
(other than the Old Convertible Debentures) which would not have constituted
Senior Indebtedness as defined in the Indenture. The New Convertible Indenture
does not impose any limitation on Alliance's ability to incur additional Senior
Indebtedness. The Senior Notes will constitute Senior Indebtedness as defined in
the New Convertible Indenture. See "Risk Factors -- Subordination."
REDEMPTION AT ALLIANCE'S OPTION
The New Convertible Debentures are subject to redemption and will be
redeemable at the option of Alliance, in whole or in part (in any integral,
multiple of $1,000), upon not less than 20 nor more than 60 days prior notice by
mail, provided that until September 15, 1996 the New Convertible Debentures
cannot be redeemed at the option of Alliance unless the closing price of the
Common Stock has equalled or exceeded 250% of the then existing Conversion Price
per share for at least 20 out of any 30 consecutive trading days ending within
60 days before the notice of redemption is first mailed. Thereafter, the New
Convertible Debentures may be redeemed at the following redemption prices
(expressed as percentages of the principal amount set forth below), if redeemed
during the 12-month period beginning September 15 of the years indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------ -----------------
<S> <C>
1996.............................................................. 104.69%
1997.............................................................. 103.75%
1998.............................................................. 102.81%
1999.............................................................. 101.88%
2000.............................................................. 100.94%
2001 and thereafter............................................... 100.00%
</TABLE>
in each case together with accrued interest to the redemption date (subject to
the right of holders of record on the relevant record date to receive interest
due on an Interest Payment Date). If less than all of the New Convertible
Debentures are to be redeemed, the Trustee will select the New Convertible
Debentures to be redeemed by lot, pro rata or by such other method as the
Trustee shall deem fair and equitable. On or after the redemption date, interest
will cease to accrue on the New Convertible Debentures, or portion thereof,
called for redemption.
No sinking fund is provided for the New Convertible Debentures.
REDEMPTION AT HOLDER'S OPTION
The New Convertible Indenture provides that if a Redemption Event occurs,
each holder of the New Convertible Debentures shall have the right, subject to
certain conditions, at the holder's option, to require Alliance to redeem all of
such holder's New Convertible Debentures, or any portion thereof that is an
integral multiple of $1,000, on the date (the "Redemption Date") that is 45 days
after the date of Alliance Notice (as defined below), for cash at a price equal
to 101% of the principal amount of such New Convertible Debentures to be
redeemed (the "Redemption Price"), together with accrued interest to the
Redemption Date.
Within 15 days after the occurrence of a Redemption Event, Alliance, or at
Alliance's request, the Trustee, is obligated to mail to all holders of record
of the New Convertible Debentures a notice ("Alliance Notice") of the occurrence
of such Redemption Event and of the redemption right arising as a result
thereof. Alliance must deliver a copy of the Alliance Notice to the Trustee. To
exercise the redemption right a holder of such New Convertible Debentures must
deliver on or before the 15th business day after the date of the Alliance Notice
written notice to the Trustee of the holder's exercise of such right, together
with the New Convertible Debentures with respect to which the right is being
exercised, duly endorsed for transfer to Alliance.
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A Redemption Event will be deemed to have occurred at such time as:
(i) there is a Change in Control of Alliance; or
(ii) Alliance's Common Stock (or other common stock into which the New
Convertible Debentures are then convertible) is not listed for trading on a
United States national securities exchange or the NASDAQ NMS or the NASDAQ
listing of Small Capitalization Stocks.
Under the New Convertible Indenture, a "Change in Control" is deemed to have
occurred at such time as (i) any person or group (as the term "person" or
"group" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act)
other than an Exempt Person files a Schedule 13D or 14D-1 (or any successor
schedule, form or report under the Exchange Act) disclosing that such person or
group (excluding any Exempt Person) has become the beneficial owner of 50% or
more of Alliance's capital stock having the power to vote in the election of
directors under ordinary circumstances ("Voting Stock"), (ii) there shall be
consummated any consolidation or merger of Alliance that is not approved by at
least a majority of the Continuing Directors (A) in which Alliance is not the
continuing or surviving corporation or (B) pursuant to which any Voting Stock of
Alliance would be converted into cash, securities or other property, in each
case other than a consolidation or merger in which the holders of such Voting
Stock immediately prior thereto have at least a majority of the Voting Stock,
directly or indirectly, of the resulting or surviving corporation immediately
after the consolidation or merger or (iii) any person acquires all or
substantially all of the assets of Alliance; provided, however, that a Change in
Control shall not be deemed to have occurred if either (x) the closing price per
share of the Common Stock for any five trading days within the period of ten
consecutive trading days ending immediately before the Change in Control shall
equal or exceed 105% of the conversion price of the New Convertible Debentures
in effect on such trading day, or (y) with respect to a Change in Control
described in clause (ii) or clause (iii) above, at least 90% of the
consideration to be paid for the Voting Stock of Alliance in the transaction or
transactions constituting the Change in Control consists of common stock traded
on a national securities exchange or quoted on the NASDAQ NMS and, as a result
of the transaction or transactions referred to in clause (ii) or clause (iii)
above, the New Convertible Debentures become convertible solely into such common
stock. Under the New Convertible Indenture, an "Exempt Person" is defined as (A)
Alliance, any subsidiary of Alliance or any employee benefit plan or stock
ownership plan of either Alliance or any subsidiary of Alliance or (B) any of
Kirkland, KIC, GSA or Mr. Wilms, or any of their respective Affiliates, or any
successor to any of Kirkland, KIC or GSA or any of their respective Affiliates
by merger, sale or transfer of assets or similar transaction or by a transfer
from Mr. Wilms to any estate planning vehicle controlled by Mr. Wilms or
established for the benefit of Mr. Wilms' family or his estate.
The Merger will not result in a Change of Control of Alliance under the
Indenture.
The right to require Alliance to redeem the New Convertible Debentures as a
result of the occurrence of a Redemption Event could create an event of default
under Senior Indebtedness as a result of which any redemption could, absent a
waiver, be blocked by the subordination provisions of the New Convertible
Debentures. See "Description of the New Convertible Debentures --
Subordination." Failure of Alliance to redeem the New Convertible Debentures
when required would result in an Event of Default with respect to the New
Convertible Debentures whether or not such redemption is permitted by the
subordination provisions.
CERTAIN COVENANTS
The New Convertible Indenture provides that Alliance will not, and will not
permit any of its Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (as defined) (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to Alliance or the relevant Subsidiary than those
that would have been obtained in a comparable transaction by Alliance or such
Subsidiary with an unrelated person and (b) Alliance delivers to the Trustee
with respect to any Affiliate Transaction involving aggregate payments in excess
of $500,000, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (a)
above and such Affiliate Transaction is
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approved by a majority of the independent members of the Board; provided,
however, that (i) any employment agreement entered into by Alliance or any of
its Subsidiaries in the ordinary course of business or (ii) the continuation,
extension, or renewal of any transaction entered into between Alliance or any
Subsidiary and any Affiliate on or prior to October 31, 1993 or (iii)
transactions among Alliance and any of Kirkland, KIC, GSA, Mr. Wilms, or their
respective Affiliates pursuant to or contemplated by agreements existing on
October 31, 1993 as in effect on such date or (iv) any agreement between
Alliance, KIC, Kirkland, GSA or their respective affiliates providing for the
payment by Alliance of management or related fees in connection with providing
services to Alliance in an aggregate amount not exceeding $1,400,000 per annum,
plus reimbursement of reasonable related expenses or (v) any agreement between
Alliance and Mr. Wilms or any of his affiliates providing for the payment by
Alliance of consulting or similar fees in an aggregate amount not to exceed
$500,000 per annum or (vi) any agreement with Mr. Wilms pursuant to which
Alliance loans funds to Mr. Wilms to be used to exercise stock purchase warrants
if such exercise occurs so that Mr. Wilms can comply with his commitment to
Alliance to obtain sufficient shares to approve the Kirkland Investment and the
increase in the authorized number of shares of Alliance's Common Stock to
100,000,000 or (vii) transactions between or among Alliance and/or its
Subsidiaries, in each case, shall not be deemed Affiliate Transactions. See
"Management -- Certain Transactions."
EVENTS OF DEFAULT
The following are Events of Default under the New Convertible Indenture: (a)
failure to pay principal of (and premium, if any) or Liquidated Damages with
respect to any New Convertible Debentures when due, whether or not such payment
is prohibited by the subordination provisions of the New Convertible Indenture;
(b) failure to pay any interest on any New Convertible Debentures when due,
continued for 30 days, whether or not such payment is prohibited by the
subordination provisions of the New Convertible Indenture; (c) failure to
perform certain covenants of Alliance in the New Convertible Indenture,
continued for 60 days after written notice as provided in the New Convertible
Indenture; (d) certain events of bankruptcy, insolvency or reorganization; (e)
default under any mortgage indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by Alliance or any of its Subsidiaries, and as a result of such default
the maturity of such Indebtedness has been accelerated prior to its express
maturity and the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness the maturity of which has been
accelerated, aggregates $5,000,000 or more, provided, that if such default under
such indenture or instrument shall be remedied or cured by Alliance or waived by
the holders of such Indebtedness within 90 days of the date of acceleration of
such Indebtedness, then the Event of Default under the New Convertible Indenture
by reason thereof shall be deemed likewise to have been thereupon remedied,
cured or waived without further action upon the part of either the Trustee or
any of the holders; and (f) a final judgment or judgments or order or orders for
the payment of money which aggregates $5,000,000 or more is entered against
Alliance or one or more of its Subsidiaries, which judgment or judgments or
order or orders shall not have been discharged or stayed pending appeal within
75 days after the entry thereof or discharged within 75 days after the
expiration of any such stay.
The New Convertible Indenture provides that, if an Event of Default shall
have occurred and be continuing either the Trustee or the holders of at least
25% of the principal amount of the New Convertible Debentures then outstanding
may declare the principal amount of all New Convertible Debentures and interest
accrued thereon to be due and payable immediately, but upon certain conditions
such declarations may be annulled and past defaults may be waived (except a
continuing default in payment of principal of (and premium, if any) or interest
on the New Convertible Debentures or a default in respect of certain provisions
which cannot be amended without the consent of the holder of each New
Convertible Debenture affected) by the holders of a majority in principal amount
of the New Convertible Debentures then outstanding. In the case of an Event of
Default resulting from bankruptcy, insolvency or certain reorganizations, such
amounts will be due and payable without any declaration or any other act on the
part of the holders or the Trustee.
The New Convertible Indenture provides that the Trustee, subject to the duty
of the Trustee during a default to act with the required standard of care, will
have no obligation to exercise any right or power
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granted it under the New Convertible Indenture at the request of the holders of
the New Convertible Debentures unless the Trustee shall have been indemnified by
such holders. Subject to such provisions in the New Convertible Indenture for
the indemnification of the Trustee and certain other limitations, the holders of
a majority in principal amount of the New Convertible Debentures then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee.
The New Convertible Indenture provides that no holder of New Convertible
Debentures will have any right to institute any action against Alliance under
the New Convertible Indenture (except actions for payment of overdue principal
(and premium, if any) or interest or to enforce conversion rights) unless such
holder previously shall have given to the Trustee written notice of default and
continuance thereof and the holders of not less than 25% in principal amount of
the New Convertible Debentures then outstanding shall have requested the Trustee
to institute such action and shall have offered the Trustee reasonable
indemnity, the Trustee shall not have instituted such action within 60 days of
such request and the Trustee shall not have received direction inconsistent with
such written request by the holders of a majority in principal amount of the New
Convertible Debentures then outstanding.
MERGER AND CONSOLIDATION
The New Convertible Indenture provides that Alliance will not merge or
consolidate with any corporation, partnership or other entity and will not sell,
lease or convey all or substantially all its assets to any entity, unless
Alliance shall be the surviving entity, or the successor entity that acquires
all or substantially all of the assets of Alliance shall be a corporation,
partnership or limited liability company or trust organized under the laws of
the United States or a State therein or the District of Columbia and shall
expressly assume by supplemental indenture all obligations of Alliance under the
New Convertible Indenture and the New Convertible Debentures, and immediately
after giving effect to such merger, consolidation, sale, lease or conveyance, no
Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have happened and be continuing.
MODIFICATION AND WAIVER
Modifications and amendments of the New Convertible Indenture may be made by
Alliance and the Trustee, with the consent of the holders of not less than a
majority in principal amount of the New Convertible Debentures then outstanding
and affected, to add any provisions to, or change in any manner or eliminate any
of the provisions of, such New Convertible Indenture or modify in any manner the
rights of the holders of the New Convertible Debentures; provided that Alliance
and the Trustee may not, without the consent of the holder of each outstanding
New Convertible Debenture affected thereby (a) extend the stated maturity of the
principal amount of any New Convertible Debenture, or reduce the principal
amount thereof or any premium thereon or reduce the rate or extend the time of
payment of interest thereon, or reduce any amount payable on redemption thereof
or otherwise change the redemption provisions, or impair the right to institute
suit for the enforcement of any conversion or any payment on any New Convertible
Debenture when due or adversely affect any conversion rights or redemption
rights upon a Redemption Event or (b) reduce the aforesaid percentage in
principal amount of the New Convertible Debentures, the consent of the holders
of which is required for any such modification.
The New Convertible Indenture may not be amended to alter the subordination
of any outstanding New Convertible Debentures without consent of each holder of
Senior Indebtedness then outstanding that would be adversely affected thereby.
The holders of a majority in aggregate principal amount of outstanding New
Convertible Debentures may waive any past default under the New Convertible
Indenture, except a default in the payment of principal (and premium, if any) or
interest or default with respect to certain covenants under the New Convertible
Indenture.
The New Convertible Indenture can be supplemented by Alliance without
consent of the holders under certain circumstances, including (i) to convey,
transfer, assign, mortgage or pledge to the Trustee as security for the New
Convertible Debentures any property or assets; (ii) to evidence the succession
of another
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corporation to Alliance, and the assumption by the successor corporation of
certain covenants, agreements, and obligations of Alliance; (iii) to add
additional covenants of Alliance to the New Convertible Indenture for the
protection of debentureholders; (iv) to cure any ambiguity or to correct or
supplement any provision of the New Convertible Indenture (or any supplement
thereto); (v) to make any changes required by amendments to the TIA; (vi) to
unilaterally reduce the conversion price of the New Convertible Debentures; and
(vii) subject to certain conditions, to appoint a successor Trustee.
SATISFACTION AND DISCHARGE OF THE NEW CONVERTIBLE INDENTURE
The Indenture provides that Alliance may terminate its obligations under the
New Convertible Indenture at any time by delivering all outstanding New
Convertible Debentures to the Trustee for cancellation and paying all sums
required to be paid pursuant to the terms of the New Convertible Indenture. In
addition, Alliance is permitted to terminate all of its obligations under the
New Convertible Indenture by irrevocably depositing with the Trustee money or
U.S. government obligations sufficient to pay principal and interest on the New
Convertible Debentures to maturity or redemption and all other sums payable
pursuant to the terms of the Indenture, after complying with certain other
procedures set forth in the New Convertible Indenture.
CONTROL BY DEBENTUREHOLDERS
The holders of a majority in aggregate principal amount of outstanding New
Convertible Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee by the New Convertible Indenture;
provided that such direction shall not be otherwise than in accordance with law
and the provisions of the New Convertible Indenture. The Trustee has the right
to decline to follow any such direction if (i) the Trustee determines that the
action or proceeding may not lawfully be taken, (ii) the Trustee determines that
the actions or proceedings so directed would involve it in personal liability or
(iii) the Trustee determines that the actions or forbearances specified in or
pursuant to such direction shall be unduly prejudicial to the interests of
holders of the New Convertible Debentures not joining in the giving of said
direction.
MANDATORY DISPOSITION PURSUANT TO GAMING LAWS
If a holder or a beneficial holder of a New Convertible Debenture or any
underlying Common Stock is required by the Nevada Gaming Commission to be found
suitable, the holder shall apply for a finding of suitability within 30 days
after the Nevada Gaming Commission request. The applicant for a finding of
suitability must pay all costs of the investigation for such finding of
suitability. If a holder or beneficial owner is required to be found suitable
and is not found suitable by the Nevada Gaming Commission, (i) the holder shall,
upon request of Alliance, dispose of his or her New Convertible Debentures and
underlying Common Stock within 30 days or within that time prescribed by the
Nevada Gaming Commission, whichever is earlier, or (ii) Alliance may, at its
option, redeem the holder's New Convertible Debentures in cash at the lesser of
(w) the principal amount thereof or (x) the price at which the New Convertible
Debentures were acquired by the holder, together with, in either case, accrued
interest to the date of the finding of unsuitability by the Nevada Commission
and repurchase the holder's underlying Common Stock at the lesser of (y) the
market price thereof on the date of the finding of unsuitability or (z) the
price at which such Common Stock was acquired by the holder. Such mandatory
disposition could be required at a time when market conditions are not favorable
to the affected Holders or at a time or at costs which are otherwise unfavorable
to such holders. See "The Company -- Gaming Regulations and Licensing".
COMPARISON OF NEW CONVERTIBLE DEBENTURES
AND OLD CONVERTIBLE DEBENTURES
The terms of the New Convertible Debentures and the Old Convertible
Debentures are identical in all material respects, except as follows:
MATURITY
The Old Convertible Debentures mature on September 15, 2002 and the New
Convertible Debentures mature on September 15, 2003.
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MANDATORY CONVERSION UPON CONSUMMATION OF MERGER
If the Merger is consummated within 60 days after the issuance of the New
Convertible Debentures, then at the effective time of the Merger the New
Convertible Debentures will be automatically converted into Common Stock at a
conversion rate of 180 shares per $1,000 principal amount of New Convertible
Debentures (equivalent to a conversion price of approximately $5.56). A holder
of New Convertible Debentures may elect to forego receipt of all or any portion
of the Common Stock that such holder would otherwise receive, and to receive in
lieu thereof one one-tenth of a share of Series E Special Stock for each share
of Common Stock that such holder would otherwise have been entitled to receive.
The terms of the Old Convertible Debentures do not provide for a mandatory
conversion of the Old Convertible Debentures into Common Stock (or Series E
Special Stock) at the Special Conversion Price at the effective time of the
Merger.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
On September 21, 1993, Alliance and the initial purchasers of Old
Convertible Debentures entered into the Registration Rights Agreement. Pursuant
to the Registration Rights Agreement, Alliance agreed to file with the
Commission promptly after September 21, 1993 a shelf registration statement
under the Securities Act (the "Shelf Registration Statement") and to cause the
Shelf Registration Statement to remain effective until September 26, 1996 to
cover resales of the Old Convertible Debentures by the holders thereof. Alliance
filed and had declared effective a registration statement on Form S-2 in
compliance with its obligations under the Registration Rights Agreement.
The Registration Rights Agreement provides that if the Shelf Registration
Statement ceased to be effective (without being succeeded immediately by an
additional Shelf Registration Statement filed and declared effective) for a
period of time exceeding 90 days in the aggregate per year (a "Registration
Default"), Alliance is obligated to pay Liquidated Damages to each holder of Old
Convertible Debentures, during the first 90-day period immediately following the
occurrence of such Registration Default in an amount equal to $0.05 per week per
$1,000 principal amount of Old Convertible Debentures and, if applicable, $0.01
per week per share (subject to adjustment in the event of stock splits, stock
recombinations, stock dividends and the like) of Common Stock issued upon
conversion of such Old Convertible Debentures. The amount of the Liquidated
Damages will increase by an additional $0.05 per week per $1,000 principal
amount or $0.01 per week per share (subject to adjustment as set forth above) of
Common Stock issued upon conversion of such Old Convertible Debentures for each
subsequent 90-day period until the applicable registration statement is filed
and declared effective or the Shelf Registration Statement again becomes
effective, as the case may be, up to a maximum amount of Liquidated Damages with
respect to any Registration Default of $0.25 per week per $1,000 principal
amount of Old Convertible Debentures or $0.05 per week per share (subject to
adjustment as set forth above) of Common Stock constituting Transfer Restricted
Securities (as defined). All accrued Liquidated Damages are to be paid to
holders of Old Convertible Debentures by wire transfer of immediately available
funds or by Federal funds check by Alliance on each Interest Payment Date.
Following the cure of a Registration Default, Liquidated Damages will cease to
accrue with respect to such Registration Default.
In addition, for so long as the Old Convertible Debentures and Common Stock
are outstanding, Alliance will continue to provide to holders of the Old
Convertible Debentures and Common Stock and to prospective purchasers of the Old
Convertible Debentures and Common Stock the information required by Rule
144A(d)(4), if applicable.
A Registration Default occurred on and accordingly,
Liquidated Damages have accrued to holders of Old Convertible Debentures as
described above. The amount of Liquidated Damages accrued and unpaid to the date
hereof is $ per $1,000 principal amount of Old Convertible Debentures, and
additional Liquidated Damages are currently accruing at the rate of $.25 per
$1,000 principal amount per week. Holders whose Old Convertible Debentures are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of any such accrued Liquidated Damages.
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There is no registration rights agreement with respect to the New
Convertible Debentures, and Alliance is not under any obligation to file any
registration statement with respect thereto, other than the Registration
Statement of which this Prospectus is a part. Based upon interpretations of the
staff of the Commission, New Convertible Debentures issued pursuant to the
Exchange Offer in exchange for Old Convertible Debentures may be offered for
resale, resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of Alliance within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Convertible
Debentures are acquired in the ordinary course of such holders' businesses and
such holders have no arrangement with any person to participate in the
distribution of the New Convertible Debentures.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING IS INTENDED ONLY AS A SUMMARY OF THE MATERIAL UNITED STATES
FEDERAL INCOME TAX ASPECTS OF THE EXCHANGE OFFER AND IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF EACH
HOLDER OF OLD CONVERTIBLE DEBENTURES.
In the opinion of Milbank, Tweed, Hadley & McCloy, based on the assumptions
and subject to the qualifications set forth herein, the succeeding discussion
accurately describes the material United States Federal income tax consequences
of the Exchange Offer to holders of the Old Convertible Debentures who hold the
Old Convertible Debentures and the New Convertible Debentures, the Common Stock
and the Series E Special Stock to be issued pursuant to the Exchange Offer or
Automatic Conversions as the case may be as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). The
discussion assumes that the Old Convertible Debentures and the New Convertible
Debentures are properly classified as indebtedness for United States Federal
income tax purposes. This discussion also does not address the United States
Federal income tax consequences to holders of Old Convertible Debentures subject
to special treatment under the federal income tax laws, such as dealers in
securities or foreign currency, tax-exempt entities, banks, thrifts, insurance
companies, and investors in pass-through entities. The discussion does not
describe any tax consequences arising out of the tax laws of any state, local or
foreign jurisdiction. This summary is based upon the Code, existing and proposed
regulations thereunder, and current administrative rulings and court decisions.
All of the foregoing are subject to change, and any such change, which may be
retroactive, could affect the continuing validity of this discussion.
The following discussion is limited to the United States Federal income tax
consequences relevant to a holder of Old Convertible Debentures that is (i) a
citizen or resident of the United States, (ii) a corporation organized under the
laws of the United States or any political subdivision thereof or therein, or
(iii) an estate or trust, the income of which is subject to United States
Federal income tax regardless of the source.
CONSIDERATION ALLOCABLE TO INTEREST
A portion of the New Convertible Debentures received in exchange for the Old
Convertible Debentures and the Common Stock or Series E Special Stock received
in exchange for New Convertible Debentures may be allocated to unpaid interest,
and the remainder of the consideration will be allocated to the principal amount
of the Old Convertible Debentures or New Convertible Debentures, as the case may
be. However, the manner in which such allocation must be done for United States
Federal income tax purposes is not clear. The tax consequences of the receipt of
New Convertible Debentures in the Exchange Offer or shares of Common Stock or
Series E Special Stock allocable to unpaid interest on the Old Convertible
Debentures or New Convertible Debentures, as the case may be, differ from the
tax consequences of the receipt of New Convertible Debentures in the Exchange
Offer or shares of Common Stock or Series E Special Stock allocable to the
principal amount of the New Convertible Debentures.
Holders of Old Convertible Debentures upon receipt of New Convertible
Debentures pursuant to the Exchange Offer, will recognize ordinary income to the
extent that any New Convertible Debentures received pursuant to the Exchange
offer are allocable to interest that has not previously been included in the
holder's income. Moreover, a holder of New Convertible Debentures upon receipt
of Common Shares or Series E Special Stock received pursuant to the Automatic
Conversion will recognize ordinary interest income to the extent that any Common
Stock or Series E Special Stock received pursuant to the Automatic Conversion is
allocable to interest which has not already been included in the holder's
taxable income. In the event amounts allocable to interest are less than amounts
previously included in the holder's taxable income, the difference should result
in an ordinary loss. Any New Convertible Debentures or shares of Common Stock or
Series E Special Stock not allocable to interest will be allocated to the
principal amount of the Old Convertible Debentures or New Convertible
Debentures, as the case may be, and will be treated as discussed below. Alliance
intends to take the position that the Common Stock or Series E Special Stock
issued in the Automatic Conversion is allocable first to principal and is
allocable to interest only to the extent that the fair market value of the
shares of Common Stock or Series E Special Stock issued in exchange for New
Convertible Debentures exceeds the principal amount of the New Convertible
Debentures. The Internal
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Revenue Service may take a contrary position. Holders of New Convertible
Debentures should consult their own tax advisors as to the amount of the Common
Stock or Series E Special Stock received that will be allocated to accrued and
unpaid interest.
The discussion set forth below pertains only to New Convertible Debentures
received in exchange for the stated principal amount of the Old Convertible
Debentures or the Common Stock or Series E Special Stock received in exchange
for the stated principal amount of New Convertible Debentures and does not
address consideration properly allocable to accrued and unpaid interest.
THE TRANSACTION
The exchange of Old Convertible Debentures for New Convertible Debentures
pursuant to the Exchange Offer and the exchange of New Convertible Debentures
for Common Stock or Series E Special Stock pursuant to the Automatic Conversion
each will be a tax-free "recapitalization" within the meaning of Section
368(a)(1)(E) of the Code. Accordingly, a holder exchanging Old Convertible
Debentures for New Convertible Debentures pursuant to the Exchange Offer and New
Convertible Debentures for Common Stock or Series E Special Stock pursuant to
the Automatic Conversion will not recognize gain or loss in respect of such
exchange for United States Federal income tax purposes, except that gain will be
recognized upon the Automatic Conversion to the extent of cash received in lieu
of fractional shares. For this purpose, a holder's gain from the Automatic
Conversion will equal the excess of the sum of the fair market value of the
Common Stock or Series E Special Stock and cash in lieu of fractional shares
received over the holder's adjusted tax basis in the New Convertible Debentures
surrendered in exchange therefor, increased by any gain recognized and decreased
by the amount of any cash received. A holder's adjusted tax basis in the New
Convertible Debentures, Common Stock or Series E Special Stock received will be
equal to the holder's adjusted tax basis in the Old Convertible Debentures or
New Convertible Debentures, as the case may be, exchanged therefor. A holder's
holding period in the New Convertible Debentures, Common Stock or Series E
Special Stock received will include the holder's holding period in the Old
Convertible Debentures or New Convertible Debentures, as the case may be,
exchanged therefor.
MARKET DISCOUNT
An Old Convertible Debenture has "market discount" in the hands of a holder
if the principal amount of the Old Convertible Debenture when acquired exceeded
the basis of the Old Convertible Debenture by an amount equal to or greater than
0.25% of the principal amount of the Old Convertible Debenture multiplied by the
number of complete years after the acquisition date to the maturity date of the
Old Convertible Debenture. Generally, gain recognized on the disposition of any
bond having market discount (a "Market Discount Bond") must be recognized and is
treated as ordinary income to the extent it does not exceed the accrued market
discount on that bond. Market discount generally accrues under a ratable method
determined by the product of total market discount and the ratio of days held to
the total days after the date of acquisition up to (and including) the date of
maturity of the Old Convertible Debentures. In lieu of the ratable method of
accrual, a holder of Old Convertible Debentures may elect to compute accrued
market discount on the basis of a constant interest rate, I.E., taking into
account the compounding of interest.
It is anticipated that Treasury Regulations will be issued to provide
guidance with respect to the treatment of accrued market discount on bonds
transferred in connection with certain tax-free reorganizations. Although such
regulations have not yet been issued, the legislative history of Section 1276 of
the Code indicates that a holder who acquires stock or new debt obligations in
exchange for Market Discount Bonds pursuant to a tax-free recapitalization or
conversion of a convertible debt obligation should not be required to recognize
accrued market discount with respect to the Market Discount Bonds as a result of
the recapitalization or conversion. Instead, the holder should treat accrued
market discount on the Market Discount Bond as accrued market discount on the
new obligation and as ordinary income to the extent of gain recognized on the
subsequent disposition of the stock recovered in exchange for the Market
Discount Bond. No such regulations have been issued, however, and it is
impossible to predict exactly what any such regulations would provide or whether
they would apply to the Exchange Offer or Automatic Conversion.
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NEW CONVERTIBLE DEBENTURES
Assuming that neither the Old Convertible Debentures nor the New Convertible
Debentures will be "traded on an established market" (within meaning of Treasury
Regulation section 1.1273-2(f)) within the sixty day period ending thirty days
after consummation of the Exchange Offer, the New Convertible Debentures will
not be issued with original issue discount ("OID") for United States Federal
income tax purposes. If, however, either the Old Convertible Debentures or the
New Convertible Debentures are so traded during that period, the New Convertible
Debentures may be issued with OID, the result of which may be to require the
holder of the New Convertible Debentures to recognize income in advance of the
receipt of cash attributable to that income. Stated interest on the New
Convertible Debenture will be taxable as ordinary income when received or
accrued by the holder in accordance with his method of accounting.
Upon the sale, exchange or redemption of a New Convertible Debenture, the
holder will recognize gain or loss equal to the difference between the amount
realized on such sale, exchange or redemption and his adjusted tax basis in the
New Convertible Debenture. Subject to the application of the market discount
rules discussed above, such gain or loss will be long-term capital gain or loss
if the New Convertible Debenture was held for more than one year.
Conversion of a New Convertible Debenture (other than with respect to any
accrued but unpaid interest) into Common Stock pursuant to its terms is not
taxable. The holder's basis and holding period for the Common Stock will include
his basis and holding period in the New Convertible Debenture.
COMMON STOCK AND SERIES E SPECIAL STOCK
Under Section 301(c) of the Code, distributions made with respect to shares
of Common Stock or Series E Special Stock generally will be treated as ordinary
income to the extent of Alliance's current and/or accumulated earnings and
profits for the taxable year of the distribution. Amounts distributed in excess
of such earnings and profits are treated as a tax-free return of capital to the
extent of the holder's adjusted tax basis in his shares of Common Stock or
Series E Special Stock, with any amount distributed in excess of such adjusted
tax basis being treated as an amount received on a sale or exchange of the
stock. A 70% dividends received deduction (80% for corporate holders owning 20%
or more in voting power and fair market value of Alliance's stock) may be
available for certain corporate holders, subject to numerous conditions and
exceptions.
Generally, gain or loss is recognized on a sale or other disposition of
Common Stock or Series E Special Stock to the extent of the difference between
the amount of cash (and the fair market value of other property) received in the
disposition and the holder's adjusted tax basis in his Common Stock or Series E
Special Stock. Subject to the market discount rules discussed above, such gain
or loss will be long-term capital gain or loss if the Common Stock or Series E
Special Stock has been held for more than one year (which holding period
includes the period during which the holder of the Common Stock or Series E
Special Stock held the Old Convertible Debentures and New Convertible
Debentures). Currently, net capital gains and ordinary income of corporations
are taxable at the same maximum rate (35%), whereas net long-term capital gains
of individuals are taxable at a maximum rate (28%) that is lower than the
maximum rate applicable to ordinary income (39.6%). In the case of both
individuals and corporations, capital losses generally may be used to offset
only capital gains, except to the extent of $3000 per annum in the case of
individuals.
In the case of a holder who exchanges Old Convertible Debentures for New
Convertible Debentures or New Convertible Debentures for Common Stock or Series
E Special Stock, if the holder has claimed a bad debt deduction under Section
166 of the Code or an ordinary loss on the exchange of Old Convertible
Debentures for New Convertible Debentures or New Convertible Debentures for
Common Stock or Series E Special Stock, then any capital gain subsequently
realized in connection with a disposition of such New Convertible Debentures,
Common Stock or Series E Special Stock, as the case may be, will be
recharacterized under Section 108(e)(7) of the Code as ordinary income to the
extent of such previously claimed bad debt deduction or ordinary loss.
54
<PAGE>
PROPOSED LEGISLATION
President Clinton's Fiscal Year 1997 Budget Proposal, released March 19,
1996 (the "Administration's Proposal"), contains a provision reducing the
dividends received deduction for corporations (other than those who own at least
20% (by vote and value) of the paying corporation) to 50% of the dividends
received, effective for dividends paid after the 30th day after the date of
enactment of the provision. The Administration's Proposal also contains a
provision that would require the dividends received deduction holding period
requirement to be met with respect to each dividend payment, effective for
dividends paid after the 30th day after the date of enactment of the provision.
Certain other pending legislative proposals would treat as a sale or exchange
the entering into of one or more transactions that tend to "hedge" the economic
risks of owning stock or debt. Holders of Old Convertible Debentures are urged
to consult their tax advisors about these proposals. No assurance can be given
as to whether or when legislation containing any or all of the above-mentioned
or similar provisions will be enacted, and if enacted, when such provisions will
be effective.
BACKUP WITHHOLDING
A holder of New Convertible Debentures or Common Stock or Series E Special
Stock may be subject to backup withholding at the rate of 31% with respect to
interest paid on the New Convertible Debentures and dividends paid on the Common
Stock or Series E Special Stock, unless the holder (i) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact or (ii) provides a correct taxpayer identification number, certifies as to
no loss of exemption from backup withholding and otherwise complies with the
applicable requirements of the backup withholding rules. Holders receiving New
Convertible Debentures in exchange for Old Convertible Debentures or Common
Stock or Series E Special Stock upon the Automatic Conversion should consult
their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption. Any amount paid
as backup withholding will be creditable against the holder's United States
Federal income tax liability.
HOLDERS OF OLD CONVERTIBLE DEBENTURES WHO DO NOT PARTICIPATE IN THE EXCHANGE
OFFER
Holders of Old Convertible Debentures who elect not to participate in the
Exchange Offer and who consequently do not exchange their Old Convertible
Debentures for New Convertible Debentures will not recognize gain or loss as a
consequence of the Exchange Offer.
INTEREST IN OLD CONVERTIBLE DEBENTURES
Based upon Alliance's records and upon information provided to Alliance by
its directors, executive officers and affiliates, neither Alliance nor any of
its subsidiaries or affiliates nor any of the directors or executive officers of
Alliance, nor any associates of any of the foregoing, including the directors or
executive officers of its subsidiaries, has effected any transactions in the Old
Convertible Debentures.
CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS
WITH RESPECT TO THE OLD CONVERTIBLE DEBENTURES
Neither Alliance nor any of its affiliates, directors or executive officers,
or any of the executive officers or directors of its subsidiaries, is a party to
any contract, arrangement, understanding or relationship with any other person
relating, directly or indirectly, to the Exchange Offer with respect to any
securities of Alliance (including, but not limited to, any contract,
arrangement, understanding or relationship concerning the transfer or the voting
of any such securities, joint ventures, loan or option arrangements, puts or
calls, guaranties of loans, guaranties against loss or the giving or withholding
of proxies, consents or authorizations), except as described in "The Exchange
Offer -- Exchange Agent and Information Agent" and "-- Fees and Expenses".
USE OF PROCEEDS
No proceeds will be generated from the Exchange Offer.
55
<PAGE>
LEGAL MATTERS
Certain legal matters related to the New Convertible Debentures are being
passed upon for Alliance by Schreck, Jones, Bernhard, Woloson & Godfrey, Las
Vegas, Nevada. Certain legal matters relating to the Exchange Offer are being
passed upon for Alliance by Milbank, Tweed, Hadley & McCloy, New York, New York.
56
<PAGE>
THE MERGER AND RELATED FINANCINGS
On October 18, 1995, Alliance entered into the Merger Agreement with BGII, a
Delaware corporation, and the Merger Subsidiary, a Delaware corporation and
wholly-owned subsidiary of Alliance. Pursuant to the Merger Agreement and
subject to the terms and conditions set forth therein, the Merger Subsidiary
will merge into BGII which will become a wholly-owned subsidiary of Alliance.
The Merger consideration to BGII stockholders will be approximately $77.2
million in cash, $35.7 million in Preferred Stock and $2.9 million in Common
Stock, assuming 10,799,501 shares of BGII common stock outstanding, less
1,000,000 shares owned by Alliance which will be canceled upon consummation of
the Merger. Alliance will also retire approximately $67.6 million of BGII's
outstanding debt (including prepayment premium and original issue discount),
plus accrued and unpaid interest, in connection with the Merger.
At April , 1996, an aggregate of 1,052,500 shares of BGII common stock
were subject to options granted to employees and directors under various stock
option plans or as replacement options with respect thereto (of which options
with respect to 552,500 shares are expected to remain outstanding after the
Merger) and an aggregate of 1,498,000 shares of BGII common stock were subject
to warrants issued by BGII in connection with certain financing transactions.
The Merger and the related transactions will be financed through the
Exchange Offer and the Automotive Conversion, the issuance of an aggregate of $5
million of Common Stock in the Private Placement, the issuance of an aggregate
of $15 million of Preferred Stock in the Preferred Stock Offering and the
issuance of $140 million aggregate principal amount of the Senior Notes in the
Note Offering.
Pursuant to the Exchange Offer, the Company will offer to exchange an
aggregate amount of up to $85 million principal amount of its New Convertible
Debentures for a like principal amount of its Old Convertiable Debentures. If
the Merger is consummated within 30 days after the issuance of the New
Convertible Debentures, then at the Effective Time, the Automatic Conversion
will occur. The Company anticipates, and it is assumed for all purposes herein,
that (i) approximately $50 million principal amount of New Convertible
Debentures will be issued in the Exchange Offer, (ii) the Automatic Conversion
will occur, and (iii) holders of approximately $ million principal amount of
New Convertible Debentures will elect to receive Series E Special Stock upon
conversion thereof. See "The Exchange Offer".
A financial institution has agreed to purchase privately at the time of
consummation of the Merger $5.0 million of the equity of Alliance at a price
equal to $4.56 (the average trading price of the Common Stock for the five
trading day period immediately preceding the agreement). This investment would
be in the form of Common Stock to the extent of 4.9% of the total Common Stock
outstanding at the time, taking into account Common Stock to be issued in the
Merger and the Exchange Offer, with the remainder to be in the form of
non-voting special stock convertible into Common Stock. The Company anticipates,
and it is assumed for all purposes herein, that all $5.0 million will be issued
in the form of Common Stock.
Alliance intends to issue in the Note Offering approximately $140,000,000
aggregate principal amount of Senior Secured Notes with an expected maturity of
seven years and an interest rate of %. The Senior Secured Notes are likely to
include restrictive covenants prohibiting or limiting, among other things, the
sale of assets, the making of acquisitions and other investments, capital
expenditures, the incurrence of additional debt and liens and the payment of
dividends and distributions. Non-compliance could result in the acceleration of
such indebtedness. In addition, it is anticipated that the Senior Notes will
contain a requirement that Alliance make periodic offers to repurchase the
Senior Notes at 101% of the principal amount thereof, together with accrued and
unpaid interest to the date of repurchase upon a Change of Control (as defined
in the Indenture).
The consummation of the Private Placement, the Preferred Stock Offering and
the Note Offering is currently contingent on consummation of the Exchange Offer,
and the consummation of the Merger is currently contingent on the consummation
of the Private Placement, the Preferred Stock Offering and the Note Offering. In
the event that the Merger is consummated, all of the New Convertible Debentures
will be automatically converted into Common Stock or Series E Special Stock, at
the election of the holder.
57
<PAGE>
SOURCES AND USES OF FUNDS
The following table sets forth the anticipated sources and uses of funds to
be used to consummate the Merger and related transactions based on the Company's
cash and debt balances as of December 31, 1995. The actual balances and number
of shares outstanding may vary based on the date of consummation of the
Transaction.
(IN MILLIONS)
<TABLE>
<CAPTION>
ANTICIPATED SOURCES OF FUNDS
<S> <C>
CASH SOURCES:
Senior Notes......................... $ 140.0
Preferred Stock...................... 15.0
Common Stock (Private Placement)..... 5.0
Available Cash....................... 12.4
---------
Total Cash Sources............... 172.4
---------
<CAPTION>
ANTICIPATED USES OF FUNDS
<S> <C>
CASH USES:
Cash to BGII Stockholders(a)......... $ 77.2
Retire BGII Debt
(includes prepayment premium and
original issue discount)(b)......... 67.6
Employee Contract Termination Costs
and Performance Unit Awards(c)...... 7.6
Fees and Expenses(d):................ 20.0
---------
Total Cash Uses.................... 172.4
---------
</TABLE>
<TABLE>
<CAPTION>
NON-CASH SOURCES:
<S> <C>
Preferred Stock...................... 35.7
Common Stock......................... 2.9
Common Stock Issued in Partial
Satisfaction of Employee Contract
Termination Costs and Performance
Unit Awards(c)...................... 4.0
---------
Total Non-Cash Sources........... 42.6
---------
Total Sources.................. $ 215.0
---------
---------
<CAPTION>
NON-CASH USES:
<S> <C>
Preferred Stock to BGII
Stockholders(e)..................... 35.7
Common Stock to BGII
Stockholders(f)..................... 2.9
Common Stock Issued in Partial
Satisfaction of Employee Contract
Termination Costs and Performance
Unit Awards(c)...................... 4.0
---------
Total Non-Cash Uses.............. 42.6
---------
Total Uses..................... $ 215.0
---------
---------
</TABLE>
- ------------------------
(a) Represents the cash consideration to be paid to BGII stockholders in the
Merger consisting of $7.83 per share of BGII common stock, calculated in
accordance with the terms of the Merger Agreement.
(b) Represents retirement of the following debt of BGII outstanding at December
31, 1995:
(i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a
prepayment premium of 101% of the aggregate principal amount thereof
plus original issue discount of $0.3 million;
(ii) $15.9 million under Wulff bank lines of credit, of which $1.6 million
matures ratably per quarter through March 31, 1998 and bears interest
at a rate of 6.95% per annum, $11.2 million is due on demand and bears
interest at a fluctuating rate tied to an international borrowing rate
plus 1% (5.3% per annum at December 31, 1995) and $3.1 million is due
on demand and bears interest at a fluctuating rate tied to an
international borrowing rate plus 1% (4.8% per annum at December 31,
1995);
(iii) $9.4 million under Bally Gaming, Inc.'s bank revolving line of credit,
which matures on March 31, 1997 and bears interest at a fluctuating
rate based on the bank's prime rate plus 1 1/2% (10% per annum at
December 31, 1995); and
(iv) Other notes of BGII payable aggregating $1.9 million due in varying
amounts from 1996 through 1999 bearing interest at rates varying from
5% to 12%.
Accrued and unpaid interest on such debt is not reflected as such amounts
are not considered material.
(c) Includes $5.0 million payable in cash to Richard Gillman and $1.3 million
payable to Neil Jenkins consisting of $0.8 million in cash and $0.5 million
in Common Stock, all pursuant to agreements with Alliance in connection with
the termination of their respective employment agreements and performance
unit awards. Additionally, Hans Kloss, who will remain with the Company,
will receive a total of $4.5 million consisting of $1.5 million in cash and
$3.0 million in Common Stock and Robert Conover, who will remain with the
Company, will receive a total of $0.7 million consisting of $0.2 million in
cash and $0.5 million in Common Stock, in connection with their employment
agreements and performance
58
<PAGE>
unit awards. The Common Stock portion of each of such payments will be
valued at the Alliance Average Trading Price but in no event more than $6.00
nor less than $4.25 per share. See "The Merger and Related Financings."
(d) Total estimated Alliance and BGII Transaction-related fees and expenses are
$32.0 million, of which $12.0 million has been paid through December 31,
1995.
(e) Represents the Preferred Stock consideration to be paid to BGII stockholders
in the Merger consisting of $3.57 per share of BGII common stock, calculated
in accordance with the terms of the Merger Agreement to equate to the value
per share of Preferred Stock obtained in the Preferred Stock Offering.
(f) Represents the Common Stock consideration to be paid to BGII stockholders in
the Merger consisting of $0.30 per share of BGII common stock valued at the
Alliance Average Trading Price.
59
<PAGE>
MARKET PRICE DATA AND DIVIDEND POLICY
The Common Stock is listed on the NASDAQ NMS under the symbol "ALLY". The
following table sets forth, for the fiscal quarters indicated, the high and low
sales price per share of the Common Stock as reported on the NASDAQ NMS.
<TABLE>
<CAPTION>
FISCAL PERIOD HIGH LOW
<S> <C> <C>
1994
First Quarter.................................................................. $ 93/8 $ 67/8
Second Quarter................................................................. 111/2 77/8
Third Quarter.................................................................. 101/4 7
Fourth Quarter................................................................. 71/4 51/4
1995
First Quarter.................................................................. $ 81/2 $ 51/8
Second Quarter................................................................. 77/8 51/4
Third Quarter.................................................................. 8 51/2
Fourth Quarter................................................................. 61/8 43/8
1996
First Quarter.................................................................. $ 6 $ 45/8
Second Quarter................................................................. 55/8 23/4
Third Quarter.................................................................. 53/8 31/4
Fourth Quarter (through , 1996).....................................
</TABLE>
On October 18, 1995 (the day the Merger Agreement was entered into), January
23, 1996 (the day the Merger Agreement was amended and restated), April 17 (the
day the Extension Agreement was signed) and April 23, 1996, the closing price
per share of the Common Stock as reported on the NASDAQ NMS was $4 1/2, $4 3/16,
$ and $4.00, respectively.
The market price of shares of the Common Stock is subject to fluctuation. As
a result, prospective purchasers are urged to obtain current market quotations.
No cash dividends were declared or paid by Alliance during the fiscal years
ended June 30, 1994 or June 30, 1995 or thereafter. The Alliance Board of
Directors does not currently intend to pay cash dividends on the Common Stock.
Future dividends on the Common Stock will be determined by the Board of
Directors in light of the Company's alternative opportunities for investment and
the earnings and financial condition of the Company, among other factors. The
Preferred Stock will accrue dividends at the rate of 15% per year, which may be
paid for a period of time in the form of additional shares of Preferred Stock.
See "Description of Capital Stock--Special Stock."
On April 1, 1996, there were approximately 1,615 holders of record of the
Common Stock.
60
<PAGE>
DILUTION
The approximate conversion price per share of Common Stock to be issued to
the holders of the New Convertible Debentures pursuant to the Automatic
Conversion exceeds the negative net tangible book value per share. Therefore,
holders acquiring shares of Common Stock pursuant to the Automatic Conversion
will realize an immediate dilution in the value of their shares. Net tangible
book value per share is determined by subtracting total liabilities from total
tangible assets and dividing the remainder by the applicable number of shares of
Common Stock. Dilution assumes an approximate conversion price of $5.56 per
share in the Automatic Conversion. The following table illustrates the dilution
to holders acquiring shares pursuant to the Automatic Conversion:
<TABLE>
<S> <C> <C>
Approximate conversion offering price per share..................... $
Negative net tangible book value per share prior to the Transaction
as of December 31, 1995(a)......................................... $
---------
---------
Increase in net tangible book value per share attributable to the
Transaction excluding shares issuable pursuant to stock options and
warrants(b)........................................................ $
---------
---------
Pro forma net tangible book value per share after the Transaction
excluding shares issuable pursuant to stock options and warrants...
---------
Dilution in pro forma net tangible book value per share to new
investors(c)....................................................... $
---------
---------
</TABLE>
- ------------------------
(a) Negative net tangible book value per share is determined by dividing
negative net tangible book value of the Company (tangible assets less
liabilities) by 12,987,483 shares of Common Stock outstanding at December
31, 1995.
(b) Based on the approximate conversion price of $5.56 per share pursuant to the
Automatic Conversion.
(c) Dilution is determined by subtracting pro forma net tangible book value per
share after the Transaction from the approximate conversion price of $5.56
pursuant to the Automatic Conversion.
The dilution per share reflects the historical cost of the Company's assets
at December 31, 1995. The Company's management believes such dilution would be
substantially reduced if it were calculated based upon the fair market value of
its assets.
61
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization as of
December 31, 1995 (i) of Alliance on a historical basis, (ii) of BGII on a
historical basis, and (iii) of the Company on a pro forma basis as adjusted to
reflect the Transaction (including the use of the estimated proceeds from the
Offerings and the Private Placement). See "The Merger and Related Financings,"
"Use of Proceeds," and "Unaudited Pro Forma Condensed Combined Financial
Information."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
--------------------------------------
THE COMPANY
ALLIANCE BGII PRO FORMA
ACTUAL ACTUAL AS ADJUSTED
---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash, Cash Equivalents and Securities Available for Sale................. $ 29,468 $ 5,526 $ 14,476
---------- ---------- --------------
---------- ---------- --------------
Long-Term Debt:
New Senior Secured Notes(1)............................................ $ -- $ -- $ 140,000
Convertible Debentures(2).............................................. 85,000 -- 35,000
Hospitality Franchise Systems.......................................... 8,476 -- 8,476
Due to Stockholder, Net of Unamortized Discount of $0.629 at December
31, 1995.............................................................. 2,797 -- 2,797
10 3/8% Senior Secured Notes due July 1998............................. -- 39,656 --
Wulff Revolving Lines of Credit........................................ -- 15,905 --
Bally Gaming, Inc. Revolving Line of Credit............................ -- 9,400 --
Other Notes Payable.................................................... 3,833 4,983 6,982
---------- ---------- --------------
Total Long-Term Debt..................................................... 100,106 69,944 193,255
New Preferred Stock(1)................................................... -- -- 50,671
Total Stockholders' Equity (Deficiency)(1)(3)(4)(5)...................... (717) 88,410 49,433
---------- ---------- --------------
Total Capitalization..................................................... $ 99,389 $ 158,354 $ 293,359
---------- ---------- --------------
---------- ---------- --------------
</TABLE>
- --------------------------
(1) Issuance costs relative to the Note Offering and the Preferred Stock
Offering are assumed to be capitalized and amortized over the relative terms
of these instruments. Issuance costs relative to the Private Placement have
been offset against proceeds.
(2) Assumes $50 million of New Convertible Debentures are exchanged and
converted into Common Stock at a premium of $340 per $1,000 principal
amount, payable in Common Stock pursuant to the Exchange Offer and Automatic
Conversion.
(3) Excludes up to (i) 2,168,834 shares of Common Stock subject to options
issued and outstanding under the United Gaming, Inc. 1991 Long-Term
Incentive Plan, as amended (the "Alliance 1991 Stock Option Plan") and the
Gaming and Technology, Inc. 1984 Employee Stock Option Plan (the "Alliance
1984 Stock Option Plan"), of which options covering 987,310 shares were
exercisable as of December 31, 1995; (ii) 2,000,000 shares of Common Stock
which will be issuable upon exercise of warrants issued to Alfred H. Wilms;
(iii) 2,750,000 shares of Common Stock issuable upon exercise of warrants
issued to Kirkland Ft. Worth Investment Partners, L.P. ("Kirkland"); (iv)
1,250,000 shares of Common Stock issuable upon exercise of warrants issued
to GSA on September 21, 1993 and up to 2,500,000 shares of Common Stock
which may be issued to Gaming Systems Advisors, L.P. ("GSA") upon exercise
of additional warrants to be granted upon consummation of the Merger; (v)
3,500,000 shares of Common Stock issuable upon conversion of the New
Convertible Debentures, assuming that $50.0 million of Old Convertible
Debentures have already been exchanged and converted into Common Stock (see
note (2) above); and (vi) an aggregate additional 1,780,000 shares issuable
upon the exercise of other options, warrants and convertible securities. See
"Certain Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Holders and Management--Outstanding Options and
Convertible Securities."
(4) Excludes (i) approximately 14,118 shares of Common Stock issuable to the
non-employee directors of BGII upon exercise of options granted under BGII's
1991 Non-employee Directors' Option Plan (the "BGII 1991 Directors' Plan")
and BGII's 1994 Stock Option Plan for Non-Employee Directors (the "BGII 1994
Plan") (assuming a price of $4.25 per share of Common Stock) and (ii)
552,500 shares of Common Stock issuable immediately prior to the Effective
Time upon the exercise of options held by employees other than Messrs.
Gillman, Jenkins and Kloss granted under the BGII 1991 Incentive Plan, based
on the assumption that all such employees elect to have their BGII options
exercisable for the number of shares of Common Stock equal to the number of
shares of BGII common stock subject thereto. See "The Merger and Related
Financings" and "Security Ownership of Certain Beneficial Holders and
Management--Outstanding Options and Convertible Securities."
(5) Includes approximately $4.0 million payable in shares of Common Stock,
subject to a collar on the Common Stock price (932,471 shares, assuming a
share price of $4.25) to Messrs. Jenkins, Kloss and Conover in connection
with employment contract termination payments and performance unit awards.
The Company currently anticipates obtaining one or more working capital
revolving facilities at Gaming and Wulff permitted under the Indenture
(providing up to $ of borrowing availability in aggregate) which would be
secured by the inventory and accounts receivable of such entities and their
subsidiaries. The Company has not received any commitment for any such facility
and no assurance can be given that it will be able to obtain any such facility
on terms acceptable to the Company. At closing, even if such facilities are
obtained, the Company expects that no borrowings will have been made under such
facilities.
62
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Combined Statements of Operations present
results of operations of the Company assuming the Transaction occurred on July
1, 1994 for the statements for the twelve months ended June 30, 1995 and
December 31, 1995 and for the six months ended December 31, 1995, and on July 1,
1993 for the statements for the six months ended December 31, 1994 and that the
Rainbow Casino operations were consolidated. Adjustments necessary to reflect
these assumptions and to restate historical combined results of operations are
presented in the Pro Forma Adjustments columns, which are further described in
the Notes to Unaudited Pro Forma Condensed Combined Financial Information.
The Unaudited Pro Forma Condensed Combined Balance Sheet presents the
financial position of the Company assuming the Transaction occurred on December
31, 1995. In preparing the following Pro Forma Financial Information, the
Company has also assumed that $50.0 million of the $85.0 million principal
amount of the Old Convertible Debentures are exchanged in the Exchange Offer and
converted into Common Stock pursuant to the Automatic Conversion. Adjustments
necessary to reflect this assumption and to restate historical combined balance
sheets are presented in the Pro Forma Adjustments column, which are further
described in the Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
The historical unaudited financial information for Alliance is derived from
the audited financial statements of Alliance for the year ended June 30, 1995,
and the unaudited reports of Alliance for the six-month periods ended December
31, 1994 and 1995. The historical unaudited financial information for BGII is
derived from the unaudited interim information generated as of and for the
periods ended June 30, 1994 and 1995. BGII operating results for the
twelve-month period ended June 30, 1995 are calculated by subtracting the
unaudited six-month period ended June 30, 1994 results from the audited year
ended December 31, 1994 results and adding the unaudited six-month period ended
June 30, 1995 results. BGII operating results for the six-month periods ended
December 31, 1994 and 1995 are calculated by subtracting the unaudited six-month
periods ended June 30, 1994 and 1995 results from the audited years ended
December 31, 1994 and 1995 results, respectively.
The Supplemental Unaudited Pro Forma Information presents pro forma cash
flow and fixed charges information. Additionally, the Supplemental Unaudited Pro
Forma Condensed Combined Statements of Operations reflect pro forma earnings for
the twelve-month period ended December 31, 1995 assuming the Transaction and the
effect of consolidating the Rainbow Casino operating results occurred on January
1, 1995. The related pro forma adjustments are consistent with those assumed
elsewhere herein.
The following information does not purport to present the financial position
or results of operations of the Company had the Transaction and events assumed
therein occurred on the dates specified, nor is it necessarily indicative of the
results of operations of the Company as they may be in the future or as they may
have been had the Transaction and the effect of consolidating the Rainbow Casino
operating results been consummated on the dates shown. The Unaudited Pro Forma
Condensed Combined Financial Information is based on certain assumptions and
adjustments described in the Notes to Unaudited Pro Forma Condensed Combined
Financial Information and should be read in conjunction therewith and with "The
Merger and Related Financings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited and unaudited
historical consolidated financial statements and related notes thereto of
Alliance and BGII included elsewhere herein.
63
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1995 (1)(2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
ALLIANCE BGII COMBINED ADJUSTMENTS COMBINED
---------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents and Securities $ 29,468 $ 5,526 $ 34,994 $ 152,825(a) $ 14,476
Available for Sale............................ (67,539)(b)
(77,227)(c)
(7,559)(c)
(10,410)(c)
2,285(d)
(12,893)(e)
Receivables, Net............................... 3,110 87,176 90,286 90,286
Inventories.................................... 672 51,591 52,263 52,263
Other.......................................... 3,395 3,983 7,378 7,378
---------- ---------- ---------- -----------
Total Current Assets......................... 36,645 148,276 184,921 164,403
Property and Equipment, Net...................... 50,870 23,244 74,114 74,114
Other Assets:
Long Term Receivables, Net..................... 4,809 9,981 14,790 14,790
Excess of Costs over Net Assets of an Acquired 3,733 5,434 9,167 44,158(c) 53,325
Business, Net.................................
Intangible Assets, Net......................... 11,638 5,380 17,018 5,202(c) 19,742
(2,478)(f)
Investment in Minority Owned Subsidiary........ 1,585 1,585 1,585
Other, Net..................................... 7,592 2,001 9,593 6,575(a) 15,671
(497)(b)
---------- ---------- ---------- -----------
Total Other Assets........................... 29,357 22,796 52,153 105,113
---------- ---------- ---------- -----------
Total Assets................................. $ 116,872 $ 194,316 $ 311,188 $ 343,630
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable............................... $ 2,295 $ 18,556 $ 20,851 $ 20,851
Accrued Liabilities............................ 10,187 17,406 27,593 (3,174)(e) 24,419
Current Maturities of Long Term Debt........... 4,054 14,957 19,011 (14,957)(b) 4,054
---------- ---------- ---------- -----------
Total Current Liabilities.................... 16,536 50,919 67,455 49,324
---------- ---------- ---------- -----------
Long Term Debt, Less Current Maturities.......... 96,052 54,987 151,039 140,000(a) 189,201
(51,838)(b)
(50,000)(f)
Other Liabilities................................ 4,082 4,082 4,082
---------- ---------- ---------- -----------
Total Liabilities............................ 116,670 105,906 222,576 242,607
Minority Interest................................ 919 919 919
Preferred Stock.................................. 15,000(a) 50,671
35,671(c)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common Stock, Par.............................. 1,298 108 1,406 118(a) 2,478
69(c)
93(c)
(108)(c)
900(f)
Paid-in Capital................................ 32,134 68,345 100,479 4,282(a) 90,257
(68,345)(c)
2,871(c)
3,870(c)
47,100(f)
Retained Earnings (Accumulated Deficit)........ (32,562) 1,842 (30,720) (744)(b) (43,223)
(497)(b)
(1,842)(c)
777(d)
(7,719)(e)
(2,478)(f)
Cumulative Translation Adjustments............. 18,662 18,662 (18,662)(c)
Other Stockholders' Equity..................... (1,587) (547) (2,134) 547(c) (79)
1,508(d)
---------- ---------- ---------- -----------
Total Stockholders' Equity (Deficiency)...... (717) 88,410 87,693 49,433
---------- ---------- ---------- -----------
Total Liabilities and Stockholders' Equity
(Deficiency)................................ $ 116,872 $ 194,316 $ 311,188 $ 343,630
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See Notes To Unaudited Pro Forma Condensed Combined Financial Information
64
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1995(1)(3)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
----------------------------------- BGII
AS ----------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gaming.................................................... $128,114 $14,809(g) $142,923 $
Food and Beverage Sales................................... 3,847 891(g) 4,738
Net Equipment Sales....................................... 27 27 248,701
Other..................................................... 4,432
---------- -------- ----------
Total Revenues.......................................... 131,988 147,688 253,133
---------- -------- ----------
OPERATING COSTS:
Gaming.................................................... 91,311 2,127(g) 93,438
Food and Beverage......................................... 2,795 334(g) 3,129
Equipment Sales........................................... 12 12 157,538
Selling, General and Administrative....................... 32,611 9,716(g) 39,153 68,651
(3,174)(h)
Unusual Charges........................................... 500
Depreciation and Amortization............................. 9,520 893(g) 10,413 8,482
---------- -------- ----------
Total Operating Costs................................... 136,249 146,145 235,171
---------- -------- ----------
Operating Income (Loss)..................................... (4,261) 1,543 17,962
OTHER INCOME (EXPENSES):
Interest Income........................................... 2,798 2,798
Interest Expense.......................................... (8,133) (988)(g) (9,121) (7,090)
Casino Royalty............................................ (810) (2,621)(g) (3,431)
Minority Interest......................................... (397) (397)
Other, Net................................................ 317 101(g) 418
---------- -------- ----------
Income (Loss) Before Taxes.................................. (10,486) (8,190) 10,872
Domestic Tax Expense........................................ (265) (265) (290)
Foreign Tax Benefit (Expense)............................... (5,779)
---------- -------- ----------
Net Income (Loss)........................................... $(10,751) $ (8,455) $ 4,803
---------- -------- ----------
---------- -------- ----------
Preferred Stock Dividend....................................
Net Loss Applicable to Common Shares........................
Income (Loss) Per Common Share(6)........................... $ (.95) $ .45
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities.......................................................................
Cash Flows from Investing Activities.......................................................................
Cash Flows from Financing Activities.......................................................................
Pro Forma Deficit of Earnings to Fixed Charges...............................................................
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend..................................
<CAPTION>
AS PRO FORMA
ADJUSTED ----------------------
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
<S> <C> <C> <C>
REVENUES:
Gaming.................................................... $142,923 $ $142,923
Food and Beverage Sales................................... 4,738 4,738
Net Equipment Sales....................................... 248,728 248,728
Other..................................................... 4,432 4,432
-------- --------
Total Revenues.......................................... 400,821 400,821
-------- --------
OPERATING COSTS:
Gaming.................................................... 93,438 93,438
Food and Beverage......................................... 3,129 3,129
Equipment Sales........................................... 157,550 157,550
Selling, General and Administrative....................... 107,804 (5,000)(i) 101,135
(1,669)(j)
Unusual Charges........................................... 500 (250)(j) 250
Depreciation and Amortization............................. 18,895 1,167(k) 22,861
2,502(l)
(214)(m)
836(n)
(325)(o)
-------- --------
Total Operating Costs................................... 381,316 378,363
-------- --------
Operating Income (Loss)..................................... 19,505 22,458
OTHER INCOME (EXPENSES):
Interest Income........................................... 2,798 2,798
Interest Expense.......................................... (16,211 ) (6,165)(n) (22,376 )
Casino Royalty............................................ (3,431 ) (3,431 )
Minority Interest......................................... (397 ) (397 )
Other, Net................................................ 418 418
-------- --------
Income (Loss) Before Taxes.................................. 2,682 (530 )
Domestic Tax Expense........................................ (555 ) (555 )
Foreign Tax Benefit (Expense)............................... (5,779 ) 3,779(p) (2,000 )
-------- --------
Net Income (Loss)........................................... $(3,652 ) $(3,085 )
-------- --------
--------
Preferred Stock Dividend.................................... $(8,039 )
--------
Net Loss Applicable to Common Shares........................ $(11,124)
--------
--------
Income (Loss) Per Common Share(6)........................... $ (.48 )
--------
--------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
$ 7,042
Cash Flows from Operating Activities......................
--------
--------
$(26,936)
Cash Flows from Investing Activities......................
--------
--------
Cash Flows from Financing Activities...................... $ (757 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges.............. $ (530 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges and Preferred $(8,569 )
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
65
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1995(1)(4)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
----------------------------------- BGII
AS ----------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gaming................................ $74,300 $ $74,300 $
Food and Beverage Sales............... 1,923 1,923
Net Equipment Sales................... 6 6 108,893
Other................................. 2,884
---------- -------- ----------
Total Revenues...................... 76,229 76,229 111,777
---------- -------- ----------
OPERATING COSTS:
Gaming................................ 50,248 50,248
Food and Beverage..................... 1,426 1,426
Equipment Sales....................... 1 1 71,093
Selling, General and Administrative... 23,172 200(r) 23,372 33,204
Unusual Charges....................... 5,316
Depreciation and Amortization......... 4,906 4,906 5,079
---------- -------- ----------
Total Operating Costs............... 79,753 79,953 114,692
---------- -------- ----------
Operating Income (Loss)................. (3,524) (3,724) (2,915)
OTHER INCOME (EXPENSES):
Interest Income....................... 818 818
Interest Expense...................... (4,288) (4,288) (3,284)
Casino Royalty........................ (1,908) (1,908)
Minority Interest..................... (276) (276)
Other, Net............................ 535 535
---------- -------- ----------
Income (Loss) Before Taxes.............. (8,643) (8,843) (6,199)
Domestic Tax Expense.................... (788) (788) (165)
Foreign Tax (Expense) Benefit........... (961)
---------- -------- ----------
Net Loss................................ $(9,431) $(9,631) $ (7,325)
---------- -------- ----------
---------- -------- ----------
Preferred Stock Dividend................
Net Loss Applicable to Common Shares....
Loss Per Common Share(6)................ $ (.79) $ (.68)
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities....................................................
Cash Flows from Investing Activities....................................................
Cash Flows from Financing Activities....................................................
Pro Forma Deficit of Earnings to Fixed Charges............................................
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend...............
<CAPTION>
AS PRO FORMA
ADJUSTED ----------------------
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
<S> <C> <C> <C>
REVENUES:
Gaming................................ $74,300 $ $74,300
Food and Beverage Sales............... 1,923 1,923
Net Equipment Sales................... 108,899 108,899
Other................................. 2,884 2,884
-------- --------
Total Revenues...................... 188,006 188,006
-------- --------
OPERATING COSTS:
Gaming................................ 50,248 50,248
Food and Beverage..................... 1,426 1,426
Equipment Sales....................... 71,094 71,094
Selling, General and Administrative... 56,576 (2,500)(s) 44,639
(9,437)(t)
Unusual Charges....................... 5,316 (1,750)(t) 3,566
Depreciation and Amortization......... 9,985 584(u) 11,963
1,251(v)
(112)(w)
418(x)
(163)(y)
-------- --------
Total Operating Costs............... 194,645 182,936
-------- --------
Operating Income (Loss)................. (6,639 ) 5,070
OTHER INCOME (EXPENSES):
Interest Income....................... 818 818
Interest Expense...................... (7,572 ) (3,343)(x) (10,915 )
Casino Royalty........................ (1,908 ) (1,908 )
Minority Interest..................... (276 ) (276 )
Other, Net............................ 535 535
-------- --------
Income (Loss) Before Taxes.............. (15,042 ) (6,676 )
Domestic Tax Expense.................... (953 ) (953 )
Foreign Tax (Expense) Benefit........... (961 ) 625(z) (336 )
-------- --------
Net Loss................................ $(16,956) $(7,965 )
-------- --------
--------
Preferred Stock Dividend................ $(3,872 )
--------
Net Loss Applicable to Common Shares.... $(11,837)
--------
--------
Loss Per Common Share(6)................ $ (.50 )
--------
--------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities.. $20,084
--------
--------
Cash Flows from Investing Activities.. $ 215
--------
--------
Cash Flows from Financing Activities.. $(5,357 )
--------
--------
Pro Forma Deficit of Earnings to Fixed C $(6,676 )
--------
--------
Pro Forma Deficit of Earnings to Fixed C $(10,548)
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
66
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1994(1)(4)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
----------------------------------- BGII
AS ----------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gaming................................ $ 60,372 $ 9,261(q) $ 69,633 $
Food and Beverage Sales............... 1,950 666(q) 2,616
Net Equipment Sales................... 16 16 113,123
Other................................. 2,475
---------- -------- ----------
Total Revenues.......................... 62,338 72,265 115,598
---------- -------- ----------
OPERATING COSTS:
Gaming................................ 43,867 1,442(q) 45,309
Food and Beverage..................... 1,414 257(q) 1,671
Equipment Sales....................... 9 9 70,835
Selling, General and Administrative... 14,296 6,255(q) 18,543 33,472
(2,008)(r)
Depreciation and Amortization......... 4,613 906(q) 5,519 4,608
---------- -------- ----------
Total Operating Costs................... 64,199 71,051 108,915
---------- -------- ----------
Operating Income (Loss)................. (1,861) 1,214 6,683
OTHER INCOME (EXPENSES):
Interest Income....................... 1,504 1,504
Interest Expense...................... (3,915) (748)(q) (4,663) (3,521)
Casino Royalty........................ (1,665)(q) (1,665)
Minority Interest..................... (169) (169)
Other, Net............................ (286) 73(q) (213)
---------- -------- ----------
Income (Loss) Before Taxes.............. (4,727) (3,992) 3,162
Domestic Tax Expense.................... (290) (290) (170)
Foreign Tax (Expense) Benefit........... (2,121)
---------- -------- ----------
Net Income (Loss)....................... $ (5,017) $ (4,282) $ 871
---------- -------- ----------
---------- -------- ----------
Preferred Stock Dividend................
Net Loss Applicable to Common Shares....
Income (Loss) Per Common Share(6)....... $ (.45) $ .08
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities...................................................
Cash Flows from Investing Activities...................................................
Cash Flows from Financing Activities...................................................
Pro Forma Deficit of Earnings to Fixed Charges...........................................
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend..............
<CAPTION>
AS PRO FORMA
ADJUSTED ----------------------
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
<S> <C> <C> <C>
REVENUES:
Gaming................................ $69,633 $ $69,633
Food and Beverage Sales............... 2,616 2,616
Net Equipment Sales................... 113,139 113,139
Other................................. 2,475 2,475
-------- --------
Total Revenues.......................... 187,863 187,863
-------- --------
OPERATING COSTS:
Gaming................................ 45,309 45,309
Food and Beverage..................... 1,671 1,671
Equipment Sales....................... 70,844 70,844
Selling, General and Administrative... 52,015 (2,500)(s) 49,515
Depreciation and Amortization......... 10,127 584(u) 12,105
1,251(v)
(112)(w)
418(x)
(163)(y)
-------- --------
Total Operating Costs................... 179,966 179,444
-------- --------
Operating Income (Loss)................. 7,897 8,419
OTHER INCOME (EXPENSES):
Interest Income....................... 1,504 1,504
Interest Expense...................... (8,184 ) (3,106)(x) (11,290 )
Casino Royalty........................ (1,665 ) (1,665 )
Minority Interest..................... (169 ) (169 )
Other, Net............................ (213 ) (213 )
-------- --------
Income (Loss) Before Taxes.............. (830 ) (3,414 )
Domestic Tax Expense.................... (460 ) (460 )
Foreign Tax (Expense) Benefit........... (2,121 ) 1,379(z) (742 )
-------- --------
Net Income (Loss)....................... $(3,411 ) $(4,616 )
-------- --------
--------
Preferred Stock Dividend................ $(3,872 )
--------
Net Loss Applicable to Common Shares.... $(8,488 )
--------
--------
Income (Loss) Per Common Share(6)....... $ (.37 )
--------
--------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities.. $8,921
--------
--------
Cash Flows from Investing Activities.. $(11,243)
--------
--------
Cash Flows from Financing Activities.. $(1,569 )
--------
--------
Pro Forma Deficit of Earnings to Fixed C $(3,414 )
--------
--------
Pro Forma Deficit of Earnings to Fixed C $(7,286 )
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
67
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1995(1)(5)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
----------------------------------- BGII
AS ----------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gaming................................ $142,042 $5,548(aa) $147,590
Food and Beverage Sales............... 3,820 225(aa) 4,045
Net Equipment Sales................... 17 17 244,471
Other................................. 4,841
---------- -------- ----------
Total Revenues...................... 145,879 151,652 249,312
---------- -------- ----------
OPERATING COSTS:
Gaming................................ 97,692 685(aa) 98,377
Food and Beverage..................... 2,807 77(aa) 2,884
Equipment Sales....................... 4 4 157,796
Selling, General and Administrative... 41,487 3,461(aa) 43,982 68,383
(966)(bb)
Unusual Charges....................... 5,816
Depreciation and Amortization......... 9,813 (13)(aa) 9,800 8,953
---------- -------- ----------
Total Operating Costs................... 151,803 155,047 240,948
---------- -------- ----------
Operating Income (Loss)................. (5,924) (3,395 ) 8,364
OTHER INCOME (EXPENSES):
Interest Income....................... 2,112 2,112
Interest Expense...................... (8,506) (240)(aa) (8,746 ) (6,853)
Casino Royalty........................ (2,718) (956)(aa) (3,674 )
Minority interest..................... (504) (504 )
Other, Net............................ 1,138 28(aa) 1,166
---------- -------- ----------
Income (Loss) Before Taxes.............. (14,402) (13,041 ) 1,511
Domestic Tax Expense.................... (763) (763 ) (260)
Foreign Tax (Expense) Benefit........... (4,644)
---------- -------- ----------
Net Income (Loss)....................... $(15,165) $(13,804) $(3,393)
---------- -------- ----------
---------- -------- ----------
Preferred Stock Dividend................
Net Loss Applicable to Common Shares....
Loss Per Common Share(6) $ (1.33) $ (.31)
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities...................................................
Cash Flows from Investing Activities...................................................
Cash Flows from Financing Activities...................................................
Pro Forma Deficit of Earnings to Fixed Charges...........................................
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend..............
<CAPTION>
AS PRO FORMA
ADJUSTED ----------------------
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
<S> <C> <C> <C>
REVENUES:
Gaming................................ $147,590 $ $147,590
Food and Beverage Sales............... 4,045 4,045
Net Equipment Sales................... 244,488 244,488
Other................................. 4,841 4,841
-------- --------
Total Revenues...................... 400,964 400,964
-------- --------
OPERATING COSTS:
Gaming................................ 98,377 98,377
Food and Beverage..................... 2,884 2,884
Equipment Sales....................... 157,800 157,800
Selling, General and Administrative... 112,365 (5,000)(cc) 96,259
(11,106)(dd)
Unusual Charges....................... 5,816 (2,000)(dd) 3,816
Depreciation and Amortization......... 18,753 1,167(ee) 22,719
2,502(ff)
(214)(gg)
836(ii)
(325)(hh)
-------- --------
Total Operating Costs................... 395,995 381,855
-------- --------
Operating Income (Loss)................. 4,969 19,109
OTHER INCOME (EXPENSES):
Interest Income....................... 2,112 2,112
Interest Expense...................... (15,599 ) (6,402)(ii) (22,001 )
Casino Royalty........................ (3,674 ) (3,674 )
Minority interest..................... (504 ) (504 )
Other, Net............................ 1,166 1,166
-------- --------
Income (Loss) Before Taxes.............. (11,530 ) (3,792 )
Domestic Tax Expense.................... (1,023 ) (1,023 )
Foreign Tax (Expense) Benefit........... (4,644 ) 3,025(jj) (1,619 )
-------- --------
Net Income (Loss)....................... $(17,197) $(6,434 )
-------- --------
--------
Preferred Stock Dividend................ $(8,039 )
--------
Net Loss Applicable to Common Shares.... $(14,473)
--------
--------
Loss Per Common Share(6) $ (.62 )
--------
--------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities.. $18,205
--------
--------
Cash Flows from Investing Activities.. $(15,478)
--------
--------
Cash Flows from Financing Activities.. $(4,545 )
--------
--------
Pro Forma Deficit of Earnings to Fixed C $(3,792 )
--------
--------
Pro Forma Deficit of Earnings to Fixed C $(11,831)
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
68
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
1. The Unaudited Pro Forma Condensed Combined Financial Statements of
Operations are presented as if the combination of Alliance and BGII occurred on
July 1, 1994 for the statements of operations for the twelve months ended June
30, 1995 and December 31, 1995 and for the six months ended December 31, 1995,
and on July 1, 1994 for the statement of operations for the six months ended
December 31, 1994. The Unaudited Pro Forma Condensed Combined Balance Sheet is
presented assuming the combination occurred on December 31, 1995 for purposes of
presenting the pro forma balance sheet. The combination is expected to be
recorded as a purchase transaction in accordance with generally accepted
accounting principles and, accordingly, BGII assets and liabilities are
presented at their estimated fair values as of that date.
The Merger Agreement provides that BGII stockholders will receive in the
Merger, in exchange for each of their issued and outstanding shares of common
stock, (i) an amount of cash (the "Cash Consideration") determined by dividing
$76.7 million by the number of shares of BGII common stock issued and
outstanding immediately prior to the Effective Time ($7.83 per share for
purposes of presentation of the pro forma financial information) (plus interest
accruing at a rate of 5.5% per annum from May 3, 1996 to the Effective Time),
(ii) a fraction of a share of Common Stock equal to the quotient of $0.30 and
the Alliance Average Trading Price ($2.9 million in aggregate) and (iii) that
number of shares (or fractions thereof) of Preferred Stock having a value as
determined in accordance with the Merger Agreement equal to $11.40 less the Cash
Consideration of $7.83, or $3.57 per share for purposes of presentation of the
pro forma financial information ($35.0 million in aggregate) (plus dividends
accruing at a rate of 15% per annum from May 3, 1996 to the Effective Time). The
price per share of Common Stock used for purposes of these Unaudited Pro Forma
Condensed Combined Financial Statements is $4.25, based on the closing price of
the Common Stock as reported on Nasdaq on April 22, 1996. The assumed price per
share of the $5.0 million Private Placement is $4.25, based on the lower of the
closing price of the Common Stock as reported on Nasdaq on April 22, 1996 or the
average trading price of $4.56 of the Common Stock for the five trading day
period immediately preceding the Private Placement agreement. See "The Merger
and Related Financings."
Foreign taxes result from the income generated by Wulff. Domestic taxes
result from Federal consolidated Alternative Minimum Taxes and state and local
income taxes.
The Rainbow Casino in Vicksburg began operations in July 1994. In March
1995, Alliance completed its acquisition of the general partnership interest in
the limited partnership owning the casino and from that point forward the
Rainbow Casino's operations have been consolidated with those of Alliance. The
Rainbow Casino's operating results have been included in the Pro Forma Condensed
Combined Statements of Operations as if it was owned for each period presented.
Certain reclassifications of BGII balances have been made to conform to the
Alliance reporting format.
The following adjustments have been made to arrive at the Unaudited Pro
Forma Condensed Combined Financial Information:
2. PRO FORMA CONDENSED COMBINED BALANCE SHEET ADJUSTMENTS AT DECEMBER 31,
1995
(a) To adjust for the net cash proceeds of the Offerings and the Private
Placement, less estimated fees and expenses which have been capitalized in
the case of the Offerings, and netted against the gross proceeds in the case
of the Private Placement.
(b) To adjust for the repayment of $67.6 million of BGII debt as such
instruments are intended to be repaid with the proceeds of the Offerings
including the remaining original issue discount and other costs associated
with the prepayment of the BGII debt totaling $0.8 million. Additionally,
certain deferred financing costs related to the BGII debt totaling $0.5
million will be written off.
69
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
(c) The purchase of BGII is presented as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
CONSIDERATION PAID:
Cash paid for original 1 million shares of BGII common stock owned by
Alliance..................................................................... $ 10,410
Cash consideration............................................................ 77,227
Value of Common Stock to be exchanged for BGII shares......................... 2,940
Value of Preferred Stock to be exchanged for BGII shares...................... 35,671
Contract termination costs for certain BGII personnel (see below)............. 6,320
--------------
Total consideration........................................................... 132,568
Estimated value of BGII's underlying net assets............................... 88,410
--------------
Excess of costs over the net assets of BGII acquired.......................... $ 44,158
--------------
--------------
</TABLE>
The compensation to be paid to BGII personnel consists of cash payable
to Messrs. Gillman and Jenkins totaling $5.8 million and Common Stock valued
at $0.5 million (the number of shares will be determined using the Alliance
Average Trading Price but in no event more than $6.00 nor less than $4.25
per share). As each of the above individuals will not be employed by the
Company after the Merger, such costs have been included in the computation
of goodwill.
Consideration to be paid to Messrs. Kloss and Conover consists of $1.7
million in cash and $3.5 million of Common Stock (the number of shares will
be determined using the Alliance Average Trading Price but in no event more
than $6.00 nor less than $4.25 per share). As Messrs. Kloss and Conover will
remain with the Company, such amounts have been capitalized and will be
amortized over the 2.5 and 1 year life of each of their employment
agreements, respectively. These transactions have been given simultaneous
effect in the Unaudited Pro Forma Condensed Combined Financial Statements
since they are conditions of the Merger Agreement.
The allocation of purchase cost in the pro forma financial statements is
based on available information. After consummation of the Merger, Alliance
will arrange for independent appraisal of the significant assets and
liabilities of BGII to determine the final allocation of purchase
cost. Alliance management does not currently believe that any adjustments to
the final allocation of purchase price will have a material effect on the
pro forma financial statements.
(d) To add back the $1.5 million valuation adjustment net of the tax
effect of $0.8 million, for the Alliance-owned BGII common stock,
representing the difference between the purchase cost of $10.4 million and
the market value at December 31, 1995 of $8.1 million.
(e) To record the payment of certain Merger and related expenses assumed
to be incurred prior to and concurrent with the pro forma balance sheet date
totaling $12.9 million of which $3.2 million has been accrued for at
December 31, 1995.
(f) Represents the conversion of $50.0 million of the Old Convertible
Debentures into shares of Common Stock. Old Convertible Debentures, each
$1,000 principal amount of Old Convertible Debentures were convertible into
100 shares of Common Stock, less aggregate estimated cost of $2.0 million.
The Company has decreased the conversion price so that each $1,000 of
principal will be converted into approximately 180 shares of Common Stock.
The additional 80 shares of Common Stock per $1,000 of principal is treated
as a "sweetener" to the original terms of the Old Convertible Debentures and
is recorded at the fair value of the stock consideration being offered.
In accordance with the rules and regulations of the Commission, the net
loss from the Exchange Offer was not considered in the Unaudited Pro Forma
Condensed Combined Statements of Operations. Assuming $50.0 million of New
Convertible Debentures to be exchanged in the Exchange Offer and converted
into Common Stock pursuant to the Automatic Conversion would result in a
non-cash
70
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
charge of $19.5 million representing the value of the Common Stock
inducement for early conversion of $17.0 million and the write-off of the
proportionate amount of the existing deferred financing costs. For every
change of $10.0 million of New Convertible Debentures converted, the
correlative increase or decrease in the non-cash charge would be $3.9
million.
3. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR
THE YEAR ENDED JUNE 30, 1995
(g) To recognize operations of the Rainbow Casino as if owned for the
entire year.
(h) Alliance development expenses, which relate to mergers, acquisitions
and joint ventures, were reduced to $3.0 million annually resulting in an
adjustment of $3.2 million. Such adjustment does not include any effect from
the elimination of direct costs related to the Merger shown separately in
(j) below. The reduction to $3.0 million reflects the elimination of costs
that were being incurred prior to Alliance's accomplishment of its strategic
plan to acquire a major gaming machine manufacturing company. To accomplish
this reduction Alliance reduced payroll costs and fees paid to consultants
and legal costs related to non-BGII transactions it had been pursuing.
(i) To adjust for estimated synergy cost savings identified by
management to date including elimination of certain duplicative costs, such
as facility, legal, accounting and compensation, which total approximately
$5.0 million on an annual basis.
(j) To eliminate costs associated with the Merger incurred by Alliance
and BGII totaling $1.7 million and $0.3 million, respectively, consisting of
legal, accounting and investment banking fees and related costs.
(k) To record the amortization on the goodwill resulting from the
Merger. The goodwill is being amortized over 40 years.
(l) To amortize the costs associated with the termination of Messrs.
Kloss and Conover's existing employment contracts with BGII over the life of
their respective employment contracts.
(m) To eliminate the amortization of goodwill on the historical
financial statements of BGII.
(n) To adjust for the interest expense on the $140.0 million of debt
which Alliance currently intends to issue as part of the financing of the
Merger, and to amortize the debt issuance costs over 7 years, net of the
elimination of the interest on the BGII debt being refinanced. For every
0.50% change in the interest rate for the $140.0 million debt financing, the
correlating change in interest expense for the year would be $0.7 million on
a pre-tax basis. Also represents the reduction of interest expense caused by
the exchange and conversion into Common Stock of $50.0 million of principal
of the New Convertible Debentures. Every $10.0 million of principal of the
New Convertible Debentures exchanged and converted into Common Stock causes
a decrease in interest expense of $0.75 million on a pre-tax basis.
(o) Represents the reduction of the amortization of the deferred
financing costs related to the $50.0 million of New Convertible Debentures
exchanged and converted into Common Stock.
(p) To adjust for the estimated effect of foreign income tax savings
resulting from acquisition restructuring which will enable Alliance to
allocate items such as interest expense to Wulff.
4. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR
THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1994 AND 1995
(q) To recognize operations of the Rainbow Casino as if owned for each
period.
71
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
(r) Alliance development expenses, which relate to mergers, acquisitions
and joint ventures, were reduced to $3.0 million annually. For the six-month
period ended December 31, 1994, Alliance exceeded this $3.0 million
annualized amount by $2.0 million, but in the most recent six-month period
ended December 31, 1995 Alliance was below this annualized amount by $0.2
million. The elimination of direct costs related to the Merger is shown
separately in note (t) below.
(s) To adjust for estimated synergy cost savings identified by
management to date including elimination of certain duplicative costs, such
as facility, legal, accounting and compensation, which total approximately
$5.0 million on an annual basis.
(t) To eliminate costs associated with the Merger incurred by Alliance
and BGII of $9.4 million and $1.8 million, respectively, for the six-month
period ended December 31, 1995, consisting of legal, accounting and
investment banking fees and related costs. No such merger costs were
incurred by either company in the six-month period ended December 31, 1994.
(u) To record the amortization of the goodwill resulting from the
Merger. The goodwill is being amortized over 40 years.
(v) To amortize the costs associated with the termination of Messrs.
Kloss and Conover's existing employment contracts with BGII over the life of
their respective employment contracts.
(w) To eliminate the amortization of goodwill on the historical
financial statements of BGII.
(x) To adjust for the interest expense on the $140.0 million of debt
which Alliance currently intends to issue as part of the financing of the
Merger, and to amortize the debt issuance costs over 7 years, net of the
elimination of the interest on the BGII debt being refinanced. Also
represents the reduction of interest expense caused by the exchange and
conversion into Common Stock of $50.0 million of principal of the New
Convertible Debentures.
(y) Represents the reduction of the amortization of the deferred
financing costs related to the $50.0 million of New Convertible Debentures
exchanged and converted into Common Stock.
(z) To adjust for the estimated effect of foreign income tax savings
resulting from acquisition restructuring which will enable Alliance to
allocate items such as interest expense to Wulff.
5. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR
THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1995
Alliance management believes that it is useful to present an unaudited pro
forma statement of operations for the most recent twelve-month period ended
December 31, 1995 in addition to those already presented because it is more
representative of the Company's current operations. This presentation assumes
that the Transaction occurred on January 1, 1995. All relevant adjustments have
been presented consistent with the Pro Forma Adjustments noted above.
(aa) To recognize operations of the Rainbow Casino as if owned for the
entire year.
(bb) Alliance development expenses, which relate to mergers,
acquisitions and joint ventures, were reduced to $3.0 million annually,
resulting in a cost reduction on a pro forma basis of $1.0 million for the
twelve-month period ended December 31, 1995. The development expenses
exceeded this $3.0 million annual amount during the first six-month period
ended June 30, 1995 by $1.2 million; however, development expenses were
below this annual amount during the six month period ended December 31, 1995
by $0.2 million. The elimination of direct costs related to the Merger is
shown separately in (dd) below.
(cc) To adjust for estimated synergy cost savings identified by
management to date including elimination of certain duplicative costs, such
as facility, legal, accounting and compensation, which total approximately
$5.0 million on an annual basis.
72
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
(dd) To eliminate costs associated with the Merger incurred by Alliance
and BGII of $11.1 million and $2.0 million, respectively, consisting of
legal, accounting and investment banking fees and related costs.
(ee) To record the amortization of the goodwill resulting from the
Merger. The goodwill is being amortized over 40 years.
(ff) To amortize the costs associated with the termination of Messrs.
Kloss and Conover's existing employment contracts with BGII over the life of
their respective employment contracts.
(gg) To eliminate the amortization of goodwill on the historical
financial statements of BGII.
(hh) Represents the reduction of the amortization of the deferred
financing costs related to the $50.0 million of New Convertible Debentures
exchanged and converted into Common Stock.
(ii) To adjust for the interest expense on the $140.0 million of debt
which Alliance currently plans to issue as part of the financing of the
Merger, and to amortize the debt issuance costs over 7 years, net of the
elimination of the interest on the BGII debt being refinanced. Also
represents the reduction of interest expense caused by the exchange and
conversion into Common Stock of $50.0 million of principal of the New
Convertible Debentures.
(jj) To adjust for the estimated effect of foreign income tax savings
resulting from acquisition restructuring which will enable Alliance to
allocate items such as interest expense to Wulff.
6. SHARE INFORMATION
The following table reflects computations of the pro forma number of shares
of Common Stock outstanding and the per share computations (shares in millions):
<TABLE>
<CAPTION>
12 MONTHS 6 MONTHS 6 MONTHS 12 MONTHS
ENDED JUNE 30, ENDED DEC. 31, ENDED DEC. 31, ENDED DEC. 31,
1995 1994 1995 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Historical weighted average shares outstanding
(a)............................................... 11.3 11.1 11.9 11.4
Shares to be sold in the Private Placement......... 1.2 1.2 1.2 1.2
Shares to be issued to BGII stockholders........... 0.7 0.7 0.7 0.7
Common Stock to be issued to terminate contracts
for certain BGII personnel........................ 0.9 0.9 0.9 0.9
Common Stock to be issued in the Automatic
Conversion........................................ 9.0 9.0 9.0 9.0
--- --- --- ---
Pro forma weighted average shares
outstanding................................... 23.1 22.9 23.7 23.2
--- --- --- ---
--- --- --- ---
</TABLE>
- ------------------------
(a) Excludes 1.3 million shares of non-voting special stock held by KIC, which
was converted into Common Stock in December 1995.
73
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
Effect of the Merger on the shareholders of Alliance, assuming a stock price
of $4.25, is as follows (shares in millions):
<TABLE>
<S> <C> <C> <C> <C>
Shares of Common Stock outstanding at
December 31, 1995....................... 13.0
Shares of BGII common stock outstanding
at December 31, 1995.................... 10.8
Less the shares of BGII common stock
already owned by Alliance........... 1.0
---
BGII common stock to be
converted......................... 9.8
---
---
Common Stock to be issued to BGII
shareholders............................ 0.7
Common Stock to be issued to terminate
contracts for certain BGII personnel.... 0.9
Common Stock to be sold in Private
Placement............................... 1.2
Common Stock to be issued in the
Automatic Conversion.................... 9.0
---
Pro forma total outstanding shares... 24.8
---
---
</TABLE>
7. SUPPLEMENTAL PRO FORMA INFORMATION
Additional supplemental information regarding cash flow and fixed charges
has been presented with adjustments consistent with those shown in the pro forma
operating results. The earnings required to cover the Preferred Stock dividend
fixed charge have been presented excluding the effects of income taxes due to
the fact that the pro forma results of operations reflect losses from continuing
operations, resulting in a computed effective tax rate from continuing
operations that is not meaningful.
74
<PAGE>
SUPPLEMENTAL ANALYSIS OF
ADJUSTED OPERATING CASH FLOW
The Company believes that it is important to present supplementally an
analysis of its Adjusted Operating Cash Flow, given the pro forma leverage ratio
of the Company. Reference should be made to the Unaudited Pro Forma Condensed
Combined Financial Information presented elsewhere herein. The information
presented in the following schedule is being provided solely for the purposes of
assisting a prospective investor in making an investment decision.
The Company believes that this information is a useful adjunct to net
income, cash flows and other generally accepted accounting principles ("GAAP")
measurements. However, this supplemental information should not be construed as
an alternative to net income or any other GAAP measure of performance as an
indicator of the Company's performance or to GAAP-defined cash flows generated
by operating, investing and financing activities as an indicator of cash flows
or a measure of liquidity.
Alliance management has made certain adjustments to the combined operating
income and has made further adjustments thereto to arrive at a measure of
adjusted operating cash flow ("Adjusted Operating Cash Flow"). As is more fully
described below, such adjustments consist of the elimination of certain charges
that management has determined to be non-recurring or unusual, as well as
adjustments made to reflect the most recent operating results of the Rainbow
Casino by annualizing the most recent six month operating results (seasonally
adjusted), and presenting such results as if they had occurred for each period
presented. The concepts of non-recurring or unusual charges are not defined in
GAAP. In making these adjustments, management considered non-recurring revenue
items as well as non-recurring expense items. There can be no assurance that
other unusual charges will not occur in the future.
75
<PAGE>
SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ESTIMATED
ALLIANCE BGII SYNERGY ADJUSTED OPERATING
-------------------------- ------------- COST CASH FLOW AND PRO FORMA
HISTORICAL AS ADJUSTED AS ADJUSTED SAVINGS NET INTEREST EXPENSE
----------- ------------- ------------- ----------- -----------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1995
Operating Income (Loss)................. $ (4,261) $ 1,543 $ 17,962
Depreciation and Amortization........... 9,520 10,413 8,482
Minority Interest....................... (397) (397) --
Casino Royalty.......................... (810) (3,431) --
----------- ------------- -------------
$ 4,052 8,128 26,444
----------- ------------- -------------
-----------
Reclassification of Certain Direct
Merger Costs......................... 1,669 250
ADJUSTMENTS:
Rainbow Operations.................... 5,219 --
Other Unusual or Nonrecurring
Charges.............................. 2,367 1,950
------------- -------------
Adjusted Operating Cash Flow............ $ 17,383 $ 28,644 $ 5,000 $ 51,027
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.......... $ 19,578
-------
-------
SIX MONTH PERIOD ENDED DECEMBER 31, 1994
Operating Income (Loss)................. $ (1,861) $ 1,214 $ 6,683
Depreciation and Amortization........... 4,613 5,519 4,608
Minority Interest....................... (169) (169) --
Casino Royalty.......................... -- (1,665) --
----------- ------------- -------------
$ 2,583 4,899 11,291
----------- ------------- -------------
-----------
ADJUSTMENTS:
Rainbow Operations.................... 3,307 --
Other Unusual or Nonrecurring
Charges.............................. -- 800
------------- -------------
Adjusted Operating Cash Flow............ $ 8,206 $ 12,091 $ 2,500 $ 22,797
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.......... $ 9,786
-------
-------
SIX MONTH PERIOD ENDED DECEMBER 31, 1995
Operating (Loss)........................ $ (3,524) $ (3,724) $ (2,915)
Depreciation and Amortization........... 4,906 4,906 5,079
Minority Interest....................... (276) (276) --
Casino Royalty.......................... (1,908) (1,908) --
----------- ------------- -------------
$ (802) (1,002) 2,164
----------- ------------- -------------
-----------
Reclassification of Certain Direct
Merger Costs......................... 9,437 1,750
ADJUSTMENTS:
Other Unusual or Nonrecurring
Charges.............................. -- 4,266
------------- -------------
Adjusted Operating Cash Flow............ $ 8,435 $ 8,180 $ 2,500 $ 19,115
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.......... $ 10,097
-------
-------
TWELVE MONTH PERIOD ENDED DECEMBER 31,
1995
Operating Income (Loss)................. $ (5,924) $ (3,395) $ 8,364
Depreciation and Amortization........... 9,813 9,800 8,953
Minority Interest....................... (504) (504) --
Casino Royalty.......................... (2,718) (3,674) --
----------- ------------- -------------
$ 667 2,227 $ 17,317
----------- ------------- -------------
-----------
Reclassification of Certain Direct
Merger Costs......................... 11,106 2,000
ADJUSTMENTS:
Rainbow Operations.................... 1,912 --
Other Unusual or Nonrecurring
Charges.............................. 2,367 5,416
------------- -------------
Adjusted Operating Cash Flow............ $ 17,612 $ 24,733 $ 5,000 $ 47,345
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.......... $ 19,889
-------
-------
</TABLE>
The above supplemental analysis should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Information and the notes
thereto. In this regard, for the year ended June 30, 1995 the Company's pro
forma deficit of earnings to fixed charges was $0.5 million, and the pro forma
deficit of earnings to fixed charges after the Preferred Stock dividend was $8.6
million. The Company's pro forma deficit of earnings to fixed charges, both
before and after the Preferred Stock dividend, for the twelve months ended
December 31, 1995 was $3.8 million, and $11.8 million, respectively. The
Company's pro forma deficit of earnings to fixed charges, both before and after
the Preferred Stock dividend, for the six-
76
<PAGE>
month period ended December 31, 1994 was $3.4 million and $7.3 million,
respectively. The Company's pro forma deficit of earnings to fixed charges, both
before and after the Preferred Stock dividend, for the six-month period ended
December 31, 1995 was $6.7 million and $10.6 million, respectively.
The direct Merger costs have been reclassified and presented in computing
the separate company Adjusted Operating Cash Flow, as management believes that
such presentation provides additional relevant information to the potential
purchasers of the Company's securities, after eliminating direct costs related
to the Merger.
DIRECT MERGER COSTS. Both Alliance and BGII have incurred direct costs
related to the Merger consisting of legal, accounting, and investment banking
fees and related costs. For Alliance, such costs totalled $1.7 million, $9.4
million and $11.1 million for the year ended June 30, 1995, the six months ended
December 31, 1995 and the twelve months ended December 31, 1995, respectively.
BGII's direct costs incurred relating to the Merger totalled $0.2 million, $1.8
million and $2.0 million for the year ended June 30, 1995, the six months ended
December 31, 1995 and the twelve months ended December 31, 1995, respectively.
The adjustments which were made in determining the supplemental analysis of
Adjusted Operating Cash Flow, which were not considered in the preceding
Unaudited Pro Forma Condensed Combined Statements of Operations reflect the
following:
RAINBOW OPERATIONS. The final elements of the Rainbow Casino facility,
consisting of an 89-room hotel and an amusement park and the completion of the
casino exterior decor, parking, landscaping and signage, were not completed
until July 1995, although the Rainbow Casino had been open without these
amenities since July 1994. Although the hotel and amusement park are not owned
or operated by Alliance, management believes that such facilities have
contributed significantly to the recent strong financial results of the Rainbow
Casino. Therefore Alliance management believes that the results of operations
for the six months ended December 31, 1995 after considering seasonality (which
management believes was immaterial) are more reflective of the property's
ongoing results of operations. Accordingly, such results for the twelve months
ended December 31, 1995 have been annualized based on the actual financial
results for the six months ended December 31, 1995, as Alliance management
believes that such results better portray the Rainbow Casino's contribution to
Adjusted Operating Cash Flow. This annualization involves forward-looking
statements that involve risks and uncertainties, including the risks of
competition, gaming regulation and the other risks detailed in this Prospectus,
including under "Risk Factors."
BGII ONE-TIME COSTS. Certain charges incurred by BGII consist of costs
relating to a regulatory investigation and legal proceedings in Louisiana
totalling $1.0 million, legal costs related to a former executive totaling $0.5
million, and legal costs related to the "Bally" trade name litigation that were
directly caused by the investigation totaling $0.2 million during the fiscal
year ended June 30, 1995. For the six months ended December 31, 1994, these
charges consisted of legal costs relating to Louisiana of $0.3 million and legal
costs related to a former executive of $0.5 million. Results for the six months
ended December 31, 1995 were adjusted for charges consisting of a reserve for
German VAT taxes and the write-down of a building in Germany, which had been
acquired in the purchase of a distributor and never used by Wulff, to its net
realizable value in anticipation of its sale, totalling $1.8 million, as well as
to adjust for legal costs relating to Louisiana of $0.7 million. During the year
ended December 31, 1995, legal costs relating to Louisiana totalled $1.4
million, legal costs related to the "Bally" trade name litigation totaled $0.2
million, and charges in Germany were $1.8 million. Such costs are considered to
be non-recurring.
During the year ended December 31, 1995, BGII entered into a merger
agreement with WMS, which was ultimately terminated to enter into the Merger
Agreement with Alliance. Based on management's assessment and allocation of the
total costs incurred for both the WMS and Alliance merger transactions one-time
costs related to the WMS transaction were, $0.2 million, $1.8 million and $2.0
million for the fiscal year ended June 30, 1995, the six months ended December
31, 1995 and the twelve months ended December 31, 1995, respectively.
77
<PAGE>
ALLIANCE ONE-TIME COSTS. One-time charges incurred by Alliance consist of
an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million
of termination costs for certain directors. These charges were incurred during
the quarter ended June 30, 1995 and are therefore included as adjustments only
for the twelve months ended June 30, 1995 and December 31, 1995.
SYNERGY COST SAVINGS. Although management cannot precisely quantify future
savings, the Company has identified and expects to realize synergy cost savings
of approximately $5.0 million on an annual basis (primarily through the
reduction of duplicative costs, such as facility, legal, accounting and
compensation costs) as a result of the Merger. The Company further expects to
incur approximately $1.0 million in one-time implementation costs in realizing
these savings, which expenditures have been added back in arriving at the above
supplemental analysis.
78
<PAGE>
FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW
The following Forecast of Operating Income and Adjusted Operating Cash Flow
(the "Forecast") is based on the expected combined operating data for Alliance
and BGII for the twelve-month period ending December 31, 1996, to the best of
management's knowledge and belief. The Forecast is based on the Company's
current best estimates of expected results given the forecasted assumptions
described in the Summary of Significant Assumptions and Accounting Policies for
the Forecast for the period presented. The Forecast, which consists of
forward-looking statements, is qualified by, and subject to, the assumptions set
forth below and the other information contained in this Prospectus, and should
be read in conjunction with the Summary of Significant Assumptions and
Accounting Policies for the Forecast as well as the "Unaudited Pro Forma
Condensed Combined Financial Information," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the audited and unaudited
historical consolidated financial statements and related notes thereto of
Alliance and BGII included elsewhere herein.
The Company does not intend to update or otherwise revise the Forecast to
reflect events or circumstances existing or arising after the date of this
Prospectus or to reflect the occurrence of unanticipated events. BGII's
independent accountants, Coopers & Lybrand L.L.P., have neither examined nor
compiled nor had any other involvement with the preparation of the Forecast and
accordingly do not express an opinion or any other form of assurance with
respect thereto, nor do they assume any responsibility for the Forecast.
Independent accountants for Alliance, KPMG Peat Marwick LLP, have not examined
the Forecast presented herein and, accordingly, do not express an opinion or any
other form of assurance with respect thereto, and no other independent expert
has examined the Forecast.
The Forecast is based upon a number of estimates and assumptions that while
presented with numerical specificity and considered reasonable by management of
the Company, are inherently subject to significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of which
are difficult to predict and many of which are beyond the control of the
Company. The assumptions disclosed herein are those that the Company believes
are significant to the Forecast and reflects management's judgment as of the
date hereof. The Forecast is necessarily speculative in nature, and it is
usually the case that one or more of the assumptions do not materialize.
However, not all assumptions used in the preparation of the Forecast have been
set forth herein. In addition, as disclosed elsewhere in this Prospectus under
"Risk Factors", the business and operations of the Company are subject to
substantial risks which increase the uncertainty inherent in the Forecast. Many
of the factors disclosed under "Risk Factors" in this Prospectus could cause
actual results to differ materially from those expressed in the Forecast. The
Forecast and actual results will vary, and those variations may be material.
Accordingly, the inclusion of the Forecast herein should not be regarded as a
representation by the Company or any other person that the Forecast will be
achieved. The Forecast is provided solely for the purposes of assisting a
prospective investor in making an investment decision, and not for purposes of
assessing equity value. The inclusion of the Forecast herein should not be
regarded as a representation by the Company or any other person that the
Forecast will be achieved. Prospective investors are cautioned not to place
undue reliance on the Forecast.
The Company was the sole preparer of the Forecast, which was prepared in
accordance with guidelines established by the American Institute of Certified
Public Accountants, except that it combines Alliance and BGII as if the
Transaction had occurred and it omits the disclosure of non-operating items,
income taxes, extraordinary items, net income and significant changes in
financial position.
The Forecast indicates Operating Income and Adjusted Operating Cash Flow,
but it may not fully reflect the Company's ability to pay cash interest
requirements because it does not reflect other cash obligations and
requirements, such as mandatory payments on debt principal and preferred stock
redemptions and dividends, and operating requirements relating to capital
maintenance and expansion. Because the Forecast has been prepared on a combined
basis, the Forecast does not account for the Company's holding company
structure, which will result in cash flows earned at certain subsidiaries being
unavailable for distribution to the Company, including to service indebtedness
of the Company.
79
<PAGE>
ALLIANCE GAMING CORPORATION
FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW
FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 1996
WITH COMPARATIVE ANALYSIS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
COMPARATIVE ANALYSIS OF
OPERATING INCOME AND
ADJUSTED OPERATING CASH
FLOW (1)
--------------------------
FORECASTED OPERATING INCOME
TWELVE MONTHS AND ADJUSTED OPERATING
ENDED DECEMBER 31, CASH FLOW FOR THE TWELVE
-------------------------- MONTHS
1994 1995 ENDING DECEMBER 31, 1996
------------ ------------ ------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING INFORMATION:
Revenues
Gaming.......................................... $ 129,690 $ 147,590 $ 163,389
Food and Beverage Sales......................... 7,096 4,045 4,189
Net Equipment Sales............................. 236,245 249,329 258,379
------------ ------------ --------
Total Revenues................................ 373,031 400,964 425,957
------------ ------------ --------
Operating Costs
Gaming.......................................... 90,125 98,377 103,331
Food and Beverage............................... 4,755 2,884 3,150
Equipment Sales................................. 152,582 157,800 158,804
Selling, General and Administrative............. 91,808(2) 96,259(2) 110,412(2)
Unusual Charges................................. -- 3,816 --
Depreciation and Amortization................... 22,618 22,719 23,192
------------ ------------ --------
Total Operating Costs....................... 361,888 381,855 398,889
------------ ------------ --------
Operating Income.................................. 11,143 19,109 27,068
------------ ------------ --------
SUPPLEMENTAL INFORMATION:
Operating Income.................................. 11,143 19,109 27,068
Depreciation and Amortization..................... 22,618 22,719 23,192
Casino Royalty.................................... (1,670) (3,674) (4,368)
Minority Interest................................. (675) (504) (920)
------------ ------------ --------
Subtotal........................................ 31,416 37,650 44,972
Adjustments:
Rainbow Operations.............................. -- 1,912(3) --
Other Unusual or Non-recurring Charges.......... 2,856(4) 7,783(4) 1,000(5)
Direct Merger Costs............................. -- -- 8,944(6)
------------ ------------ --------
Adjusted Operating Cash Flow...................... $ 34,272 $ 47,345 $ 54,916
------------ ------------ --------
------------ ------------ --------
OTHER DATA:
Net Interest Expense............................ $ 20,600
--------
--------
Mandatory Principal Payments.................... $ 4,957
--------
--------
Capital Expenditures............................ $ 13,485
--------
--------
</TABLE>
- ------------------------
(1) See Note 2 -- Presentation of Supplemental Comparative Information of the
"Summary of Significant Assumptions and Accounting Policies for the
Forecast."
(2) Includes selling, general and administrative costs for the twelve months
ended December 31, 1994 and 1995 net of the following: direct Merger costs,
the business development costs over the $3.0 million budgeted amount
totaling $4.7 million and $12.1 million in 1994 and 1995, respectively and
net synergy cost savings totaling $5.0 million in 1994 and 1995 and $4.0
million in 1996. See note (6) below for one-time $1.0 million costs to
implement synergy cost savings. See note (6) below for the 1996 presentation
which includes direct Merger costs.
(3) Represents adjustment to reflect Rainbow Casino's annualized results for the
period net of incremental royalty.
(4) Reflects items determined by management to be unusual or non-recurring
(which are also included in Total Operating Costs). The concepts of one-time
or unusual charges are not defined in GAAP.
(5) For 1996, the non-recurring charges consist of the $1.0 million of one-time
charges (which are included in Selling, General and Administrative costs) to
implement the expected annual synergy cost savings (which are reflected in
Total Operating Costs as well).
(6) Direct Merger Costs for 1996 have been included in Total Operating Costs and
presented as an adjustment in computing the Adjusted Operating Cash Flow.
See note (2) above for the presentation of direct Merger costs in 1994 and
1995.
See accompanying Summary of Significant Assumptions and Accounting Policies for
the Forecast
80
<PAGE>
SUMMARY OF SIGNIFICANT
ASSUMPTIONS AND ACCOUNTING POLICIES FOR THE FORECAST
FOR THE TWELVE-MONTH PERIOD ENDING DECEMBER 31, 1996
NOTE 1. -- INTRODUCTION
The Forecast of Operating Income and Adjusted Operating Cash Flow for the
twelve-month period ending December 31, 1996 and the accompanying related
Summary of Significant Assumptions and Accounting Policies of Alliance Gaming
Corporation and subsidiaries, after consummation of the Transaction, represent
the Company's best estimate as of the date of the Forecast of Operating Income
and Adjusted Operating Cash Flow of the Company for the first twelve months of
combined operations (after elimination of all significant intercompany accounts
and transactions). The Forecast reflects management's judgment, based on present
circumstances, of the expected set of conditions and their expected courses of
action, to the extent such conditions or action are anticipated to affect the
results described in the Forecast.
The assumptions described herein are those that management believes are
significant to the Forecast or are the key factors upon which the results shown
in the Forecast depend. However, not all assumptions used in the preparation of
the forecast have been set forth herein. The estimates and assumptions, which
though considered reasonable by management may not be achieved and are
inherently subject to significant business, economic, regulatory and competitive
uncertainties and contingencies, including possible competitive responses, many
of which are not within the control of the Company and are not possible to
assess accurately. Therefore, the actual results achieved during the forecast
period will vary from those set forth in the Forecast, and the variations may be
material. Prospective investors are cautioned not to place undue reliance on the
Forecast.
The Forecast assumes that, among other things: (i) the proceeds of the
Offerings and the Private Placement are used as contemplated in "Use of
Proceeds;" (ii) there will be no change in generally accepted accounting
principles that may have a direct material effect on the reporting of financial
results of the Company; (iii) there will be no material changes made to gaming
regulations that would affect the operations of the Company; and (iv) that
management will realize the anticipated synergies. Management believes that
these assumptions, when taken together with management's extensive experience in
operating in such markets, provide a reasonably objective basis to forecast the
Company's operations for the period presented.
The Company does not intend to update or otherwise revise the Forecast to
reflect events or circumstances existing or arising after the date hereof or to
reflect the occurrence of unanticipated events. The Forecast is provided solely
for the purposes of assisting a prospective investor in making an investment
decision, and not for the purposes of assessing equity value.
For a discussion of significant accounting policies see Note 1 of the Notes
to the Alliance audited consolidated financial statements and the "Summary of
Significant Accounting Policies" of the notes to the BGII audited consolidated
financial statements included elsewhere in this Prospectus.
NOTE 2. -- PRESENTATION OF SUPPLEMENTAL COMPARATIVE INFORMATION
For the purpose of assisting investors in evaluating the forecasted
information, the Company has presented a Comparative Analysis for the
twelve-month periods ended December 31, 1994 and 1995. The Statement of
Operations Information in the Comparative Analysis for the twelve months ended
December 31, 1995 has been derived from the Company's Unaudited Pro Forma
Condensed Combined Statements of Operations and the Supplemental Information in
the Comparative Analysis for the twelve months ended December 31, 1995 has been
derived from the Supplemental Analysis of Adjusted Operating Cash Flow included
elsewhere herein. The Comparative Analysis for the twelve months ended December
31, 1994 has been derived using accounting principles and assumptions consistent
with those used in deriving the Comparative Analysis for the twelve months ended
December 31, 1995, and includes adjustments for the planned reduction of the
Company's ongoing development costs to $3.0 million per year, resulting in an
adjustment for such period of $4.7 million, certain estimated synergy cost
savings (net of one-time implementation costs) and items management believes to
be one-time charges totaling $2.8 million, and assumes that the Rainbow Casino
was owned since its opening in July 1994. The Comparative Analysis presented for
the twelve-month periods ended December 31, 1994 and 1995 has been prepared by
management to provide potential investors with additional information to analyze
the Forecast and should not be construed as a
81
<PAGE>
NOTE 2. -- PRESENTATION OF SUPPLEMENTAL COMPARATIVE INFORMATION (CONTINUED)
presentation of actual historical results or expected future results. The
"Unaudited Pro Forma Condensed Combined Financial Information," "Supplemental
Analysis of Adjusted Operating Cash Flow" and the audited and unaudited
historical consolidated financial statements and related notes thereto of
Alliance and BGII included elsewhere herein should be read for additional
information.
NOTE 3. -- OPERATING ASSUMPTIONS
The assumptions disclosed herein are those that management believes are
significant to the Forecast. There will be differences between forecasted and
actual results, because events and circumstances frequently do not occur as
expected, and those differences may be material.
REVENUES AND COST OF SALES
GAMING MACHINE MANAGEMENT OPERATIONS
NEVADA
In its Nevada gaming machine management operations, Alliance selects, owns,
installs, manages and services gaming devices (approximately 5,250 devices at
December 31, 1995) in third-party owned local establishments such as taverns,
restaurants, supermarkets, drug stores and convenience stores (approximately 520
locations at December 31, 1995).
The Company has agreements with local bars, taverns, restaurants and
convenience stores for either space leases or revenue-sharing arrangements.
Under the revenue-sharing arrangements, the Company shares the revenues from the
machines with the location operator, and with space leases the Company pays a
fixed rental to the owner of the establishment and then the Company receives all
of the revenues derived from the gaming devices. At December 31, 1995, the
weighted average remaining term of the Company's revenue-sharing arrangements
was approximately 3.9 years, and for space leases was approximately 2.9 years.
NEVADA GAMING MACHINE MANAGEMENT OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS MONTHS
ENDED DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS EXCEPT UNIT
DATA)
<S> <C> <C> <C>
Average Number of Machines............................................. 5,180 5,288 5,482
Average Number of Locations............................................ 504 521 541
Total Revenues......................................................... $90,092 $91,949 $101,579
Costs and Expenses..................................................... $76,248 $77,507 $85,582
</TABLE>
Gaming machine management revenues are a function of the average number of
machines installed, times the average net win per machine. The revenues are
assumed to increase due to the increase in the number of Alliance's machines
installed, which reflects increased demand caused in part by Nevada's
significant population growth trend. The Forecast assumes the renewal of 80% of
the contracts expiring during the forecast period which the Company intends to
retain. For the year ended June 30, 1995, the Company did not renew 17% of
expiring agreements, including those the Company had determined to allow to
lapse.
Additionally, in December 1995, the Company implemented the Gambler's Bonus
cardless slot player's club and player tracking system. The Company assumes, for
the purpose of this Forecast, that there will be 88 locations, or an aggregate
of 980 machines, installed at June 1996, increasing to 130 locations, or 1,490
machines, at December 1996. Consistent with results of previously installed
machines linked to Gambler's Bonus, the Forecast assumes that there will be an
increase in the average net win per machine at these locations. Consistent with
contracts signed to date, the Forecast assumes that the contracts with the
additional locations will allow the Company to receive a percentage of the
increased gaming win generated
82
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
by Gambler's Bonus in addition to its existing revenue participation. Forecasted
results of the Nevada gaming operations are directly dependent upon the
realization of these assumptions. Variations from the realization of these
assumptions will have a material effect upon the forecasted results.
The Forecast assumes that the Nevada gaming machine management operations
costs and expenses (which include selling, general and administrative costs)
related to gaming machine management are relatively stable as a percentage of
revenues as compared to the 1995 levels.
LOUISIANA
VSI operates video poker devices in the greater New Orleans area under an
exclusive agreement with the owner of the only full service thoroughbred horse
racing facility and its 10 associated OTBs. The tenth OTB location opened in
Metairie, Louisiana in October 1995, bringing the total number of machines in
operation to approximately 700 (which is the assumed number of machines for the
forecasted period). Only the operator of the full service horse racing facility
may own OTBs.
LOUISIANA GAMING MACHINE MANAGEMENT OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average Number of Machines................................................ 724 702 700
Total Revenues............................................................ $17,196 $15,739 $ 16,946
Cost and Expenses......................................................... $13,882 $11,921 $ 12,985
</TABLE>
Revenues are assumed to increase as a result of the full year impact of the
Metairie OTB location completed in October 1995.
The Forecast assumes that the statute that permits the operation of
unlimited numbers of video poker devices in pari-mutuel horse racing tracks and
the associated OTB's is not adversely amended in the current Louisiana
legislature session or changed by referendum. See "Risk Factors -- Strict
Regulation by Gaming Authorities." Forecasted results of the Louisiana gaming
operations are directly dependent upon the assumption concerning the pending
legislation. An unfavorable result in legislation or referendum will have a
material adverse effect upon the forecasted results.
Pursuant to the terms of the VSI Loan (as defined), VSI may not pay cash
dividends or make any distribution of its property. The loan, which had an
outstanding balance of $3.4 million at December 31, 1995, amortizes quarterly
until due in full in September 1998 and may be prepaid at any time without
penalty. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Forecast assumes that costs related to operation of the video poker
devices in the greater New Orleans area (which include selling, general and
administrative costs) are relatively stable as a percentage of revenues as
compared to the 1995 levels.
83
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
CASINO OPERATIONS
PLANTATION STATION
PLANTATION STATION OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT UNIT
DATA)
<S> <C> <C> <C>
Average Number of Slot Machines.............................................. 422 462 453
Win/Slot/Day................................................................. $ 46 $ 38 $ 41
Average Number of Table Games................................................ 9 9 9
Win/Table/Day................................................................ $ 260 $ 219 $ 225
Gaming Revenues.............................................................. $ 8,892 $ 8,209 $ 8,645
Total Revenues............................................................... $ 12,847 $ 12,183 $ 12,653
Costs and Expenses........................................................... $ 10,425 $ 10,150 $ 10,555
</TABLE>
Total revenues include food and beverage sales, which are assumed to remain
relatively stable compared to 1995; however, the food and beverage sales provide
only minimal gross profit.
The Forecast assumes that total revenues will experience a 4% increase from
the previous year. Management assumes that the Sparks, Nevada gaming market will
increase by 3% in 1996 compared to 5% growth for calendar 1995 as reported by
the Nevada Gaming Control Board. In addition, because the negative impact on
Plantation Station of a major street, sidewalk, and landscaping redevelopment
project by the City of Sparks ended in December 1995, the Forecast assumes that
revenues will increase in 1996. Forecasted results of the Plantation Station
operations are directly dependent upon the realization of these assumptions.
Variations from these assumptions will have a material effect upon the
forecasted results.
Management also assumes that the cost of operations at the Plantation
Station will remain stable as a percentage of total revenues as compared to the
1995 levels.
84
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
RAINBOW CASINO
RAINBOW CASINO OPERATIONS (A)
<TABLE>
<CAPTION>
FORECASTED
TWELVE MONTHS ENDED TWELVE
MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS EXCEPT UNIT
DATA)
<S> <C> <C> <C>
TOTAL VICKSBURG MARKET
Number of Slots.............................................................. 2,849 2,847 2,880
Number of Tables............................................................. 152 154 155
Win/Slot/Day................................................................. $ 124 $ 142 $ 153
% CHANGE................................................................... -- 15.2% 7.4%
Win/Table/Day................................................................ $ 851 $ 789 $ 730
% CHANGE................................................................... -- -7.2% -7.5%
Win/Position/Day............................................................. $ 128 $ 140 $ 145
% CHANGE................................................................... -- 9.2% 4.0%
RAINBOW
Number of Slots.............................................................. 573 589 589
Number of Tables............................................................. 28 28 25
Win/Position/Day............................................................. $ 72 $ 102 $ 132
% CHANGE................................................................... -- 42.7% 29.2%
Total Revenues............................................................... $ 10,433 $ 29,069 $ 36,400
Costs and Expenses........................................................... $ 7,918 $ 18,995 $ 23,540
</TABLE>
- ------------------------
(a) The information for 1994 and 1995 represents the historical results of the
Rainbow Casino, which opened in July 1994 and was not consolidated with
Alliance until March 1995.
The total gaming market for the Vicksburg Mississippi area is assumed to
increase 5% to approximately $200 million for 1996. Management assumes that its
location at Vicksburg Landing and the adjoining amenities enable the Rainbow
Casino to attract visitors from the existing tourism market of the historic city
of Vicksburg as well as a significant share of the local market. The Rainbow
Casino market share is assumed to remain at its current 18% level which is up
from 13% prior to the opening of the Days Inn Hotel, the Funtricity
Entertainment Center and the restaurant in July 1995. Both the hotel and
entertainment park are operated by third parties. Forecasted results of
Mississippi gaming operations are directly dependent upon the realization of
these assumptions. Variations from these assumptions will have a material effect
upon forecasted results.
The costs and expenses are assumed to remain stable as a percentage of
gaming revenues as compared to the 1995 levels.
NET EQUIPMENT SALES
Forecasted net equipment sales revenues includes the operating results from
Gaming, Systems and Wulff. There are numerous factors which affect any forecast
of net gaming equipment sales, including gaming regulatory factors and casino or
arcade patron preferences. The impact of such factors on the Company will be
material.
GAMING
Net equipment sales reflect the sales of video and reel-type gaming machines
to casinos in various jurisdictions, including casinos in Nevada and Atlantic
City, riverboats, Native American casinos, and international markets. Net
equipment sales is a function of the number of unit sales and the net sales
price per unit. Gaming results include GmbH and BGI Australia Pty Limited along
with certain reclassifications from historical presentation.
85
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
GAMING
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
UNIT SALES
United States.............................................................. 17,126 12,586 14,991
International.............................................................. 4,499 5,498 5,509
---------- ---------- ------------
Total.................................................................. 21,625 18,084 20,500
Net Revenues............................................................... $ 118,659 $ 111,849 $ 122,483
Cost and Expenses.......................................................... $ 111,655 $ 105,944 $ 111,733
</TABLE>
Although worldwide electronic gaming machine sales (for these purposes,
primarily slot and video machines) decreased in 1995, management assumes that
1996 worldwide gaming machine sales will increase as a result of (1) three major
casino openings in Las Vegas, (2) the opening of Indiana riverboat casinos and
(3) the expansion of certain other markets and the increasing demand for
replacement machines. However, particularly in the case of non-traditional
gaming markets, the timing and magnitude of electronic gaming machine sales is
difficult to predict with accuracy. The Forecast assumes a relatively constant
market share during the forecast period while Gaming's share during the past
three years has grown significantly.
The Forecast assumes gross margin increases during the forecast period due
to a 1.5% increase in net unit price, continued reduction in the new material
cost per unit (although at a lower rate than experienced during the past two
years) and improved manufacturing efficiencies as a result of higher production
levels during the forecast period than during the year ended December 31, 1995.
Gaming's forecasted operating results are directly dependent upon the
realization of these assumptions. The Forecast assumes selling, general and
administrative expenses will increase as a result of increased product
development and sales efforts. Variations from these assumptions will have a
material effect upon forecasted results. As Gaming's manufacturing overhead
costs and selling, general and administrative expenses are relatively fixed,
variances from the forecasted unit sales impact margins to a greater extent than
if such costs were predominantly variable.
SYSTEMS
Systems' revenues reflect the sales of computer hardware and computer
software, as well as maintenance and upgrades of such computer equipment, to
casinos in various jurisdictions, including Nevada and Atlantic City,
riverboats, Native American casinos and, to a lesser extent, in international
markets. Hardware and software sales are based on the contracts that Systems
enters into with each of the individual casinos. Such contracts generally
reflect pre-determined prices for goods and services provided by Systems.
Maintenance revenues are generally a function of the total installed base of
Systems' GMUs.
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Revenues....................................................... $ 13,386 $ 20,681 $ 20,565
Cost and Expenses.................................................. $ 9,793 $ 14,893 $ 14,262
</TABLE>
Management assumes that revenues during the forecast period will be
comparable to the prior year. The forecasted net revenues assumes that
approximately 40% of Systems' sales result from product upgrades and expansions.
The Forecast assumes gross margin will increase during the forecast period due
to lower average discounts off list-price primarily due to a change in customer
mix and the absence of a provision for product upgrades which was recorded
during the year ended December 31, 1995. The forecast assumes
86
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
selling, general and administrative expenses will increase approximately 13%.
Systems' forecasted operating results are directly dependent upon the
realization of these assumptions. Variations from these assumptions will have a
material effect upon forecasted results. In particular, because Systems'
revenues are concentrated in a relatively small number of customers, a change in
circumstantial delay or other change in a small number of orders will materially
impact Systems' operating results.
WULFF
Wulff sales reflect the sales of new and used wall machine units,
third-party wall machines, pinball machines and other related amusement devices
and used equipment primarily in Germany to various arcades, taverns, hotels and
amusement galleries. Wulff's revenues are a function of the number of unit sales
and the sales price per unit.
WULFF OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE MONTHS TWELVE
ENDED MONTHS
DECEMBER 31, ENDING
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
New Wall Machine Units..................................................... 13,100 12,000 12,000
Net Revenues (all machines)................................................ $ 104,147 $ 116,782 $ 115,331
Cost and Expenses.......................................................... $ 88,572 $ 101,610 $ 98,495
</TABLE>
The Forecast assumes that new wall machine revenues for the first six months
of 1996 will be adversely affected by an industry down-turn caused by
regulations imposed in Germany limiting the number of wall machines per square
meter in arcade locations effective January 1, 1996, thereby reducing sales
opportunities. The Forecast assumes demand for new wall machines to continue to
be lower during the first half of the forecast period than during the first half
of 1995, but to increase, and exceed the 1995 level of demand in the second half
of the forecast period principally due to the expected impact of new regulations
going into effect on January 1, 1997, which will require all wall machines in
use to have meters to monitor the amount inserted by players and paid out by the
machine. There can be no assurance that the down-turn in the first half of 1996
will be less than the down-turn in the last half of 1995, nor that the down-turn
is solely related to the regulatory change, and, accordingly, temporary in
nature. Further, there can be no assurance that the forecasted positive impact
of the 1997 regulations will be realized or that demand will increase as
forecasted.
The Forecast assumes gross margin will increase during the forecast period
due to lower raw material costs per unit partially offset by a lower average
price per unit. Wulff's forecasted operating results will be directly dependent
upon the realization of these assumptions. The Forecast assumes selling, general
and administrative expenses will remain relatively constant. Variations from the
realization of these assumptions will have a material effect upon forecasted
results. As Wulff's manufacturing overhead costs and selling, general and
administrative expenses are relatively fixed, variances from forecasted unit
sales could impact margins to a greater extent than if such costs were
predominantly variable.
OTHER OPERATING COSTS AND EXPENSES (ALL BUSINESS UNITS)
The Forecast gives effect to assumed cost savings as a result of Merger
synergies and further assumes a reduction in corporate development costs, all on
the basis reflected under "Supplemental Analysis of Adjusted Operating Cash
Flow." In contrast to the actual results presented in the Comparative Analysis
for 1995, the Forecast assumes no charges will be incurred of the sort reflected
in the "Supplemental Analysis of Adjusted Operating Cash Flow" as "Other Unusual
or Non-recurring Charges," although the concepts of non-recurring or unusual
charges are not defined under GAAP. In developing the Forecast, management
included anticipated Merger costs for the forecast period, and reviewed the
Comparative Analysis period for
87
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
non-recurring revenue items as well as non-recurring expense items. The Forecast
assumes that sales and distribution expense, research and development and Wulff
expenses will increase by $1.5 million, $1.3 million and $1.5 million,
respectively, over 1995 levels. The forecast of other operating costs and
expenses are particularly dependent upon the assumptions concerning synergy cost
savings and reduction of corporate development costs. There is a possibility
that a variation from the assumed savings may occur, and the effect may be
material. Assumptions for forecasted overhead levels and certain other expenses
as reflected above (E.G., for litigation costs) may be subject to factors
substantially outside of its control, to a greater degree than assumptions
regarding its business units' revenues and cost of sales.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are expected to continue to be charged to
earnings on substantially the same basis as has been done historically. There
are no significant capital additions expected during the forecast period, nor is
there any expected material change to depreciation or amortization rates.
Capital replacement is expected to continue during the year at a moderate rate.
The Forecast also gives effect to expected increases in amortization of goodwill
and other assets resulting from the Merger.
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Gaming...................................................................... $ 1,522 $ 879 $ 750
Systems..................................................................... 626 294 276
Wulff....................................................................... 7,389 7,067 5,682
Gaming Machine Management................................................... 6,166 7,773 5,132
Casinos..................................................................... 644 3,803 1,580
Other....................................................................... 1,169 444 65
--------- --------- ------------
Total................................................................... $ 17,517 $ 20,260 $ 13,485
--------- --------- ------------
--------- --------- ------------
</TABLE>
Management believes that it has substantial discretion to reduce forecasted
levels of capital expenditures without materially reducing operating results for
the forecasted period, principally in the case of the Gaming Machine Management
and Casino expenditures. The significant capital expenditures in 1994 and 1995,
including upgrading the Plantation Casino, completing the Rainbow Casino and
upgrading the Gaming Machine Management installed base, are assumed to further
enhance the Company's ability to reduce 1996 capital expenditures on a
discretionary basis. Management estimates the minimum level of capital
expenditures for maintenance purposes is approximately $8.0 million.
88
<PAGE>
NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT
The following is a reconciliation of the historical EBITDA by business unit
to the combined Adjusted Operating Cash Flow:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER FORECASTED
31, TWELVE MONTHS ENDING
------------------------------ DECEMBER 31,
1994 1995 1996
-------------- -------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
EBITDA by Business Unit:
Gaming Machine Management................................ $ 17,159 $ 18,260 $ 19,957
Casinos.................................................. 2,927 10,546 14,958
Gaming................................................... 7,004(a) 5,905(a) 10,750
Systems.................................................. 3,593 5,788 6,303
Wulff.................................................... 15,575 15,172 16,836
Alliance Corporate Administrative Expense................ (10,609) (8,912) (5,800)
Alliance Development Expense............................. (7,694) (15,072) (10,944)
BGII Corporate Administrative Expense.................... (4,520) (3,732) (4,800)
Discontinued Operations/Other............................ (1,378) (933) --
Casino Royalty........................................... -- (2,718) (4,368)
Minority Interest........................................ (675) (504) (920)
BGII Unusual Charges..................................... -- (5,816) (2,000)
-------------- -------------- --------------------
Combined EBITDA............................................ 21,382 17,984 39,972
Adjustments:
Direct Merger Costs...................................... -- 13,106(b) 8,944(b)
Alliance Development Expense Reductions.................. 4,694 966 --
Rainbow Operations....................................... 340(c) 2,506(c) --
Unusual or Nonrecurring Charges.......................... 2,856(d) 7,783(e) 1,000(f)
Synergy Costs Savings.................................... 5,000 5,000 5,000
-------------- -------------- --------------------
Adjusted Operating Cash Flow............................... $ 34,272 $ 47,345 $ 54,916
-------------- -------------- --------------------
-------------- -------------- --------------------
</TABLE>
- ------------------------
(a) Includes certain charges incurred by Gaming and not reflected as "BGII
Unusual Charges" above, consisting of costs relating to a regulatory
investigation and legal proceedings in Louisiana totalling $0.3 million and
$1.4 million for the years ended December 31, 1994 and 1995 respectively.
(b) For the twelve months ended December 31, 1995, $11.1 million of direct
Merger costs are included in Alliance Development Expense and $2.0 million
in BGII Unusual Charges. For the Forecasted Twelve Months Ending December
31, 1996, $6.9 million of direct Merger costs are included in Alliance
Development Expense and $2.0 million in BGII Unusual Charges.
(c) To adjust to reflect the operating results of the Rainbow Casino as if owned
during all of 1994 and 1995 and to reflect the most recent operating results
of the Rainbow Casino, presented as if such results had occurred for all of
1995 (including an adjustment for additional casino royalty expense of
approximately $1.7 million and $1.0 million, respectively).
(d) Includes legal costs included as BGII Corporate Administrative Expense
related to a former executive totalling $0.5 million and $0.3 million
incurred by Gaming relating to a regulatory investigation and legal
proceedings in Louisiana and a reserve for discontinued operations of $2.0
million for Alliance included in Alliance Corporate Administrative Expense.
(e) Includes one-time charges included in Alliance Corporate Administrative
Expense consisting of an executive signing bonus of $1.3 million paid in
Common Stock and $1.1 million of termination costs for certain officers and
directors, which were incurred during the quarter ended June 30, 1995. Also
includes $1.4 million incurred by Gaming relating to a regulatory
investigation and legal proceedings in Louisiana, and $0.2 million included
in BGII Corporate Administrative Expense for legal costs related to the
"Bally" trade name litigation. Also includes BGII unusual charges of $2.0
million in costs related to the merger agreement with WMS, a provision of
$0.8 million at Wulff to writedown to net realizable value the carrying
value of a building to be sold and a provision of $1.0 million to increase
Wulff's tax reserves primarily for V.A.T.
(f) Includes $1.0 million of one-time charges to implement the expected annual
synergy cost savings.
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<PAGE>
NOTE 5. -- MANDATORY PRINCIPAL PAYMENTS
Because the Forecast has been prepared on a consolidated basis, the Forecast
does not account for the Company's holding company structure, which will result
in cash flows earned at certain subsidiaries being unavailable for distribution
to the Company, including to service indebtedness of the Company during the
forecast period. Mandatory principal payments for the twelve months ending
December 31, 1996 (all of which relate to indebtedness of subsidiaries) consist
of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
VSI Loan.......................................................................................... $ 1,074
Rainbow Casino debt............................................................................... 2,810
Other............................................................................................. 73
------
$ 3,957
------
------
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE
The following table sets forth selected consolidated financial information
of Alliance as of and for the fiscal years ended June 30, 1991, 1992, 1993, 1994
and 1995, and as of and for the six months ended December 31, 1994 and 1995. The
historical financial information of Alliance as of June 30, 1991, 1992 and 1993
and for the years ended June 30, 1991 and 1992 as set forth below has been
derived from the audited consolidated financial statements of Alliance not
included in this Prospectus. The results for the period ended December 31, 1995
will not necessarily be indicative of the results for the fiscal year ended June
30, 1996, and in the opinion of Alliance, include all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the information set
forth herein. The table should also be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Unaudited Pro Forma Condensed Combined Financial Information", the audited
consolidated financial statements of Alliance and the unaudited interim
condensed consolidated financial statements of Alliance, including the notes
thereto and other financial and operating information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER 31,
FISCAL YEARS ENDED JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES:
Gaming:
Routes............................................ $ 77,150 $ 77,940 $ 96,282 $ 102,830 $ 106,827 $ 52,511 $ 52,621
Casinos and Taverns............................... 11,281 11,560 12,526 15,679 21,287 7,861 21,679
Food and Beverage Sales............................. 3,120 3,376 4,184 4,480 3,847 1,950 1,923
Net Equipment Sales(1).............................. 214 379 99 65 27 16 6
--------- --------- --------- --------- --------- --------- ---------
91,765 93,255 113,091 123,054 131,988 62,338 76,229
COSTS AND EXPENSES:
Cost of Gaming:
Routes............................................ 58,299 58,585 72,614 76,332 79,875 39,214 40,361
Casinos and Taverns............................... 8,528 8,459 8,667 11,871 11,436 4,653 9,887
Cost of Food and Beverage........................... 2,249 2,367 2,876 3,084 2,795 1,414 1,426
Cost of Equipment Sales............................. 151 284 49 20 12 9 1
Selling, General and Administrative................. 8,059 8,950 12,667 13,555 14,633 6,486 9,398
Business Development Costs.......................... -- -- 900 1,192 7,843 3,508 10,737
Corporate Expenses.................................. 7,567 5,290 6,191 7,882 9,735 4,302 3,037
Bad Debt Expense.................................... 4,845 539 461 705 400 -- --
Write-off of Inventories, Intangibles and Other
Assets............................................. 4,982 -- -- -- -- -- --
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 4,613 4,906
--------- --------- --------- --------- --------- --------- ---------
Total cost and expenses........................... 109,619 94,136 113,143 130,522 136,249 64,199 79,753
--------- --------- --------- --------- --------- --------- ---------
Operating Loss........................................ (17,854) (881) (52) (7,468) (4,261) (1,861) (3,524)
OTHER INCOME (EXPENSE):
Interest Income..................................... 1,750 1,324 998 2,084 2,798 1,504 818
Interest Expense.................................... (4,663) (4,505) (5,046) (6,830) (8,133) (3,915) (4,288)
Other Net........................................... (1,007) (618) 450 (673) (890) (455) (1,649)
--------- --------- --------- --------- --------- --------- ---------
Loss Before Income Taxes.............................. (21,774) (4,680) (3,650) (12,887) (10,486) (4,727) (8,643)
Income Tax (Expense) Benefit.......................... 5,958 -- -- (241) (265) (290) (788)
--------- --------- --------- --------- --------- --------- ---------
Net Loss.......................................... $ (15,816) $ (4,680) $ (3,650) $ (13,128) $ (10,751) $ (5,017) $ (9,431)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net Loss Per Common Share............................. $ (1.73) $ (0.51) $ (0.38) $ (1.28) $ (0.95) $ (0.45) $ (0.79)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted Average Common Shares Outstanding............ 9,151 9,248 9,696 10,251 11,300 11,101 11,859
Deficit of Earnings to Fixed Charges(2)............... $ (21,744) $ (4,680) $ (3,650) $ (12,887) $ (10,487) $ (4,726) $ (8,644)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro Forma Ratio of Earnings to Fixed Charges (2)...... -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents............................. $ 5,774 $ 10,239 $ 9,580 $ 37,085 $ 13,734 $ 28,189 $ 15,729
Securities Available for Sale......................... -- -- -- 12,489 23,680 12,596 13,739
Net Working Capital................................... 10,450 11,557 7,991 50,926 31,552 40,087 20,109
Total Assets.......................................... 79,024 75,594 73,768 119,416 126,348 115,353 116,872
Total Long-term Debt, including
Current Maturities................................... 44,450 43,282 44,798 90,726 101,397 89,375 100,106
Total Stockholders' Equity (Deficiency) (2)........... 27,008 23,660 22,665 15,099 9,985 13,917 (717)
</TABLE>
- ------------------------------
(1) Includes sales to related parties of $86 (1991), $236 (1992), $2 (1993), $6
(1994), $0 (1995).
(2) For the twelve months ended June 30, 1995 and six months ended December 31,
1994 and 1995, the pro forma deficit of earnings to fixed charges was
$(530), $(3,414) and $(6,676), respectively. No dividends were paid by
Alliance during any period presented.
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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII
The following table sets forth selected financial information of BGII
(consolidated for the periods 1992 through 1995 and combined for 1991), as of
and for the years ended December 31, 1991, 1992, 1993, 1994 and 1995, of which
certain periods are included elsewhere in this Prospectus. See "Basis of
Presentation and Description of Business" in BGII's Notes to Consolidated
Financial Statements. The historical financial information of BGII as of
December 31, 1991, 1992 and 1993 and for the years ended December 31, 1991 and
1992 as set forth below has been derived from the audited financial statements
of BGII not included in this Prospectus. The selected historical consolidated
financial data for periods prior to November 18, 1991 (the date BGII completed
its initial public offering of common stock), present, on a historical cost
basis, the financial position and results of operations of the subsidiaries and
divisions of BEC which formerly conducted operations as Gaming, Systems and
Wulff. This table should also be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Pro Forma Condensed Combined Financial Information" and the audited
consolidated financial statements of BGII, including the notes thereto and other
financial and operating information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993(1) 1994(1) 1995(1)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues...................................................... $ 153,648 $ 163,781 $ 168,707 $ 236,192 $ 249,312(2)
Cost of Sales................................................. 102,357 99,906 121,710(3) 157,059 163,131(2)
Selling, General and Administrative Expenses.................. 36,725 46,348 57,357(4) 59,989 65,289
Provision for Doubtful Receivables............................ 2,176 3,597 8,176(5) 5,763 6,712(2)
Unusual Charges............................................... -- -- -- -- 5,816(6)
Interest Expense, Primarily Charged by BEC in 1991............ 1,602 1,951 4,424 6,768 6,853
Provision for Income Taxes.................................... 5,784 6,725 4,242 2,820 4,904
--------- --------- --------- --------- ---------
Income (Loss) before Extraordinary Gain....................... 5,004 5,254 (27,202) 3,793 (3,393)
Extraordinary Gain on Early Extinguishment of Debt............ -- -- 3,759 -- --
--------- --------- --------- --------- ---------
Net Income (Loss)............................................. $ 5,004 $ 5,254 $ (23,443) $ 3,793 $ (3,393)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (Loss) Per Share before Extraordinary Gain............. $ 0.48 $ 0.50 $ (2.54) $ 0.35 $ (0.31)
Extraordinary Gain on Early Extinguishment of Debt Per
Share........................................................ -- -- 0.35 -- --
--------- --------- --------- --------- ---------
Net Income (Loss) Per Share................................... $ 0.48 $ 0.50 $ (2.19) $ 0.35 $ (0.31)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro Forma Net Income.......................................... $ 2,435(7) $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro Forma Net Income Per Share................................ $ 0.23(7) $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average Number of Common Shares Outstanding................... 10,450 10,573 10,685 10,727 10,776
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and Cash Equivalents..................................... $ 14,429 $ 9,800 $ 5,436 $ 9,204 $ 5,526
Working Capital............................................... 69,350 82,481 83,009 95,772 97,357
Property, Plant and Equipment, Net............................ 19,650 18,695 24,042 24,358 23,244
Total Assets.................................................. 131,342 150,805 170,830 192,242 194,316
Long-term Debt, Including Current Maturities.................. 7,186 25,950 62,458 69,762 69,944
Stockholders' Equity.......................................... 98,605 101,277 74,879 85,883 88,410
</TABLE>
- ------------------------------
(1) Includes results from the acquisition of a distribution business by Wulff
in January 1993.
(2) Includes the impact of sales returns of $0.3 million and a provision for
doubtful receivables of $0.9 million recorded in the second quarter of 1995
by Gaming related to two riverboats at the River City Complex in New
Orleans which filed for bankruptcy.
(3) Includes $6.2 million in charges to increase inventory valuation reserves
in 1993 principally related to inventory originally intended for sale in
the Louisiana video lottery terminal market.
(4) Includes $1.2 million in charges related to a management reorganization at
Gaming in 1993.
(5) Includes a provision for doubtful receivables totaling $5.1 million
recorded by Gaming in 1993 related to a former distributor who filed for
bankruptcy during the second quarter of 1993.
(6) Includes $4.0 million in merger transaction costs and related litigation
expenses, a provision of $0.8 million at Wulff to writedown to net
realizable value the carrying value of a building to be sold and a
provision of $1.0 million to increase Wulff's tax reserves primarily for
value added taxes.
(7) Includes pro forma income tax information for the year ended December 31,
1991 to reflect the provision for income taxes and net loss as if Gaming
and Systems had filed separate income tax returns. The pro forma
information assumes that Gaming and Systems would have been unable to
utilize such operating losses on a carry back basis.
93
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides an assessment of the liquidity and capital
resources of Alliance, the pro forma liquidity and capital resources of the
Company, and the results of operations of each of Alliance and BGII. The
discussion should be read in conjunction with the audited consolidated financial
statements of Alliance and BGII, and the unaudited interim condensed
consolidated financial statements of Alliance, in each case including the notes
thereto, which are included elsewhere in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES OF ALLIANCE
At December 31, 1995, Alliance had working capital of approximately
$20,109,000, a decrease of approximately $11,637,000 from June 30, 1995. The
decrease in working capital is due in part to a decrease in cash and cash
equivalents which were used to fund development activities in connection with
Alliance's business strategy. As of December 31, 1995, Alliance had $29,468,000
in cash, cash equivalents and securities available for sale, of which
approximately $7,000,000 is necessary to fund ongoing gaming operations in the
ordinary course of business. At June 30, 1995, Alliance had working capital of
approximately $31,746,000 and $37,414,000 in cash, cash equivalents and
securities available for sale.
For the six months ended December 31, 1995, Alliance incurred development
costs associated with pursuing Alliance's business developmental strategy
relating to mergers and acquisition of approximately $10,737,000 consisting of
$9,437,000 of direct costs incurred related to the Merger and the previous
tender offer and consent solicitation by Alliance and $1,300,000 of salaries and
administrative costs of the mergers and acquisitions unit. During fiscal 1995,
Alliance incurred approximately $7,843,000 in expenses associated with pursuit
of Alliance's business strategy, of which $1,669,000 related to the Merger.
Alliance's business 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, dockside and
riverboat casinos (including Native American casinos), gaming systems and
technology and the supply and management of electronic gaming machines.
On July 16, 1994 the Rainbow Casino located in Vicksburg, Mississippi
permanently opened for business. In connection with the completion of the casino
and the acquisition of its original 45% limited partnership interest in RCVP,
the partnership which owns the casino, through a wholly-owned subsidiary,
Alliance funded a $3,250,000 advance to the Rainbow Casino Corporation, an
unaffiliated Mississippi corporation ("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 and the HFS financing is
secured).
The HFS financing provided to RCC on August 3, 1993 consisted of a $7.5
million loan which is secured by a first priority lien on all of the assets of
the project. The terms of the HFS financing provide that, in connection with the
loan and certain marketing services provided by HFS to RCC, RCC will pay to HFS
a royalty based upon the casino's annual gross gaming revenues of 12% on the
first $40 million, 11% on the next $10 million, and 10% thereafter, which
royalty is also secured by a lien on the assets of the project. See
"Business--Casino Operations."
On March 29, 1995, Alliance consummated certain transactions whereby
Alliance acquired from RCC the controlling general partnership interest in RCVP
and increased its limited partnership interest. In exchange for commitments by
Alliance and National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National
Gaming Corporation, to provide additional financing (up to a maximum of
$2,000,000 each) to be used, among other things, for the completion of certain
elements of the project which survived the opening of the casino (for which RCC
was to have been responsible, but failed to satisfy) and for a $500,000 payment
paid to HFS as a waiver fee, a commitment by Alliance to fund any additional
capital necessary for the completion, upgrading or working capital of the
project, the following occurred: (i) a subsidiary of Alliance became the general
partner and RCC became the limited partner of RCVP and (ii) the respective
partnership interests were adjusted. As of December 31, 1995, amounts
outstanding under the HFS facility and the
94
<PAGE>
related financings aggregated $9.7 million. As adjusted, RCC is entitled to
receive 10% of the net available cash flows (which amount shall increase to 20%
of cash flow from gaming revenues above $35,000,000 (i.e. only on such
incremental amount)), for a period of 15 years, such period being subject to one
year extensions for each year in which a minimum payment of $50,000 is not made.
In addition, if during any continuous 12-month period until December 31, 1999
the casino achieves earnings from the project of at least $10.5 million before
deducting depreciation, amortization, certain debt payments and substantially
all taxes, then Alliance will be obligated to pay to certain principals of the
original partnership an amount aggregating $1 million in cash or shares of
Common Stock. Since March 29, 1995 the results of operations of the Rainbow
Casino have been consolidated.
Alliance and Casino Magic Corporation, through wholly-owned subsidiaries,
are members in KGP and KFP, both Kansas limited liability companies. Under an
option agreement (the "Option Agreement") granted to KGP by Camptown and The
Racing Association of Kansas-Southeast ("TRAK Southeast"), KGP has been granted
the exclusive right, which right expires on September 13, 2013, to operate
gaming machines and/or casino-type gaming at Camptown's racing facility in
Frontenac, Kansas if and when such gaming is permitted in Kansas. In December
1994, Camptown received a $3,205,000 loan from Boatmen's Bank which was
guaranteed by KFP. Alliance and Casino Magic Corporation each invested
$1,580,000 in KFP which amounts were used by KFP to purchase a certificate of
deposit to collateralize its guaranty. Construction of Camptown's racing
facility has been completed and the facility opened for business in May 1995.
The racing facility was temporarily closed on November 5, 1995 due to poor
financial results. Camptown filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in January 1996 and has stated its intention to reopen for
business following bankruptcy reorganization. Boatmen's Bank demanded payment of
the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan
and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed
Boatmen's Bank's position in the loan to Camptown which is secured by a second
mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK
Southeast and Camptown continue to be bound by the Option Agreement. KFP intends
to vigorously pursue all of its rights and remedies which may include, among
other things, seeking authority from the bankruptcy court to commence a
foreclosure action. In the case of a foreclosure action, KFP would be required
to assume or pay the existing first mortgage of approximately $2,000,000 if KFP
becomes the purchaser at any such sale. Alliance intends to continue to monitor
its investment in KFP. The Kansas legislature has considered gaming bills during
the 1996 session although none have passed. There can be no assurance that
gaming of any type will ever be legalized in Kansas.
In March 1992, Alfred H. Wilms committed to provide to VSI, a
majority-controlled subsidiary of Alliance, a subordinated loan of up to $6.5
million dollars (the "VSI Loan"). The VSI Loan, as amended, bears interest at a
rate equal to the London Interbank Offered Rate for a period of ninety days plus
2%, payable quarterly, and is due on September 21, 1998. The VSI Loan is secured
by liens in favor of N.V. Continental Trust Company ("CTC"), an affiliate of Mr.
Wilms, on substantially all of VSI's assets. Pursuant to the terms of the VSI
Loan, VSI may not pay cash dividends or make any distribution of its property.
Alliance also issued to Mr. Wilms warrants to purchase 2,000,000 shares of
Common Stock at $2.50 per share in connection with such loan which expire on
September 1, 1998 (the "Wilms Warrants"). As of December 31, 1995, there was an
outstanding balance of $3.4 million on this loan. See "Certain Relationships and
Related Transactions."
Cash provided by operations for the six months ended December 31, 1995
decreased by approximately $1,588,000 from amounts reported for the same period
in 1994. The change is primarily due to an increase in business development
costs over the same period from the prior year of $7,229,000, primarily related
to the Merger, partially offset by an increase in cash provided by the casino
operations of approximately $5,700,000 attributable to the Rainbow Casino.
Cash provided by operations for fiscal 1995 decreased approximately
$8,105,000 from fiscal 1994. Included in fiscal 1994's cash provided by
operations was a non-recurring gain of $3,600,000 associated with the
termination of Alliance's letter agreement with Capital Gaming International,
Inc. ("Capital Gaming"), which concerned the Company's proposed equity
investment in Capital Gaming, and the payment by Capital Gaming of $4,000,000
(offset by transaction expenses) to the Company in connection therewith, and
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<PAGE>
$6,351,000 of charges related to Alliance's decision to exit the downtown Las
Vegas gaming market and dispose of its tavern operations. Exclusive of these
items, expenditures related to supporting Alliance's business strategy relating
to mergers and acquisitions in fiscal 1995 increased approximately $3,051,000
from fiscal 1994. Long-term accrued expenses decreased by approximately
$1,031,000 from fiscal 1994 as Alliance paid rent and other exit expenses
against the amounts accrued in fiscal 1994 as noted above. The remaining
increase in accrued expenses accounted for the 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 Alliance'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 fiscal 1995 include
$1,313,000 in non-cash compensation expense and $1,075,000 related to certain
service contracts and termination costs.
Cash provided by investing activities for the six months ended December 31,
1995 increased $12,403,000 over that in 1994 due primarily to the proceeds from
the sale of approximately $8,015,000 of securities. Also, net collections on
receivables improved by $3,299,000 over the same period last year.
Cash flows used for investing activities in fiscal year 1995 decreased by
$5,651,000 from the prior year. Net collections on receivables in fiscal 1995
improved by $2,605,000 over those in fiscal 1994. In fiscal 1994, Alliance
funded approximately $7,250,000 in loans to Capital Gaming 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.
Cash used in financing activities for the six months ended December 31, 1995
declined $76,000 from the same period in 1994 due primarily to Alliance's
borrowing of $682,000 in 1995.
Cash flows from financing activities in fiscal year 1995 declined
$48,402,000 from fiscal 1994. In fiscal 1994, Alliance completed the private
placement of $85,000,000 aggregate principal amount of its Convertible
Debentures. Concurrent with the closing of the issuance of the Convertible
Debentures, Kirkland invested $5,000,000 in Alliance (the "Kirkland Investment")
in exchange for 1,333,333 shares of Alliance'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. In December 1995, Kirkland elected to convert the
entire 1,333,333 shares of Special Stock into an equivalent number of shares of
Common Stock.
EBITDA (as defined: see Note 1 to the Alliance Summary Historical Financial
Information) as a percent of the related revenues changed for Nevada gaming
machine management operations from 15.3% in fiscal 1994 to 16.7% in fiscal 1995
and to 14.8% in the first six months of fiscal 1996 and for Louisiana gaming
machine management operations from 17.5% to 19.1% and to 20.6% for the same
periods. EBITDA as a percent of revenues for casino operations (excluding
discontinued operations), excluding certain one-time charges, was 18.2% in
fiscal 1994 and 23.2% in fiscal 1995 and 30.9% in the first six months of fiscal
1996. The increase in the first six months of fiscal 1996 was due primarily to
the acquisition of the Rainbow Casino. EBITDA should not be construed as an
alternative to net income or any other GAAP measure of performance as an
indicator of Alliance's performance or to cash flows generated by operating,
investing and financing activities as an indicator of cash flows or a measure of
liquidity. Management believes that EBITDA is a useful adjunct to net income and
other GAAP measurements and is a conventionally used financial indicator. On a
pro forma basis, earnings would have been inadequate to cover fixed charges by
approximately $0.5 million for the year ended June 30, 1995 and would have been
inadequate to cover fixed charges by approximately $6.7 million for the
six-month period ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (PRO FORMA)
On October 18, 1995 Alliance entered into the Merger Agreement with BGII and
the Merger Subsidiary. Pursuant to the Merger, BGII will become a wholly-owned
subsidiary of Alliance. The aggregate Merger consideration to BGII stockholders
will be approximately $77.2 million in cash (including interest accruing at a
rate of 5.5% per annum from May 3, 1996 to the Effective Time), $35.7 million in
Preferred Stock
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<PAGE>
(including dividends accruing at a rate of 15% per annum from May 3, 1996 to the
Effective Time) and $2.9 million in Common Stock. Alliance will also retire
approximately $67.6 million of long-term debt of BGII (including prepayment
premium and original issue discount) plus accrued and unpaid interest in
connection with the Merger, and will generally assume BGII's obligations with
respect to outstanding options and warrants to purchase shares of BGII common
stock. See "The Merger and Related Financings."
The Company currently anticipates obtaining one or more working capital
revolving facilities at Gaming and Wulff (providing up to $ of borrowing
availability in aggregate) which would be secured by the inventory and accounts
receivable of such entities and their subsidiaries. The Company has not received
any commitment for any such facility and no assurance can be given that it will
be able to obtain any such facility on terms acceptable to the Company. At
closing, even if such facilities are obtained, the Company expects that no
borrowings will have been made under such facilities.
Following the Transaction, the Company believes that its working capital and
funds generated from operations will be sufficient to meet its existing
commitments, debt payments and other obligations as they become due; however,
the Company expects that it will have to refinance all or a portion of the
Convertible Debentures and the Senior Secured Notes at maturity if its cash flow
from operations does not increase substantially. On a pro forma basis after
giving effect to the Transaction, the Company's earnings would have been
inadequate to cover fixed charges and Preferred Stock dividends by approximately
$8.6 million and approximately $10.5 million for the 12-month period ended June
30, 1995 and the six-month period ended December 31, 1995, respectively. The
Company believes that its cash flow needs for the next 12 months will increase
as a result of an increase in accounts receivable relating to the introduction
of new gaming machines and the expected increases in production and sales levels
from recent historical levels.
Following the Transaction, it remains a part of Alliance's business strategy
to seek on a more limited basis complementary gaming opportunities, including
opportunities in which its gaming machine management and casino experience may
be applicable. As part of its business activities, Alliance is regularly
involved in the identification, investigation and development of such
opportunities. Accordingly, in order to support such activities, Alliance may in
the future desire to issue additional debt or equity securities if and when
attractive opportunities become available on terms satisfactory to management.
However, the terms of the Senior Secured Notes will significantly restrict the
Company's ability to incur indebtedness. See "Risk Factors -- High Leverage and
Fixed Charges after the Merger; Holding Company Structure; Working Capital."
Management believes that customer financing terms have become an
increasingly important competitive factor in certain emerging markets.
Competitive conditions sometimes require Gaming and Systems to grant extended
payment terms on gaming machines and other gaming equipment. While these
financings are normally collateralized by such equipment, the resale value of
the collateral in the event of a default may be less than the amount financed.
In conjunction with sales by Gaming, with recourse to Gaming and/or BGII , of
certain trade receivables to third parties, Gaming and/or BGII have guaranteed
amounts due from various customers of approximately $18.2 million at December
31, 1995. It is possible that one or more of Gaming's customers whose obligation
has been guaranteed by Gaming may be unable to make payments as such become due.
In this case Gaming may become responsible for repayment of at least a portion
of such amounts over the term of the receivables. In general, under the terms of
these contracts, the Company may be responsible for monthly payments of the
outstanding obligations. Accordingly, the Company will have greater exposure to
the financial condition of its customers in emerging markets than has
historically been the case in established markets like Nevada and Atlantic City.
Wulff provides customer financing for approximately 20% of its sales, and
management expects this practice temporarily to increase during the latter half
of 1996. In order to be competitive in meeting customer demand for financing of
gaming equipment in emerging markets, the Company plans to continue to evaluate
the need to involve third party finance companies or secure additional
financing, although there is no assurance that such additional financing will be
obtained.
97
<PAGE>
ALLIANCE RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1994
REVENUES
Total revenues for the six months ended December 31, 1995 were $76,229,000,
an increase of $13,891,000 (22.3%) over those for the same period in 1994.
Revenues from all gaming machine management operations increased $110,000 (0.2%)
to approximately $52,621,000 in the six months ended December 31, 1995. Revenues
from the Louisiana gaming machine management operations increased $147,000
(1.9%) primarily as a result of the opening of a new OTB in October 1995.
Revenues from Nevada gaming machine management operations for the six months
ended December 31, 1995 decreased approximately $36,000 (0.1%). The decrease in
the Nevada gaming machine management revenues was attributable to a $0.52
decrease in the average net win per gaming machine per day for the six months
ended December 31, 1995 over the same period in 1994 (accounting for a decrease
of approximately $499,000) which exceeded an increase in the weighted average
number of gaming machines on location for the six months ended December 31, 1995
over the same period in 1994 (accounting for an increase of approximately
$463,000). Revenues from casino and tavern operations, including food and
beverage sales, increased approximately $13,791,000 (140.6%) during the six
months ended December 31, 1995 over those for the same period in 1994 as
revenues recognized from the Rainbow Casino, which were consolidated beginning
March 29, 1995, exceeded the revenues lost with the termination of Alliance's
lease at the Royal Casino and the reduction of operations at Alliance's tavern
locations.
COSTS AND EXPENSES
COSTS OF REVENUES. Cost of gaming machine management revenues for the six
months ended December 31, 1995 increased $1,147,000 (2.9%) over the same period
in 1994. Costs of revenues from gaming machine management operations in
Louisiana decreased $53,000 (1.1%) over the same period in 1994 as a result of
better controlling direct labor costs. Costs of gaming revenues for Nevada
gaming machine management revenues for the six months ended December 31, 1995
increased $1,200,000 (3.5%) over the same period in 1994 and increased slightly
as a percent of Nevada gaming machine management revenues primarily due to
increased costs associated with additional and renewed space lease contracts.
Cost of gaming machine management revenues includes rents under both space lease
and revenue sharing arrangements, gaming taxes and direct labor, including
related taxes and benefits. The cost of casino and tavern revenues including
costs of food and beverage revenues increased $5,246,000 (86.5%) over the same
period in 1994 primarily due to the Rainbow Casino cost of revenues which were
consolidated beginning March 29, 1995. This increase was partially offset by the
termination of Alliance's lease at the Royal Casino and the reduction of
operations at Alliance's tavern locations. Cost of casino and tavern revenues
includes cost of goods sold, gaming taxes, rent and direct labor, including
related taxes and benefits.
EXPENSES. For the six months ended December 31, 1995 Alliance incurred
developmental costs associated with pursuing Alliance's business development
strategy relating to mergers and acquisitions of approximately $10,737,000,
consisting of $9,437,000 of direct costs incurred related to the Merger and the
previous tender offer and consent solicitation by Alliance and $1,300,000 of
salaries and administrative costs of the mergers and acquisitions unit, which
represented an increase of $7,229,000 (206.1%). These business development
expenses include salaries and wages, related taxes and benefits, professional
fees, travel expense and other expenses associated with supporting Alliance's
strategy. The level of business development activities, exclusive of Merger
costs, has been reduced from prior periods due to the termination of two
executives in this business unit in order to reduce costs, and the relocation of
this unit to lower cost office space. Alliance believes that such reduced level
of costs will be adequate to pursue its business development strategies on a
more limited basis in accordance with its business plan following consummation
of the Merger.
Selling, general and administrative expenses for the six months ended
December 31, 1995 increased approximately $2,912,000 (44.9%) over the same
period in 1994. Expenses for casinos and taverns for the six months ended
December 31, 1995 increased $3,629,000 (198.3%) over the prior year primarily
due to the Rainbow Casino expenses which were consolidated beginning March 29,
1995. This increase was partially
98
<PAGE>
offset by the termination of Alliance's lease at the Royal Casino and the
reduction of operations at Alliance's tavern locations. Such expenses related to
gaming machine management operations for the six months ended December 31, 1995
decreased $717,000 (15.4%) over the same period in 1994 reflecting steps taken
to control costs, including reduced staffing levels. Corporate general and
administrative expenses decreased $1,265,000 (29.4%). This decrease was caused
primarily by controlling costs and reducing staffing levels. Alliance expects
that there may be further increases in selling, general and administrative
expenses related to the addition of new management and development personnel and
other costs associated with supporting Alliance's business strategy. Included in
last year's other income and expenses is a charge of $404,000 representing
Alliance's equity in the net loss of the Rainbow Casino in its first six months
of operations prior to Alliance's acquisition of the general partnership
interest in RCVP on March 29, 1995.
Interest expense for the period increased $373,000 over the same period last
year due principally to the increased interest expense related to the debt of
Rainbow Casino.
FISCAL 1995 COMPARED TO 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 machine management operations increased $3,997,000
(3.9%) to approximately $106,827,000 in fiscal 1995. Revenues from gaming
machine management operations in the State of Louisiana declined $1,796,000
(10.3%) primarily as a result of increased competition from riverboat
operations. Revenue from Nevada gaming machine management operations for fiscal
1995 increased approximately $5,739,000 (6.7%) over those for fiscal 1994. The
increase in the Nevada gaming machine management 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 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 over those for fiscal 1994 as revenues
recognized from the Rainbow Casino, which were consolidated beginning March 29,
1995, exceeded the revenues lost as a result of the closing of Alliance's
properties in downtown Las Vegas and the termination of Alliance's lease at the
Royal Casino.
COSTS AND EXPENSES
COSTS OF REVENUES. Cost of gaming machine management revenues for the
fiscal year ended June 30, 1995 increased $3,543,000 (4.6%) over that for fiscal
1994. Costs of revenues for gaming machine management operations in Louisiana
decreased $1,199,000 (10.7%) from fiscal 1994 as revenues declined primarily as
a result of increased competition in that market. As a percent of related
revenues, Louisiana gaming machine management costs of revenues remained
relatively constant. Cost of gaming revenues for Nevada gaming machine
management revenues for fiscal 1995 increased $4,742,000 (7.3%) over that in
fiscal 1994 and increased slightly as a percent of Nevada gaming machine
management revenues due primarily to increased costs associated with additional
and renewed space lease contracts. Cost of gaming machine management 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, for fiscal
1995 decreased $724,000 (4.8%) over that in fiscal 1994 primarily due to the
closing of Alliance's properties in downtown Las Vegas and the termination of
Alliance's lease at the Royal Casino. These decreases were partially offset by
increases in 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% over that in fiscal 1994.
99
<PAGE>
EXPENSES. In fiscal 1995, Alliance incurred development costs associated
with pursuing Alliance's long term growth strategy of approximately $7,843,000,
an increase of approximately $6,651,000 (558.0%) over fiscal 1994. Included in
the development costs for fiscal 1995 was $1,669,000 of costs related to the
Merger. Included as an offset to development costs for fiscal 1994 was a
non-recurring gain of $3,600,000 related to Alliance's effort to acquire Capital
Gaming and the payment by Capital Gaming to extinguish its obligation to issue
warrants to Alliance in connection therewith. Fiscal 1994 development costs also
include certain significant expenses associated with Alliance's purchase of
Native American Investments, Inc. ("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 Alliance's long-term growth strategy. With the
exception of the significant costs expected to be incurred in conjunction with
the Merger, Alliance expects to continue to incur a significant level of
development costs although at a reduced level compared to fiscal 1995 due to the
termination of two executives in this business unit in order to reduce costs and
its relocation to lower cost office space. Alliance believes that such reduced
costs will be adequate to pursue its business development strategies on a more
limited basis in accordance with its business plan following consummation of the
Merger.
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,
Alliance'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 were $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 Alliance.
Exclusive of the development and corporate expenses noted above, selling,
general and administrative expenses for fiscal 1995 increased $1,078,000 (7.9%)
from fiscal 1994. Selling, general and administrative expenses related to gaming
machine management operations in fiscal 1995 decreased $1,340,000 (13.8%) from
fiscal 1994. Selling, general and administrative expenses for Louisiana gaming
machine management 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 gaming machine management
operations in fiscal 1995 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%) over those in fiscal 1994. The acquisition of the Rainbow
Casino, which contributed $1,984,000 to the increase, was partially offset by
the closing of Alliance's downtown Las Vegas properties and the termination of
the lease at the Royal Casino. Also contributing to the increase in selling,
general and administrative expenses were $478,000 of expenses related to certain
service contracts and termination costs. Selling, general and administrative
expenses may be subject to further increases.
In fiscal 1994, due to continuing losses from operations, negative cash
flows and incompatibility with Alliance's long-term growth strategy, Alliance's
Board of Directors resolved to (i) exit the downtown Las Vegas gaming market and
(ii) dispose of the currently operated small independent tavern operations.
Based on these decisions, Alliance recognized total expenses of approximately
$5,884,000 in fiscal 1994. As a result of the decision to exit the downtown Las
Vegas gaming market, in September 1994, Alliance substantially reduced
operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall &
Saloon. Included in the fiscal 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.
100
<PAGE>
On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race
Course in New Orleans, Louisiana where Alliance operated 199 electronic gaming
machines prior to the fire (of which 193 were destroyed by the fire) through its
controlled subsidiary, VSI. Alliance 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, Alliance recorded
approximately $247,000 of income from business interruption insurance proceeds
compared to $241,000 of such proceeds in fiscal 1994. Alliance is discussing
settlement of additional business interruption claims with the insurance
carrier. Alliance 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 TO 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 machine management operations increased
$6,548,000 (6.8%) to approximately $102,830,000 in fiscal 1994. Gaming machine
management operations in the state of Louisiana contributed $5,222,000 (an
increase of 42.9%) to the overall increase in gaming machine management revenues
as Alliance continued to experience increasing demand in that relatively young
market. Revenue from Nevada gaming machine management operations increased
approximately $1,326,000 (1.6%) over those for fiscal 1993. The increase in the
Nevada gaming machine management revenues was attributable to a $1.30 increase
in the average net win per gaming machine per day in fiscal 1994 over that of
fiscal 1993 (accounting for an increase of approximately $2,608,000) which was
partially offset by a decrease in the weighted average number of gaming machines
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 fiscal 1993 due to the continued expansion of casino operations and
operating additional troubled tavern locations.
COSTS AND EXPENSES
COSTS OF REVENUES. Cost of gaming machine management revenues for the
fiscal year ended June 30, 1994 increased $3,718,000 (5.1%) over that for fiscal
1993. Gaming machine management operations in Louisiana contributed $2,854,000
(an increase of 40.6%) from fiscal 1993 to the overall increase. Cost of gaming
revenues for Nevada gaming machine management revenues for fiscal 1994 increased
$864,000 (1.3%) over that for fiscal 1993. The increase to cost of Nevada gaming
machine management 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 gaming machine management
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 for fiscal 1994 increased $3,412,000 (29.6%) over
that for 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 (the "Mizpah"). Previously,
Alliance 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 Alliance's long-term growth
strategy, Alliance's Board of Directors resolved to (i) exit the downtown Las
Vegas gaming market and (ii) dispose of the currently operated small independent
tavern operations. Based on these decisions, Alliance 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, Alliance substantially
reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall
& Saloon. Included in the fiscal 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
101
<PAGE>
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.
Alliance's lease at the Mizpah has a remaining lease term of approximately
8.5 years with an option on Alliance's behalf to terminate the lease arrangement
at any time after December 31, 1995 with 120 days notice. In September 1994,
Alliance 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, Alliance
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 Alliance'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 Alliance'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%) over those in fiscal 1993. 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 Alliance, $350,000 in fees incurred under
the one year consulting contract with Carole A. Carter, the former President and
Chief Operating Officer of Alliance, continued expansion of the Louisiana
machine management operations which contributed approximately $546,000 to the
overall increase and $274,000 of overall increases in Nevada machine management
operations. The general and administrative costs for casinos and taverns were
$3,622,000 (18.0%) of related revenues for fiscal 1994 as compared to $3,511,000
(21.0%) for fiscal 1993. The same costs for gaming machine management operations
were $9,736,000 (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
over that for fiscal 1993 expense of $461,000 due primarily to the financial
difficulties of a particular customer in Northern Nevada.
On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race
Course in New Orleans, Louisiana where Alliance operated 199 electronic gaming
machines prior to the fire (of which 193 were destroyed by the fire) through its
controlled subsidiary, VSI. Alliance 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, Alliance had
recorded approximately $241,000 of income from business interruption insurance
proceeds. Alliance will continue to receive proceeds under this policy while the
Fairgrounds Race Course is rebuilt. Alliance 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.
BGII RESULTS OF OPERATIONS
GENERAL
BGII was formed in August 1991 to consolidate BEC's gaming machine
manufacturing and distribution operations which are conducted through Wulff,
Gaming and Systems. The operations of Wulff were conducted through Bally Wulff
Automaten GmbH and Bally Wulff Vertriebs GmbH, two direct subsidiaries of BEC,
until their transfer to BGII in contemplation of the initial public offering of
common stock of BGII. The operations of Gaming and Systems were conducted as
divisions or subsidiaries of BEC until substantially all of the assets and
liabilities of these divisions and subsidiaries were transferred to BGII in
contemplation of the initial public offering of common stock of BGII. For
purposes of this discussion of results of operations of BGII, the operations of
Wulff, Gaming and Systems are described separately as well as on a consolidated
basis and GmbH results are included in Wulff's results. The results of
operations for Wulff and Gaming include an allocation of BGII, the parent
company, revenues and expenses, and intercompany transactions which are
eliminated on a consolidated basis.
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<PAGE>
The following tables set forth, for the periods indicated, the percentage of
revenues represented by items reflected in BGII's consolidated statements of
operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
CONSOLIDATED
REVENUES:
Sales....................................................................... 97.5% 97.9% 98.1%
Other....................................................................... 2.5 2.1 1.9
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales............................................................... 72.1% 66.5% 65.4%
Selling, General and Administrative......................................... 34.0 25.4 26.2
Provision for Doubtful Receivables.......................................... 4.9 2.4 2.7
Unusual Charges............................................................. -- -- 2.3
---------- ---------- ----------
111.0 94.3 96.6
---------- ---------- ----------
Operating Income (Loss)....................................................... (11.0) 5.7 3.4
Interest Expense.............................................................. 2.6 2.9 2.8
---------- ---------- ----------
Income (Loss) before Income Taxes and Extraordinary Gain...................... (13.6) 2.8 0.6
Provision for Income Taxes.................................................... 2.5 1.2 2.0
---------- ---------- ----------
Income (Loss) before Extraordinary Gain....................................... (16.1) 1.6 (1.4)
Extraordinary Gain on Early Extinguishment of Debt............................ 2.2 -- --
---------- ---------- ----------
Net Income (Loss)............................................................. (13.9)% 1.6% (1.4)%
---------- ---------- ----------
---------- ---------- ----------
WULFF
REVENUES:
Sales....................................................................... 96.6% 96.3% 97.1%
Other....................................................................... 3.4 3.7 2.9
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales............................................................... 65.4% 64.9% 67.4%
Selling, General and Administrative......................................... 25.5 25.1 24.1
Provision for Doubtful Receivables.......................................... 0.5 1.7 1.3
Unusual Charges............................................................. -- -- 2.9
---------- ---------- ----------
91.4 91.7 95.7
---------- ---------- ----------
Operating Income.............................................................. 8.6 8.3 4.3
Interest Expense.............................................................. 1.3 1.3 1.0
---------- ---------- ----------
Income before Income Taxes.................................................... 7.3 7.0 3.3
Provision for Income Taxes.................................................... 3.7 2.3 3.5
---------- ---------- ----------
Net Income.................................................................... 3.6% 4.7% (0.2)%
---------- ---------- ----------
---------- ---------- ----------
ADDITIONAL INFORMATION (APPROXIMATE UNITS):
New Wall Machines Sold by Wulff............................................. 12,552 13,100 12,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
GAMING
<S> <C> <C> <C>
REVENUES:
Sales....................................................................... 98.3% 99.3% 98.9%
Other....................................................................... 1.7 0.7 1.1
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales............................................................... 100.0% 73.7% 71.9%
Selling, General and Administrative......................................... 48.4 21.9 24.6
Provision for Doubtful Receivables.......................................... 16.9 3.0 3.6
Unusual Charges............................................................. -- -- 1.9
---------- ---------- ----------
165.3 98.6 102.0
---------- ---------- ----------
Operating Income (Loss)....................................................... (65.3) 1.4 (2.0)
Interest Expense.............................................................. 7.1 4.6 5.2
---------- ---------- ----------
Loss before Income Taxes and Extraordinary Gain............................... (72.4) (3.2) (7.2)
Provision for Income Taxes.................................................... -- 0.2 0.3
---------- ---------- ----------
Loss before Extraordinary Gain................................................ (72.4) (3.4) (7.5)
---------- ---------- ----------
Extraordinary Gain on Early Extinguishment of Debt, Net of Income Taxes....... 7.7 -- --
---------- ---------- ----------
Net Income (Loss)............................................................. (64.7)% (3.4)% (7.5)%
---------- ---------- ----------
---------- ---------- ----------
ADDITIONAL INFORMATION (UNITS):
New Slot Machines Sold...................................................... 7,749 17,655 11,948
New Video Gaming Machines Sold.............................................. 2,205 3,807 6,080
Other....................................................................... 202 163 56
---------- ---------- ----------
Total..................................................................... 10,156 21,625 18,084
---------- ---------- ----------
---------- ---------- ----------
SYSTEMS
REVENUES:
Sales....................................................................... 100.0% 100.0% 100.0%
Other....................................................................... -- -- --
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales............................................................... 28.2% 32.0% 35.3%
Selling, General and Administrative......................................... 42.8 46.5 34.3
Provision for Doubtful Receivables.......................................... (4.4) 2.1 5.3
---------- ---------- ----------
66.6 80.6 74.9
---------- ---------- ----------
Operating Income.............................................................. 33.4 19.4 25.1
Interest Expense.............................................................. -- 0.2 --
---------- ---------- ----------
Income before Income Taxes.................................................... 33.4 19.2 25.1
Provision for Income Taxes.................................................... -- -- --
---------- ---------- ----------
Net Income.................................................................... 33.4% 19.2% 25.1%
---------- ---------- ----------
---------- ---------- ----------
ADDITIONAL INFORMATION:
New Installations Implemented............................................... 6 11 9
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
WULFF
Wulff's revenues for the year ended December 31, 1995 were $130.7 million
compared to $111.1 million in 1994, an increase of $19.6 million (18%). This
improvement resulted from the favorable effect of currency translation rates in
the 1995 period, an increase in slot and video gaming machines sold by
Vertriebs' wholly-owned subsidiary, GmbH, and an increase in used equipment and
recreation and amusement machine sales offset in part by a decrease in new wall
machine units sold by 8% and a decrease in the average selling price for new
wall machines by 8.4%. Revenues from GmbH increased by 99% due to increased new
casino openings and greater market penetration in Western and Central Europe and
in Africa. The overall decline in the value of the U.S. dollar against the
Deutsche Mark increased revenues by $15.0 million in 1995. New and used wall
machine sales for the last six months of 1995 were impacted by regulations,
which became effective January 1, 1996, limiting the number of wall machines per
square meter in arcade locations, thereby reducing new sales opportunities.
Industry-wide demand for new machines was adversely effected by this new
regulation while demand for used machines increased dramatically. The decrease
in demand for new wall machines resulted in increased competition based on sales
price resulting in the reduction in average selling price for new units during
the year. Management expects the demand for new wall machines to continue to be
lower than prior year levels during the first half of 1996. See "Risk Factors --
Operating History -- Recent Losses." Revenues from the distribution of
recreational and amusement machines increased by approximately 8.7% during 1995.
Operating income was $5.6 million for 1995 compared to $9.2 million in 1994,
a decrease of $3.6 million or 40%. This decrease resulted from lower gross
margins, higher selling, general and administrative expenses, and unusual
charges, offset in part by a lower provision for doubtful receivables. Gross
margins for 1995 were 33% compared to 35% in the prior year. Gross margin was
unfavorably impacted by higher unit costs associated with lower production
levels, a change in product mix to lower priced used machines and a decrease in
average selling price of new wall machines sold. Selling, general and
administrative expenses increased by $3.5 million resulting from the effect of
currency translation rates between years and costs associated with the increased
revenues in GmbH. Wulff recorded unusual charges in 1995 of $0.8 million to
writedown to net realizable value the carrying value of a building to be sold
and $1.0 million to increase its tax reserves primarily for value added taxes.
In addition, Wulff incurred $2.0 million of unusual charges representing an
allocation of merger transaction costs and litigation expenses related to the
proposed merger with WMS, which has since been terminated, and to a tender offer
by Alliance which was subsequently terminated in connection with the execution
of a definitive merger agreement between BGII and Alliance.
The effective tax rate for the year ended December 31, 1995 was 50% compared
to an effective rate of 26% in 1994. The 1994 rate was lower due to
implementation of a tax planning strategy that reduced the effective tax rate by
approximately 50%.
GAMING
Gaming's revenues for the year ended December 31, 1995 were $108.4 million
compared to $117.8 million in 1994, a decrease of $9.4 million or 8%. New gaming
machines sold decreased to 18,084 units in 1995 from 21,625 units in 1994, a
decrease of 16%. This decline in new unit sales was caused principally by a
reduced number of new casino openings, especially in the riverboat markets,
partially offset by increased sales in the Nevada market. Management believes
that the increase in sales into the Nevada market occurred principally due to
the popularity of Gaming's new Game Maker-Registered Trademark- machine, a
multi-game, touch screen video device which accounted for 26% of Gaming's unit
sales in 1995. The average price of new gaming machines sold increased
approximately 3% in 1995 principally due to proportionately greater sales of the
higher priced Game Maker-Registered Trademark- machine. Revenues from new
machines decreased to $90.9 million in 1995 from $106.6 million in 1994.
Revenues from sales of used equipment increased by 121% to $9.2 million in 1995.
In addition, revenues from sales of service parts and interest income from
financing customer receivables increased by $2.2 million in 1995.
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Gaming incurred an operating loss of $2.2 million for 1995 compared to
operating income of $1.6 million in the 1994 period, a decline of $3.8 million.
The decline in operating results was principally due to the impact of the
aforementioned decrease in revenues, higher selling, general and administrative
costs and higher bad debt provisions and unusual charges offset, in part, by an
increase in gross margin.
Gross margin as a percentage of total revenues was 28% for 1995 compared to
26% in 1994. Lower costs of materials in 1995 were offset, in part, by decreased
absorption of manufacturing overhead expenses attributable to the decline in new
sales units for 1995.
Selling, general and administrative expenses increased to $26.7 million in
1995 compared to $25.8 million in 1994, an increase of 3%. The $0.9 million
increase resulted principally from an increase in legal expenses primarily
related to Louisiana. Despite the decrease in unit sales in 1995, the provision
for doubtful accounts increased $0.3 million resulting from the closure of
certain riverboat casinos. Gaming incurred $2.0 million of unusual charges in
1995 representing an allocation of merger transaction costs and litigation
expenses related to the proposed merger with WMS, which has since been
terminated, and to a tender offer by Alliance which was subsequently terminated
in connection with the execution of the Merger Agreement.
SYSTEMS
Systems' revenues for the year ended December 31, 1995 were $20.7 million, a
55% increase compared to 1994. This increase is directly attributable to the
increased number of game monitoring units ("GMUs") sold to both new casinos and
to existing customers which expanded their casinos, upgraded their current
systems due to new products, or replaced existing systems. In 1995 Systems sold
approximately 22,000 GMUs compared to 13,000 in 1994. During 1995, Systems
products were installed in 9 new locations and as of December 31, 1995, Systems
had 50 installations on-line. The average price of a GMU sold during 1995
decreased by 1.5% from the 1994 average price.
Systems' operating income was $5.2 million in 1995 compared to $2.6 million
in 1994, a 100% increase. This increase resulted from increased GMUs sold,
partially offset by lower gross margins, higher selling, general and
administrative expenses and a higher provision for doubtful receivables. Gross
margin was 65% in 1995 compared to 68% in 1994. This decrease results from the
decrease in the average selling price of a GMU during 1995, higher product costs
and a provision for product upgrades. Selling, general and administrative
expenses increased by $0.9 million in 1995 principally as a result of higher
compensation costs to support the business and higher facility costs for the
1995 year as 1994 was only impacted for six months by the higher costs resulting
from Systems occupying its new facility in July 1994. The provision for doubtful
accounts of $1.1 million in 1995 was primarily attributable to one riverboat
customer.
CONSOLIDATED
Revenues for the year ended December 31, 1995 were $249.3 million, net of
eliminations, compared to $236.2 million in 1994, an increase of 6%. This
increase is due to the aforementioned increase at Wulff and Systems partially
offset by the aforementioned decrease in Gaming's revenues.
BGII had operating income of $8.4 million for 1995 compared to $13.4 million
in the 1994 period. The decrease in operating results of $5.0 million was caused
principally by the unusual charges recorded in 1995 along with the
aforementioned decrease in Wulff and Gaming's operating results partially offset
by the aforementioned increase in operating income at Systems.
Interest expense was $6.9 million in 1995 compared to $6.8 million in 1994.
The net loss for 1995 was $3.4 million or $0.31 per share compared to net
income of $3.8 million or $0.35 per share in 1994. This decline in net income
resulted from the after tax effect of $5.3 million in unusual charges and an
increase in the effective income tax rate primarily due to the aforementioned
higher effective tax rate in Germany in 1995.
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YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
WULFF
Wulff's revenues for the year ended December 31, 1994 were $111.1 million
compared to $112.6 million in 1993, a decrease of $1.5 million (1%). New wall
machine unit sales of Wulff's products increased approximately 4% in 1994.
Additionally, the average selling price for new wall machine units sold
increased approximately 10% due principally to popular models introduced by
Wulff in the latter part of 1994. Revenues from the distribution of recreational
and amusement machines, new wall machines manufactured by third parties, used
wall machines and other revenues decreased approximately 17% in the 1994 period
due in part to depressed economic conditions in Germany and increased
competition in the lower margin recreational and amusement sales markets.
Currency translation rate adjustments of Wulff's revenues into U.S. dollars
increased revenues by $2.3 million in the 1994 period due to fluctuations in the
German mark versus the U.S. dollar.
Wulff's operating income was $9.2 million for 1994 compared to operating
income of $9.7 million in the 1993 period. The $0.5 million decrease in 1994 as
compared to 1993 was caused principally by the aforementioned decrease in
revenues and a $1.4 million increase in the provision for bad debts, offset, in
part, by a slight improvement in Wulff's gross margin as a percentage of total
revenues and a decrease in selling, general and administrative expenses of
approximately 3%. The increase in Wulff's provision for bad debts was caused by
an increase in Wulff's accounts and notes receivable balances in the 1994 period
as well as the general impact of depressed economic conditions on some of
Wulff's customers.
GAMING
Gaming's revenues for the year ended December 31, 1994 were $117.8 million
compared to $48.5 million in 1993, an increase of $69.3 million (143%). New
gaming machines sold increased to 21,625 units in 1994 from 10,156 units in
1993, an increase of 112%. The introduction of Gaming's S5500 ProSeries-TM- line
of slot machines and its new Game Maker-Registered Trademark-, a multi-game
touch screen machine, in the second half of 1993 and 1994, respectively, as well
as the proliferation of legalized gaming in riverboat markets, contributed to
this increase of units sold. The average price of gaming machines sold increased
18% in 1994 due to additional features, such as the embedded bill acceptor, in
the new machines and fewer sales through distributors in 1994. Aggregate
revenues from new machines increased to $106.6 million in 1994 from $41.7
million in 1993. Revenues from other sources, including interest income,
increased $4.4 million from $6.8 million in 1993 to $11.2 million in 1994,
primarily due to increased sales of used units and machine accessories.
Gaming's operating income was $1.6 million for 1994 compared to an operating
loss of $31.7 million in the 1993 period, an improvement of $33.3 million. The
1993 operating loss includes $12.5 million of unusual charges principally
relating to the writedown of inventories originally intended for the Louisiana
VLT market and provisions for bad debts relating to Gaming's former distributor
in Louisiana. The improvement in operating results was principally due to the
aforementioned increase in revenues, higher gross margins realized from
increased absorption of manufacturing overhead costs coupled with lower costs of
materials, offset, in part, by higher selling, general and administrative costs
as well as higher bad debt provisions and interest costs.
Cost of sales as a percentage of Gaming's total revenues, was 73% in 1994
compared to 87% in 1993, excluding an inventory valuation adjustment in 1993 of
$6.2 million (13% of 1993 total revenues). The lower cost of sales is due to
increased absorption of overhead manufacturing expenses attributable to
increased production in 1994 as compared to 1993 and lower costs of materials
attributed to ongoing redesign of products and volume discounts from suppliers.
Selling, general and administrative expenses increased to $25.9 million in
1994 compared to $23.4 million in 1993, an increase of 11%. The $2.5 million
increase was caused principally by increased staffing levels in the sales
departments and sales related costs associated with the aforementioned sales
volume increase in 1994 compared to 1993. Bad debt expense provisions increased
to $3.6 million in 1994 from $3.2 million in 1993, excluding a $5.1 million
increase in the provision in 1993 primarily relating to Gaming's former
distributor of VLT devices in Louisiana. This $0.4 million increase (13%)
resulted from increased sales volume in the 1994 period.
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SYSTEMS
Systems' revenues for the year ended December 31, 1994 were $13.4 million
compared to $12.0 million in the comparable 1993 period, an increase of $1.4
million (12%). Continued growth in casino emerging markets, particularly with
casinos on Indian lands and on riverboats, contributed to an increase in the
demand for gaming monitoring systems and the increase in Systems' revenues.
Systems' operating income was $2.6 million for the year ended December 31,
1994 compared to $4.0 million during the twelve months ended December 31, 1993.
This decrease in operating income of $1.4 million was caused primarily by
slightly lower gross profit margins as a percentage of revenues, higher selling,
general and administrative costs and a higher provision for bad debts offset, in
part, by the aforementioned increase in revenues. Selling, general and
administrative expenses increased $1.1 million due to higher sales levels,
increased staffing levels and increased facility costs. The provision for bad
debts increased $0.8 million due to the increase in revenues and higher accounts
receivable balances outstanding during the period.
CONSOLIDATED
Revenues for the year ended December 31, 1994 were $236.2 million, net of
eliminations, compared to $168.7 million in 1993, an increase of 40%. This
increase is due to the aforementioned increase at Gaming and Systems partially
offset by the aforementioned decrease in Wulff's revenues.
BGII had operating income of $13.4 million for 1994 compared to an operating
loss of $18.5 million in the 1993 period. The improvement in operating results
of $31.9 million was caused principally by the aforementioned improvement in
Gaming's operating results partially offset by the aforementioned decline in
operating income at Systems and Wulff.
Interest expenses was $6.8 million in 1994 compared to $4.4 million in 1993.
This increase was caused by higher borrowings outstanding and higher interest
rates in 1994.
BGII's effective tax rate in 1994 and 1993 differs from the U.S. statutory
rate of 34% principally due to the lack of tax benefits available for operating
losses generated in the U.S.
IMPACT OF INFLATION AND FOREIGN CURRENCY TRANSLATION
Inflation has not had a significant effect on Alliance's operations for the
three years ended December 31, 1995 or BGII's operations during the three years
ended December 31, 1995.
Substantially all of Wulff's transactions are denominated in Deutsche Marks.
The Deutsche Mark is the functional currency used by BGII to translate Wulff's
financial statements. Therefore, BGII is exposed to foreign exchange rate risk.
BGII does not generally enter into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations.
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BUSINESS
OVERVIEW
Alliance is a diversified gaming company that currently operates
approximately 6,000 electronic gaming machines (primarily video poker devices
and slot machines) and also owns and operates a small casino in each of
Vicksburg, Mississippi and Sparks/Reno, Nevada. Alliance is the largest gaming
machine management operator in Nevada and is the exclusive operator of video
poker devices at the only racetrack and ten associated OTBs in the greater New
Orleans area.
As part of its long-term growth strategy, Alliance entered into the Merger
Agreement on October 18, 1995 with BGII pursuant to which BGII will become a
wholly-owned subsidiary of Alliance. BGII, through subsidiaries in the United
States and Germany, is a leading designer, manufacturer and distributor of
electronic gaming machines. BGII also designs, assembles and sells computerized
monitoring systems for slot and video gaming machines which provide casino
operators with on-line real time player tracking, security and maintenance
capabilities.
BGII is currently the second largest manufacturer of casino-style electronic
gaming machines in North America and since 1993 has made significant inroads in
recapturing a portion of its once dominant market share of the late 1970s.
Although BGII sells gaming devices to most of the major participants in the
United States casino industry, the Company hopes to continue to increase its
penetration in such casinos by capitalizing on Alliance's and BGII's
management's relationships within the gaming industry to enable the Company to
demonstrate the performance capabilities of its current products.
Alliance believes that the Merger represents an opportunity to acquire an
established company with a well-recognized presence in the gaming industry and a
significant base of assets and experience. Management estimates that the
installed base of casino-style electronic gaming machines (for these purposes,
primarily slot and video machines) is approximately 650,000 units, of which
approximately 50% are located in North America, and that annual sales in North
America have grown from approximately 30,000 units in 1991 to approximately
89,000 units in 1995, reflecting a period of exceptional growth in the number
and size of casinos in North America. Historically, growth in the gaming machine
market has been principally fueled by sales to new casinos and to a lesser
degree by replacement of machines (which have an average replacement cycle of
three to seven years) and the application of new technology. In the future,
management believes that annual sales growth resulting from replacement
requirements and the application of new technology should outpace growth in
demand generated by new casino openings, which growth rate is expected to
decline. Management believes that the Merger provides Alliance with an avenue
for entering a business historically characterized by effective barriers to
entry in that the BGII assets being acquired are difficult to replicate and
require significant time and investment to develop successfully.
BUSINESS STRATEGY
The Company's strategic objective is to build a pre-eminent gaming
entertainment company to capitalize on what management believes to be gaming's
continuing growth within the entertainment industry. In addition to continuing
the development of the Company's existing business units, the Company's
strategic focus will be on the Gaming and Systems business unit, key elements of
which include:
CAPITALIZE ON BGII'S CURRENT SALES MOMENTUM. Since 1993, BGII's management
has initiated steps to increase its share of gaming machine sales in traditional
markets and capture increased gaming machine market share in new and emerging
jurisdictions. In the mid-1980s, BGII's management's slow response to rapidly
evolving technology, new competitors and changing customer preferences
contributed to a significant reduction in Gaming's market position. Hans Kloss,
who became President of BGII in 1993, and other members of the current BGII
senior management, have led BGII's efforts to rebuild its market position, and
have effectively increased its presence in major casinos in the Las Vegas
market, including Caesars Palace and the MGM Grand. As part of its long-term
growth strategy, Gaming has increased its research and development efforts,
focusing on upgrading its gaming machine product line, and has increased its
sales and marketing efforts. For example, Gaming introduced its ProSeries-TM-
reel-type slot machines during the third quarter of 1993 and its multi-game
touch screen machine, the V7000 Game Maker-Registered Trademark- ("Game
Maker-Registered Trademark-"),
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during the third quarter of 1994, which have contributed significantly to an
increase in unit sales which have approximately doubled the level of unit sales
in 1993. See "Gaming Machine Manufacturing and Systems-- Gaming--Products."
DEVELOP AND MARKET PREMIER GAMING ENTERTAINMENT PRODUCTS EMPLOYING NEW
TECHNOLOGY. The Company intends to continue to develop, market and sell premier
gaming entertainment products and systems that employ available information
technology currently in common use in other segments of the entertainment
industry, but not yet prevalent in the gaming industry. The Company believes
that technological enhancements are the key to improving the appeal of its games
and locations. To implement this strategy, the Company will draw upon the
resources of Dr. Craig Fields, Vice Chairman of the Board, who has over 20 years
of experience with advanced information technology from his work with several
leading companies and government agencies. Alliance has developed and is
currently marketing a next-generation computerized product called "Gambler's
Bonus," a cardless slot players' club and player tracking system for use in its
gaming machine management route operations which will allow multiple locations
to be linked together into a distributed gaming environment. Management believes
that "Gambler's Bonus" offers a wider variety of gaming choices to players than
any other gaming device currently available for use in route locations.
Additionally, BGII is in the process of developing an innovative form of
cashless wagering that uses bar-coded coupons which can be read by bill
validators in slot machines with the resulting information being transmitted to
a computerized monitoring system, subject to testing and regulatory approval. In
addition, both BGII and Alliance have developed electronic gaming machines with
bill acceptor and ticket printer features, as well as touch screen and
multi-game capabilities.
ENHANCE OPERATING EFFICIENCIES AND IMPROVE THE QUALITY OF THE COMPANY'S
PRODUCTS AND SERVICES. The Company is taking a number of steps in different
business units to improve its operating efficiencies while at the same time
improving the quality of its products and services, including (i) engineering
improvements in its gaming machine manufacturing operations and reducing per
unit costs by increasing production throughput and negotiating decreases in
materials costs; (ii) continuing to improve Wulff's manufacturing efficiency and
productivity through the use of computer-aided design systems, automated
production equipment and devotion of substantial resources to product quality
control in its wall machine operations; (iii) expanding the installed base of
electronic gaming machines equipped with Gambler's Bonus, and updated
bill-acceptor devices throughout its Nevada gaming machine management
operations, which is expected to improve Alliance's revenues and operating
efficiencies; and (iv) initiating improved customer service programs and
increasing employee responsiveness to customers' needs for after-sale services.
Management will continue to seek cost reductions and efficiencies.
CAPITALIZE ON RELATIONSHIPS AND ENTER INTO ALLIANCES WITH TECHNOLOGY AND
ENTERTAINMENT COMPANIES. Management's focus on technological developments in
gaming entertainment has created the potential for alliances with other
technology-oriented companies for the purpose of sharing information or
professional services in developing product concepts. The Company intends to
continue to develop or license technology which can be integrated into various
aspects of the gaming entertainment industry in the future. In addition, the
Company intends to make strategic acquisitions of rights to use proprietary
technology when attractive opportunities arise. There can be no assurance,
however, that any such alliances or acquisitions will be available to the
Company or will result in sustained beneficial results to the Company.
BUSINESS UNITS
Following the Merger, the Company will operate through four business units:
(i) casino-style electronic gaming machine manufacturing and systems, (ii)
German operations (consisting of the manufacture and distribution of
wall-mounted gaming machines and distribution of other recreational and
amusement machines), (iii) gaming machine management operations and (iv) casino
operations. The business units described in clauses (i) and (ii) are currently
operated by BGII, and the business units described in clauses (iii) and (iv) are
currently operated by Alliance.
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GAMING MACHINE MANUFACTURING AND SYSTEMS
INDUSTRY OVERVIEW
Gaming's primary markets for its gaming machine products are the United
States and Europe and, to a lesser extent, Canada, the Far East, Latin America
and the Caribbean. The following table sets forth the percentage of Gaming's new
unit sales by market segment during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF NEW UNITS SOLD
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
NEW UNIT SALES BY MARKET SEGMENT 1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Nevada and Atlantic City............................................... 27% 34% 42%
International.......................................................... 27 21 30
Riverboats............................................................. 31 31 12
Indian Gaming.......................................................... 12 13 14
Other (principally VLTs)............................................... 3 1 2
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
UNITED STATES MARKETS. Within the United States, Nevada represents the
largest installed base of gaming machines with an installed base of
approximately 185,000 machines as of December 31, 1995. Atlantic City is the
second largest market which management estimates had an installed base of
approximately 30,000 machines as of December 31, 1995. Product sales in these
markets are primarily to established casino customers to either replace existing
machines or as part of an expansion or refurbishment of the casino. Also,
because gaming machine revenues have increased at a higher rate than table game
revenues over the past decade, casino operators have frequently increased floor
space dedicated to gaming machines. In addition, major casino openings in
Nevada, expansions of existing casinos and the proliferation of casinos in
emerging markets have created additional floor space available for new machines
and are anticipated to further increase competitive pressures on casino
operators to replace existing equipment with new machines on an accelerated
basis.
Riverboat casinos began operating in 1991 and, as of December 31, 1995,
riverboat casinos were operating in Indiana, Iowa, Illinois, Mississippi,
Missouri and Louisiana. The estimated installed base of gaming machines on
riverboats is approximately 61,000 machines as of December 31, 1995.
Casino-style gaming continues to expand on North American Indian lands.
Indian gaming is regulated under the Indian Gaming Regulatory Act of 1988 which
permits specific types of gaming. Gaming's machines are placed only with Indian
gaming operators who have negotiated a compact with the state and received
approval by the U.S. Department of the Interior. Gaming has, either directly or
through its distributors, sold machines for casinos on Indian lands in Arizona,
Connecticut, Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico, North
Dakota, South Dakota and Wisconsin. Compacts have also been approved in Oregon,
Colorado and Louisiana, although Gaming made no deliveries in these
jurisdictions during 1995. In addition to the approved states, compacts are
under consideration in several states, including Alabama, California, Maine,
Massachusetts, Rhode Island, Texas and Washington. The installed base of all
Indian gaming machines as of December 31, 1995 was approximately 52,000 units.
In addition, there are currently casinos in Colorado and South Dakota. The
estimated installed base of machines in these markets as of December 31, 1995
was approximately 13,000 machines.
The continued growth of domestic emerging markets for gaming machines is
contingent upon the public's acceptance of these markets and an ongoing
regulatory approval process by Federal, state and local governmental
authorities. Management cannot predict which new jurisdictions or markets, if
any, will approve the operation of gaming machines, the timing of any such
approval or the level of Gaming's participation in any such new markets.
INTERNATIONAL MARKETS. In addition to the domestic markets, the gaming
industry is also expanding in international markets. Gaming's primary
international market is Europe, and to a lesser extent, Canada, the
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Far East, Latin America and the Caribbean. Gaming has begun, and plans to
continue, expansion into the Australian market, and in 1995, BGII established an
office in Sydney, Australia. No new machines have yet been sold into Australia.
The percentage of Gaming's international revenues by geographic area for the
periods indicated are set forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Europe (including sales to GmbH)......................................... 69.2% 55.6% 51.4%
Canada................................................................... 12.7 16.6 21.6
Latin America............................................................ 16.3 20.5 19.7
Far East................................................................. 1.8 4.4 4.0
Other.................................................................... -- 2.9 3.3
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
MARKETS FOR SYSTEMS. Systems' primary markets for its computerized
monitoring systems are the United States and, to a lesser extent, Canada, New
Zealand, Latin America, Europe, and the Caribbean. Markets for Systems within
the United States include traditional land-based casinos predominately in Nevada
and Atlantic City, New Jersey, Indian gaming and riverboats. Domestically, the
market for monitoring systems is divided equally between selling to new
installations and to existing customers who are either expanding their casino
floors or are upgrading their hardware to a new product release. Unlike the
United States, where most jurisdictions require the implementation of systems,
there have been few international markets to do so. Management believes,
however, that the international market for such systems is increasing, and that
Systems' sales to such markets will increase accordingly.
GAMING
PRODUCTS. Gaming designs, manufactures and distributes a variety of
electronic slot and video gaming machines. Machines are differentiated from one
another by graphic design and theme, cabinet style and size, payout, reel-type
design and minimum/maximum betting amount. Slot machines are normally produced
to specific order, with design and configuration customized to a customer's
particular requirements. Customers may also change from one gaming model to
another gaming model by ordering a "conversion kit" which consists of artwork,
reel strips and a computer chip. Gaming's video gaming machines are designed to
simulate various live card games and keno through a video display. New games and
themes are introduced periodically in order to satisfy customer demand and to
compete with product designs introduced by competitors. Gaming introduced its
"ProSeries-TM-" reel-type slot machines during the third quarter of 1993 and its
multi-game touch screen machine, the Game Maker-Registered Trademark-, during
the third quarter of 1994.
The Game Maker-Registered Trademark- can offer up to 10 different video
games within one gaming device. Various games can be selected from a game
library that has over 200 games. The games simulate various card games, keno and
popular reel-spinning games. The Game Maker-Registered Trademark- machines
contain bill acceptors and many other features believed to be popular with
casinos and their customers. The Game Maker-Registered Trademark- machines are
available in upright, bar top and slant top cabinets. Based on Gaming's sales of
this product to date, management believes that Gaming is currently more
competitive than in the past in the video gaming device market. Revenues from
sales of Game Maker-Registered Trademark- machines were approximately $0.1
million, $6.7 million and $27.4 million during 1993, 1994 and 1995,
respectively.
The ProSeries-TM- was the result of a comprehensive product development
effort which began in 1991. The development process included extensive testing
of the new products in-house and on casino floors for reliability and player
appeal. Based on Gaming's sales of the ProSeries-TM- products to date,
management believes that the ProSeries-TM- has been the catalyst to allow Gaming
to increase market share in traditional and emerging markets for gaming machines
as the product becomes accepted by casino customers. Revenues from sales of
ProSeries-TM- machines were approximately $19.3 million, $86.2 million and $57.1
million during 1993, 1994 and 1995, respectively.
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Gaming typically offers a 90-day labor and up to a one-year parts warranty
for new gaming machines sold and is actively involved in customer service after
the original installation. Gaming provides several after-sale, value- added
services to its customers including customer education programs, a 24-hour
customer service hot-line, and field service support programs and spare parts
programs.
In addition, Gaming sells and services used gaming machines and sells parts
for existing machines. Sales of used gaming machines increased for 1995 as
management implemented a policy to reduce inventory levels. Sales of used
equipment were $2.7 million, $4.2 million and $9.2 million for the years ended
December 31, 1993, 1994 and 1995, respectively.
The following table sets forth the percentages of Gaming's revenues provided
by each of its major product lines during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Slot machines..................................................... 67.0% 74.2% 52.8%
Video gaming machines............................................. 18.9 16.3 31.0
Other (primarily used machines, parts and services)............... 14.1 9.5 16.2
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
Gaming machines have a mechanical life that can exceed 10 years. However, in
the established markets, Gaming's experience is that casino operators usually
replace gaming machines after three to seven years. The factors which result in
replacement of gaming machines sooner than their mechanical life include
technological advances, development of new games, new sound and visual features
and changing preferences of casino patrons. Casinos typically recoup the
purchase cost of their electronic gaming machines in a few months, which allows
casinos to replace machines with new models that are popular with casino
patrons.
Gaming often accepts used machines as trade-ins toward the purchase of new
gaming equipment. While a small secondary market exists in the United States,
used machines are typically resold into the international market. While some
used equipment is reconditioned for direct sale, much is sold in container lots
on an "as is" condition through independent brokers.
In the past, Gaming had designed, manufactured and distributed video lottery
terminals ("VLTs"), which are generally operated by, or under the regulation of,
state or provincial lottery commissions. The VLT business was less than 2% of
revenues during 1993, 1994 and 1995. Gaming will pursue this business only on a
selected basis in the future.
PRODUCT DEVELOPMENT. The Company believes that technological enhancements
are the key to improving the appeal of its electronic gaming machines. Most
gaming machines on casino floors today are driven by technology which was
developed over 20 years ago. The Company believes that accelerating the use of
existing computer technology will give its gaming machines and systems a
competitive advantage in the gaming industry.
Gaming develops its products for both the domestic and international market.
Gaming's product development process is divided into two areas, hardware and
software. Major areas of hardware development include cabinet style, electronic
capability, machine handle, coin hopper and bill acceptor. Hardware development
efforts are focused upon player appeal, product reliability and ease of
maintenance. Development cycles for hardware can range from a few days for
simple enhancements to more than a year for new electronics or new mechanical
packages.
The software development process for new games, which includes graphics
development, involves a continuous effort requiring relatively significant human
resource allocations. Creativity in software development is an important element
in product differentiation as the major manufacturers sometimes use similar
hardware technology. Ideas for new models are generated both internally and from
customers. Gaming can design the software and artwork for a new model in as
little as two weeks, excluding regulatory approval. All
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new or modified hardware and software is designed to satisfy all applicable
testing standards and must receive the approval of the appropriate gaming
regulatory agency based substantially on satisfying such applicable testing
standards before such gaming product can be offered for play to the public. Most
gaming jurisdictions rely upon and accept the certification of selected
independent laboratories that a gaming product meets the applicable testing
standards.
Regulatory approval for new or modified hardware and software changes takes
from 30 days to three months or more. On an annual basis, Gaming expects to
introduce approximately 25 new games to the market. However, no assurance can be
made with respect to the rate of new model introductions.
During 1993, 1994 and 1995, Gaming spent $3.0 million, $3.5 million, and
$3.7 million, respectively, on product research and development.
SALES AND MARKETING. Gaming uses a direct sales force, an independent
distributor network and GmbH to sell its products. Gaming's sales staff of
approximately 20, which operates offices in Nevada, New Jersey, Mississippi,
Illinois and Florida, generated approximately 84% of new machine sales over the
past three years. Gaming currently uses distributors for sales to certain
specific markets in the United States as well as certain European jurisdictions.
Gaming's agreements with distributors do not specify minimum purchases but
generally provide that Gaming may terminate such agreements if certain
performance standards are not met. Approximately 8% of new gaming machine unit
sales over the past three years have been generated through independent
distributors (including foreign distributors) and 8% have been generated through
GmbH.
In addition to offering an expansive product line, Gaming provides
customized services in response to specific casino requests. These services
include high quality silkscreen printing of gaming machine glass, customized
game development and interior design services. Gaming also offers customized
design services that utilize computer aided design and studio software programs.
Gaming's design department can generate a casino floor layout and can create a
proposed slot mix for its customers. In many of the emerging markets, Gaming
provides assistance to customers including the selection of related equipment
such as slot stands, chairs, etc. and a recommended layout of the casino floor
as well as a mix of machine models. Sales to established casinos in Nevada
normally require completion of a successful trial period for the machines in the
casino.
Approximately 75% of Gaming's slot and video gaming machine sales are on
terms of 90 days or less. Approximately 25% of Gaming's sales, primarily in
certain emerging markets such as riverboat and Indian gaming casinos, are
financed over extended periods as long as 36 months and bear interest at rates
ranging from 8% to 14%. International sales are generally consummated on a cash
basis or financed over a period of one year or less. In addition, in certain
situations, Gaming has participated in the financing of other gaming related
equipment manufactured by third parties in the emerging markets. Management
believes that financing of customer sales has become an increasingly important
factor in certain emerging markets. See "--Competition."
CUSTOMERS. The demand for slot machines and video gaming machines varies
depending on new construction and renovation of casinos and other facilities
with needs for new equipment. Since machines are not replaced each year, many
current customers will need only product maintenance in the near future. Growth
will depend on Gaming's ability to obtain new customers and take advantage of
the newly emerging markets. For the year ended December 31, 1995, Gaming's
largest customer accounted for approximately 5% of Gaming's sales while Gaming's
ten largest customers, excluding GmbH, accounted for approximately 25% of
Gaming's revenues. During that period, sales to GmbH accounted for approximately
9% of Gaming's revenues.
ASSEMBLY OPERATIONS. Gaming's Las Vegas facility was built in 1990
specifically for the design, manufacture and distribution of gaming equipment.
The 150,000-square foot facility was designed to meet fluctuating product design
demands and volume requirements, and management believes the facility enables
Gaming to increase production without significant capital expenditures.
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Management believes that its assembly operations allow for rapid generation
of different models to fill orders quickly and efficiently. Another major
advantage of the existing plant operation is the system by which machines can be
altered in many ways including the size, type and color of glass, sound and
payoff patterns to produce a "customized" product for each customer. Gaming
keeps an inventory of parts that allow machines to be altered quickly to conform
with a particular customer's design/feature request. Gaming designs all of the
major assemblies that are incorporated into the final machine configuration.
COMPETITION. The market for gaming machines in North America is dominated
by a single competitor, IGT. There are a number of other well established,
well-financed and well-known companies producing machines that compete with each
of Gaming's lines in each of Gaming's markets. The other major competitors are
Universal Distributing of Nevada, Inc., Sigma Games, Inc., WMS and in the
international marketplace, companies who market gaming machines under the brand
names of Aristocrat, Atronic, Cirsa and Novomatic. In addition, certain
technology-oriented companies, including CDS and Sega Enterprises Ltd., have
recently announced their intention to enter the gaming machine business.
Management believes that some of these competitors generally have greater
capital resources than Gaming. Competition among gaming product manufacturers,
particularly with respect to sales of gaming machines into new and emerging
markets, is based on competitive customer pricing and financing terms, appeal to
the player, quality of the product and having an extensive distribution and
sales network.
The future success of the Company, to a large extent, will be dependent upon
the ability of Gaming to design, manufacture and market technologically
sophisticated products that achieve high levels of player acceptance. The
development of a successful new product or product design by a competitor could
adversely affect sales of Gaming's products and force Gaming to respond quickly
with its own competing products. In addition, management believes that customer
financing terms have become an increasingly important competitive factor in
certain emerging markets. Competitive conditions sometimes require Gaming to
grant extended payment terms on gaming machines and other gaming equipment.
While these financings are normally collateralized by such equipment, the resale
value of the collateral in the event of a default may be less than the amount
financed. Accordingly, Gaming will have greater exposure to the financial
condition of its customers in emerging markets than has historically been the
case in established markets like Nevada and Atlantic City. Also, because certain
of Gaming's competitors generally have greater financial resources than Gaming,
Gaming will need to rely on third party financing arrangements in order to
compete in providing competitive financing to customers. See "--Sales and
Marketing."
SYSTEMS
PRODUCTS. Systems designs, assembles, and sells a computerized monitoring
system ("SDS 6000") for slot and video gaming machines which provide casino
operators with on-line real time data relative to a machine's accounting,
security, and maintenance functions. The SDS 6000 also provides data to, and
receives data from, other third party player tracking computer and software
applications allowing casinos to track their players to establish and compile
individual player profitability and other demographic information. SDS 6000 is
comprised primarily of (1) hardware consisting of microcontroller based printed
circuit boards which are installed within the slot and video machines as well as
card reader displays and keypads which provide casinos the ability to track
player gaming activity and to monitor access to slot and video machines by the
casino's employees, (2) application software developed by Systems which provides
access to the slot machine's activity data gathered by the microcontroller
hardware, and (3) third party mini-computers on which the application software
resides. Systems also provides software and hardware support services, including
maintenance, repair and training for purchasers of its monitoring systems.
PRODUCT DEVELOPMENT. Systems' product development is divided into two
areas, hardware and software. The major areas of hardware development include
microcontroller circuit board design and programming as well as user interface
devices such as card readers, keypads and displays. Hardware development efforts
are focused upon the casino operator in terms of functionality, product
reliability and ease of maintenance and customer appeal in terms of appearance
and ease of use. Development cycles for hardware can vary between a few months
for minor revisions to more than a year for major design changes or for changes
made by various slot manufacturers with which Systems' product must communicate
and be
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physically integrated. Software development results in (1) periodic product
releases that include new features which extend and enhance the SDS 6000
product, (2) periodic maintenance releases which enable casino operators to
correct problems or improve the usability of the system and (3) documentation
needed to install and use the system.
In 1995, the hardware and software groups from Systems, as well as engineers
from Gaming, coordinated efforts to develop a form of cashless wagering that
uses bar-coded coupons which can be read by the bill validators in Gaming's slot
machines which are connected to an SDS 6000 system. Testing and regulatory
approval is being pursued by Systems in anticipation of a 1996 release to casino
operators. In 1996, Systems and Gaming development groups will continue to
direct development efforts towards other forms of cashless wagering for use on
Gaming's slot machines and the SDS 6000 system.
During 1993, 1994 and 1995, Systems spent $1.4 million, $1.7 million and
$1.9 million, respectively on product research and development.
SALES AND MARKETING. Systems has a direct sales force which produces the
majority of its sales. Gaming's sales force and Gaming's independent distributor
network produce the balance of Systems' sales, primarily in situations where
customers are making slot machine and computerized slot monitoring system
purchase decisions at the same time. Worldwide, Systems has approximately 60,000
GMUs installed, or in the process of being installed, of which approximately
53,000 are in the United States. Over the past three years, Systems' own sales
force has generated approximately 78% of its sales.
Systems offers its customers the option of signing separate hardware and
software maintenance agreements at the time of sale. These agreements are for
periods of one year and automatically renew unless otherwise canceled in writing
by the customer or Systems. After an initial warranty period, typically 90 days,
the customer is invoiced a monthly hardware and software maintenance fee which
provides essentially for repair and/or replacement of malfunctioning hardware
and software, software version upgrades, and on-call support for software.
Systems offers limited financing terms, normally less than one year, for
sales to new installations. Most sales, however, are invoiced on a net 30 days
basis.
CUSTOMERS. The demand for computerized slot monitoring systems is driven
either by regulatory requirements in a given jurisdiction and/or by a casino
operator's competitive need to properly track their players' activity and
establish and compile individual player profitability and other demographic
information, all of which is of particular importance to casinos in developing
marketing strategies. Systems' revenues are derived equally from selling to new
installations as well as to existing customers who are either expanding their
casino floors or are upgrading their hardware to a new product release. For the
year ended December 31, 1995, Systems' ten largest customers (which includes
certain multi-site casino operators that have corporate agreements with Systems)
accounted for approximately 92% of Systems' revenues. Due to the high initial
costs of installing a computerized monitoring system, customers for such systems
generally have tended not to change suppliers once they have installed such a
system. Future growth will be based on further expansion in the established and
emerging markets as well as continued development efforts by Systems to provide
customers with new and innovative hardware and software product offerings.
COMPETITION. Although there are numerous companies providing computerized
slot monitoring systems to casino operators, the competition currently consists
of IGT, CDS, and to a lesser extent, by Gaming Systems International and Acres
Gaming. Competition is keen in this market due to the number of providers and
the limited number of casinos and the jurisdictions in which they operate.
Pricing, product feature and function, accuracy, and reliability are all main
factors in determining a provider's success in selling its system. Systems
believes the future success of its operations will be determined by its ability
to bring new and innovative products to the market place and at the same time
maintain a base of loyal existing customers.
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GERMAN OPERATIONS
INDUSTRY OVERVIEW
Management believes that the German amusement game industry, a historically
stable market, consists of approximately 200,000 wall machine units and 50,000
token machine units. German regulations require the replacement of wall machines
after a period of up to four years, ensuring replacement sales in Germany. As a
result, the annual market sales are approximately 50,000 units with fluctuations
resulting primarily from economic conditions and regulatory changes. In May
1993, the maximum initial coin drop in wall machines was increased from 30
pfennigs to 40 pfennigs. This regulatory change caused some customers to defer
purchases prior to this regulatory proposal pending its outcome. During
mid-1994, the German government effected a tax law revision based on a European
Court ruling, whereby V.A.T. charged to the operators of wall machines was
significantly reduced. Management believes this tax law revision, offset in part
by increased leisure taxes, caused the aggregate new wall machine unit sales to
increase to approximately 47,000 units in 1994. Effective January 1, 1996, a
regulatory change took effect requiring all arcade operators to have at least 15
square meters of space for each wall machine and a maximum of 10 machines per
arcade. Starting in mid-1995, arcade operators began removing wall machines from
their arcades to meet the requirements of this new regulation. Despite this
adverse impact, the demand for new wall machines remained at approximately
47,000 units in 1995. All wall machines manufactured since 1992 have meters that
monitor the amount inserted by players and paid out by the machine; from the end
of 1996 on, all wall machines in use are required to have such meters, which
management believes should lead to an increase in demand for new, metered wall
machines in the latter half of 1996. See "--Operations of Wulff--Products." See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--BGII Results of Operations" and "Gaming Regulation and
Licensing--Germany."
One of the most important markets for wall machines in Germany is the arcade
market. A significant number of arcades are owned by competitors of Wulff who
are able to introduce their own machines into the arcades and generally do not
purchase wall machines from Wulff. Wulff's two largest competitors, NSM, AG and
Gauselmann, AG, own arcades containing approximately 15% of the wall machines in
Germany. Management believes Wulff's share of the installed base of German wall
machines market was approximately one-quarter of the market for each of the last
three years. On an ongoing basis, the German legislative authorities regulate
and monitor the wall machine industry so as to ensure certain manufacturing
standards and the fairness of each machine to users. The most significant
legislation presently affecting the wall machine industry relates to prescribed
licensing procedures, the use, installation and operation of wall machines and
the taxation of wall machines. There have been no recent material changes in
these ongoing legislative regulations. See "Risk Factors--Operating
History--Recent Losses" and "Gaming Regulation and Licensing--Germany."
Token machines, unlike wall machines, are not designed to pay off money.
Instead, a player wins games or tokens. Therefore, the strict German licensing
requirements governing wall machines are not currently applied to token
machines, although it cannot be ruled out that this may change in the future due
to legislative changes or changes in administrative practice. Furthermore,
management believes that the token machine market has reached its potential and
that sales will decline because token machines are not subject to the four-year
operation limit set by German regulations. See "Gaming Regulation and
Licensing-- Germany."
OPERATIONS OF WULFF
PRODUCTS. Wulff's manufacturing operations were founded in Berlin in 1950
and sold to BEC in 1972. Wulff produces and distributes a variety of models of
wall machines, under the trade name "Bally Wulff", for operation in arcades,
hotels, restaurants and taverns primarily in Germany. These wall machines are
coin-operated, armless gaming devices similar to slot machines that award
winnings for matching numbers or symbols on three to five wheels or drums and
differ primarily in appearance, graphic design, theme, pay-table and customer
appeal. Each game costs up to 40 pfennigs (approximately $0.28, assuming an
exchange rate of $1=DM 0.6987 as of December 31, 1995 hereinafter) to play,
although the player may deposit larger amounts to provide continuous play but
not to increase payoffs. German regulations limit the maximum payout to ten
times the player's stake (DM 4.00 or approximately $2.80 per game). Current
models of wall
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machines provide the player the opportunity to win 100 special games on one
play, which increases the potential amount that can be won on the minimum coin
drop. German regulations require a minimum payback of 60% for wall machines,
although many machines are generally programmed to pay back at higher rates to
encourage play. Effective January 1, 1997, all wall machines in use must have
meters that monitor the amount inserted by players and paid out by the machine.
See "Gaming Regulation and Licensing-- Germany."
In addition to manufacturing wall machines, Wulff distributes wall machines
and other recreational and amusement coin-operated machines manufactured by
third parties to provide a more extensive line of products to its customers.
These machines include pool tables, dart games, pinball machines, jukeboxes and
arcade games and are distributed primarily for use in arcades, restaurants,
hotels and taverns. One of BGII's indirect subsidiaries, GmbH distributes
traditional slot machines, manufactured primarily by Gaming, principally to
customers in Europe, Russia and, through its branch office in Johannesburg,
South Africa, the African continent. The following table sets forth the
percentage of Wulff's revenues by product line during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Wall machines manufactured by Wulff...................................... 42.8% 50.8% 37.5%
Recreational and amusement machines and third party wall machines
distributed............................................................. 36.4 20.0 22.3
Slot machines distributed................................................ 5.0 6.3 11.2
Other (primarily used machines, parts and services)...................... 15.8 22.9 29.0
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Wulff also manufactures token machines for operation in arcades, hotels,
restaurants and taverns in Germany. See "Gaming Regulation and
Licensing--Germany."
PRODUCT DEVELOPMENT. Management believes that Wulff's wall machines are
viewed as premium products because of their quality, dependability, ease of
service and proven ability to attract players and generate revenue. Wulff
designs its machines to appeal to each of the three categories of participants
in the distribution process-- Wulff's sales representatives and independent
distributors, the owner/operators of the machines, and the players. The sales
representatives and distributors require machines with broad appeal that are
easy to demonstrate and sell. The owner/operators desire reasonably priced
machines that are easy to collect from and service and that are proven revenue
generators. The players prefer entertaining machines that are simple to play and
have unique features.
Wulff's management has formed design teams which are responsible for
generating ideas for creative new machines. These teams are comprised of
representatives of each department involved in the production and distribution
of machines, such as art design, engineering, manufacturing, marketing and
sales. The design teams meet for three days each calendar quarter at a site away
from Wulff's headquarters. The teams analyze machines currently being marketed
by Wulff and its competitors to assess their strengths and weaknesses and then
suggest ideas for new machines. These ideas are reviewed to determine which
machines should be produced on a trial basis. Wulff typically pursues 15 to 20
projects at any given time, and approximately 12 to 15 machines are submitted
for licensing each year. These new machines are built in limited quantities and
then test marketed for three to six months. Generally, less than one-half of the
new machines tested are put into full scale production. Management believes this
process of generating new ideas and then turning only a limited number of the
ideas into machines which will reach the mass market is responsible for the high
quality of Wulff's machines and their continued acceptance and success in the
marketplace. Because the machines have a reputation for quality, Wulff is often
able to produce and market a particular model for up to two years, which
management believes, based upon its experience in the relevant marketplace and
feedback from customers, exceeds the industry average.
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During 1993, 1994 and 1995, Wulff spent approximately $3.3 million, $3.5
million, and $3.6 million, respectively, on product research and development.
SALES AND MARKETING. Wulff sells approximately 94% of its products through
its own sales force of 56 people located in its 23 regional sales offices.
Independent German distributors account for approximately
6% of sales. Approximately 97% of Wulff's sales of new wall machines are in the
German market. The sales offices are operated as independent profit centers and
are assigned geographic areas for which they are responsible for sales,
servicing the machines and assisting in collecting customers' accounts
receivable balances. GmbH maintains a sales office in Hanover for the
distribution of traditional slot machines, principally in Europe, and has an
office in Johannesburg, South Africa for the sale and distribution of
traditional slot machines into the African continent.
Wulff devotes substantial time, money and effort marketing and promoting its
products. Wulff takes an active part in the annual Amusement Game Fair which is
held each January in Frankfurt, Germany, at which Wulff introduces new products.
The wall machines manufactured and sold by Wulff generally sell for prices
ranging from DM 5,000 to DM 8,000 (approximately $3,493 to $5,590). A majority
of machines distributed by Wulff are paid for in full within 90 days after the
sale. Remaining sales of machines are financed by Wulff generally over a
12-month period, with interest rates of up to 12%. For this reason, Wulff
establishes an internal credit rating and credit limit for each customer. Under
Wulff's conditions of sale, title to a machine is retained by Wulff until the
machine has been paid for in full. In addition, Wulff demands collateral as
security. Currently, Wulff provides customer financing for approximately 20% of
its sales, and management expects this practice to increase during the latter
half of 1996. In approximately 60% of its sales, Wulff accepts wall machines
and/or other recreational and amusement equipment as trade-ins toward the
purchase of new machines. To the extent possible, the used machines are then
resold.
CUSTOMERS. Each of Wulff's top ten customers in 1994 has maintained its
relationship with Wulff for over three years. For the fiscal year ended December
31, 1995, no single customer accounted for more than 3% of Wulff's sales, while
Wulff's top ten customers accounted for approximately 10% of Wulff's sales.
Wulff's customer base for wall machines may be divided into two categories
which differ based on the preferences of their clientele. Arcade operators are
generally interested in purchasing the newest products in the hopes that a new
innovation will result in a high level of public demand to play the new "hot"
product. Hotels, restaurants and taverns, on the other hand, are generally more
inclined to purchase lower-priced existing models with proven earnings records
to provide as an amenity to customers.
ASSEMBLY OPERATIONS. Wulff's manufacturing process is primarily an assembly
operation. Its manufacturing facility consists of a four-story, 100,000-square
foot building in Berlin, Germany. Wulff purchases its key raw materials,
sub-assemblies and fabricated parts from a variety of suppliers, and most parts
are purchased from multiple suppliers. While there exists no formal long-term
contract commitments to any single supplier, Wulff has placed certain standing
orders with suppliers through 1996 to help assure the availability of specific
quantities on an as-needed basis. These orders are cancelable by Wulff at any
time without penalty. Most of the component parts are standard on all models of
all Wulff's wall machines, which promotes easy conversion from the production of
one model to another in response to customer demand. Except in connection with
certain promotions, Wulff generally maintains low inventory levels of assembly
parts, and the amount of work-in-process is generally less than the number of
machines sold in one week.
Because of its manufacturing structure, Wulff is capable of substantially
increasing its wall machine output without significant capital expenditures.
Wulff continues to improve its manufacturing efficiency and productivity through
the use of computer-aided design systems, automated production equipment and
devotion of substantial resources to product quality control.
COMPETITION. Germany's wall machine manufacturing industry is dominated by
Wulff and two of its competitors, NSM, AG and Gauselmann, AG. Management
believes these three entities collectively account for more than 90% of the
entire market. Wulff competes with many companies in the distribution of coin-
operated amusement games, some of which are larger and have greater resources
than Wulff. Wulff's two
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major competitors own and operate a significant number of arcades, which may
give them a competitive advantage arising from a built-in market for their games
and the ability to test market new games in their own arcades. Increased foreign
competition in Germany may have an adverse impact on the Company's future wall
machine revenues. Management believes that the primary competitive factors in
the wall machine coin-operated amusement game market are the quality and depth
of the product line, price and customer service which includes the ability to
fill orders quickly and efficiently.
Management believes that the market for token machines has expanded rapidly,
from sales of approximately 3,900 units in 1993 to approximately 16,700 units in
1995. Management believes that token machines have in recent years competed
directly with wall machines due to the lower prices and the popularity of the
token machines. Furthermore, management believes that the token machine market
may have reached its potential and that sales may decline because token machines
are not subject to the four-year operation limit set by German regulations. See
"Gaming Regulation and Licensing--Germany."
Increased foreign competition in Germany may have an adverse impact on the
Company's future wall machine revenues.
GAMING MACHINE MANAGEMENT OPERATIONS
NEVADA OPERATIONS
Alliance's Nevada gaming machine management operations involve the
selection, ownership, installation, operation and maintenance of video poker
devices, reel-type slot machines and other gaming machines in local
establishments such as taverns, restaurants, supermarkets, drug stores and
convenience stores operated by third parties ("local establishments").
Alliance's gaming machine management operations target local residents who
generally frequent establishments close to their homes.
The following table sets forth certain historical data concerning the
Alliance's Nevada gaming machine management operations:
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------- AT DECEMBER 31,
1991 1992 1993 1994 1995 1995
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Number of electronic gaming machines
owned...................................... 5,240 5,505 5,121 5,148 5,208 5,288
Number of locations......................... 527 552 508 496 516 521
</TABLE>
Alliance enters into gaming machine management agreements with local
establishments through either revenue-sharing arrangements or space lease
arrangements. In revenue-sharing arrangements, most common with taverns,
restaurants and convenience stores, Alliance does not pay rent, but rather
receives a percentage of the revenues from the electronic gaming machines. In
such arrangements, both the owner of the local establishment and Alliance must
have a gaming license. In space lease arrangements, most common with
supermarkets and drug stores, Alliance pays a fixed rental to the owner of the
local establishment and Alliance receives all of the revenues derived from the
gaming machines. In such arrangements, only Alliance (and not the establishment
owner) is required to hold a gaming license. Most of the local establishments
serviced by Alliance are restricted by law to operating no more than 15 gaming
machines.
Revenue-sharing arrangements accounted for approximately 80%, 86%, 86% and
86% of the Nevada gaming machine management revenues and 77%, 80%, 78% and 78%
of its operating Nevada gaming machines in 1993, 1994 and fiscal 1995 and the
six-month period ended December 31, 1995, respectively. At December 31, 1995,
the weighted average remaining term of Alliance's revenue-sharing arrangements
was approximately 3.9 years. Space lease arrangements accounted for
approximately 20%, 14%, 14% and 14% of the Nevada gaming machine management
revenues and 23%, 20%, 22% and 22% of its operating Nevada gaming machines in
1993, 1994 and fiscal 1995 and the six-month period ended December 31, 1995. At
December 31, 1995, the weighted average remaining term of Alliance's space
leases was 2.9 years.
Alliance 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, greater competitive pressures in the gaming
machine management business have increased the portion of gaming machine
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management revenues payable to the local establishment, decreasing Alliance's
gross margins from these operations. As a result, Alliance has refocused its
Nevada gaming machine management 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, canceling or not renewing unprofitable contracts.
SALES AND MARKETING. As the largest Nevada gaming machine management
operator, Alliance 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 electronic gaming machines with features customized to customers'
needs, such as Gambler's Bonus.
Alliance has developed and is currently testing a new system called
"Gambler's Bonus". Gambler's Bonus is designed as a cardless slot players' club
and player tracking system, which allows multiple route locations to be linked
together into a distributed gaming environment. Through this technology,
Alliance is 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, Alliance will offer a
series of new and unique games available only to members of the Gambler's Bonus
players' club. Since launching Gamblers' Bonus, the gaming machines linked to
Gambler's Bonus have experienced an increase in net win per day per machine. As
of March 1, 1996, Alliance had 286 machines linked to the Gambler's Bonus
system, and management expects to have Gambler's Bonus in approximately 50
locations, or a total of 430 machines, by the end of March 1996 and 88
locations, or a total of 980 machines, by June 1996. Alliance believes Gambler's
Bonus will improve both the revenues and operating efficiencies of its Nevada
gaming machine management operations and has the potential to create additional
opportunities in the gaming machine management segment of the gaming industry.
Additionally, in keeping with the trends in the Nevada market, Alliance is
updating its gaming device base with bill-acceptor equipped electronic gaming
machines which are also expected to improve revenues and operating efficiencies.
CUSTOMERS. Alliance believes it has a diversified customer base with no one
customer accounting for more than 10% of Alliance's revenues generated from
Nevada gaming machine management operations during fiscal 1995, although
approximately 14.1% of such revenues was generated through an affiliated group
of such customers. The affiliated group consists of eight partnerships each
having one individual partner who is common to all such partnerships. For the
year ended December 31, 1995, Alliance's ten largest customers accounted for
approximately 20.7% of Alliance's revenues.
ASSEMBLY OPERATIONS. Alliance currently manufactures and distributes
electronic gaming machines in Nevada for use in its gaming machine management
operations. Alliance manufactured approximately 80% of the electronic gaming
machines currently used in its Nevada gaming machine management operations. The
manufacturing process generally involves the assembly of standard components
which are readily available from various sources. Alliance is not dependent upon
any one supplier for the material or components used in its manufacturing
operations.
COMPETITION. Alliance is subject to substantial direct competition for its
revenue-sharing and space lease gaming machine management locations from several
large gaming machine management operators and numerous small operators, located
principally in Las Vegas, Reno and the surrounding areas. Alliance and Jackpot
Enterprises, Inc. are the dominant gaming machine management operators in
Nevada. The principal method of competition for gaming machine management
operators includes the economic terms of the revenue-sharing or space lease
arrangement, the services provided and the reputation of the gaming machine
management operator. Price competition is intense and has reduced Alliance'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.
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LOUISIANA OPERATIONS
In March 1992, Alliance obtained a contract to operate video poker gaming
devices in the greater New Orleans, Louisiana area through its controlled
subsidiary, VSI. Alliance entered into an operating agreement which runs through
May 2002 with Fair Grounds for Alliance to be the exclusive operator of video
poker devices at the only racetrack and ten associated OTB parlors in the
greater New Orleans area. Alliance selects, installs, manages and services video
poker devices for each of the ten facilities owned by Fair Grounds for which it
receives a percentage of the revenue generated by the devices. Alliance
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, Alliance owns 49% of the
capital stock of VSI and three prominent members of the Louisiana business and
legal community own the remaining 51%. Pursuant to the terms of the VSI Loan,
VSI may not pay cash dividends or make any distribution of its property. The VSI
Loan amortizes quarterly until due in full in September 1998 and may be prepaid
at any time without penalty. Alliance, however, owns all the voting stock of VSI
and the majority of its officers and directors are Alliance employees. Alliance
has a 71% interest in dividends of VSI in the event dividends are declared.
Alliance 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 Alliance is entitled to
receive 60% of any SVS dividends. Under the terms of its contract with Fair
Grounds, Alliance 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, Alliance
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.
Alliance is prohibited by the Louisiana Act from engaging in both the
manufacture and operation of gaming machines in Louisiana and, therefore,
Alliance does not manufacture its own gaming machines for use in Louisiana.
Further, the Louisiana legislature recently passed a bill which could have the
effect of curtailing the Company's activities in Louisiana. See "Risk
Factors--Regulation by Gaming Authorities" and "Gaming Regulation and
Licensing--Louisiana."
On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race
Course in New Orleans where Alliance operated 199 gaming machines prior to the
fire, 193 of which were destroyed in the fire. Alliance was fully insured for
all equipment, leasehold improvements, other assets and business income with the
exception of immaterial deductibles. From December 17, 1993 through December 31,
1995, Alliance recorded approximately $815,000 of income from business
interruption insurance proceeds. Alliance is discussing settlement of additional
business interruption claims with the insurance carrier.
SALES AND 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.
Alliance 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.
COMPETITION. Alliance is subject to extensive competition for contracts to
operate video poker devices and Alliance'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 three video poker devices.
In addition, Louisiana has authorized riverboat gaming statewide and several
riverboats are operating in Orleans Parish. Riverboats are permitted
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to have live table games and an unlimited number of gaming machines, including
slot machines. Louisiana has also authorized one land-based casino, permitted to
include live table games and an unlimited number of gaming machines in New
Orleans, which opened in May 1995; however, its operator filed for bankruptcy
reorganization and ceased operations in November 1995. The operator has stated
its intention to reopen the land-based casino following reorganization.
CASINO OPERATIONS
RAINBOW CASINO. On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. The entire project consists of the
Rainbow Casino, which is a 24,000-square foot casino owned and operated by
Alliance containing approximately 589 gaming machines and 28 table games, and
also includes an 89-room Days Inn hotel and a 10-acre indoor and outdoor
entertainment complex called Funtricity Entertainment Park, which was developed
by a subsidiary of Six Flags Corporation. Both the hotel and entertainment park,
which were substantially completed in late May 1995, are operated by third
parties. The entire property, known as Vicksburg Landing, is the only
destination of its kind in Mississippi containing a casino/family entertainment
complex.
Through a wholly-owned subsidiary, Alliance 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 RCC, an unaffiliated Mississippi corporation.
Pursuant to a management agreement dated October 29, 1993, which terminates on
December 31, 2010, Alliance through a wholly-owned subsidiary also serves as
manager of the casino. In connection with the completion of the casino and the
acquisition of its original 45% limited partnership interest, Alliance funded a
$3,250,000 advance to RCC on the same terms as RCC's financing from HFS (other
than the fact that such advance is subordinate to payments due to HFS, and the
HFS financing is secured). The HFS financing provided to RCC on August 3, 1993
consisted of a $7.5 million loan secured by a first priority lien on all of the
assets of the project. The terms of the HFS financing provide that, in
connection with the loan and certain marketing services provided by HFS to RCC,
RCC will pay to HFS a perpetual royalty based upon the casino's annual gross
gaming revenues of 12% on the first $40 million, 11% on the next $10 million,
and 10% thereafter.
On March 29, 1995, Alliance consummated certain transactions whereby
Alliance acquired from RCC the controlling general partnership interest in RCVP
and increased its partnership interest. In exchange for the commitments by NGM,
a subsidiary of National Gaming Corporation, and Alliance to provide additional
financing (up to a maximum of $2,000,000 each) to be used, among other things
for 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) and for a $500,000 payment paid to HFS as a waiver fee, a
commitment by Alliance to fund any additional capital necessary for the
completion, upgrading or working capital of the project, the following occurred:
(i) a subsidiary of Alliance became the general partner and RCC became the
limited partner and (ii) the respective partnership interests were adjusted. As
of December 31, 1995, amounts outstanding under the HFS facility and the related
financings aggregated $9.7 million. As adjusted, RCC is entitled to receive 10%
of the net available cash flows after debt service and other items, as defined
(which amount increases to 20% of such amount if revenues exceed $35,000,000
(i.e. only on such incremental amount)), for a period of 15 years, such period
being subject to one year extensions for each year in which a minimum payment of
$50,000 is not made. In addition, if during any continuous 12-month period until
December 31, 1999 the casino achieved earnings from the project of at least
$10.5 million before deducting depreciation, amortization, royalty and income
taxes, then Alliance would be obligated to pay to certain principals of the
original partnership an amount aggregating $1 million in cash or shares of
Common Stock 180 days after the occurrence. The casino has achieved the required
earnings as adjusted, and Alliance is obligated to make the required payment or
issue the Common Stock by September 30, 1996. Also, Alliance's 5.2% royalty on
gross revenues was terminated on the date it became the general partner.
PLANTATION STATION. In April 1990, Alliance purchased, for an aggregate
purchase price of $9,700,000, substantially all of the assets of the Plantation
Station casino ("Plantation Station") located near the border of Reno and Sparks
in northern Nevada. Plantation Station is a 20,000 square-foot casino which
currently
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contains approximately 453 gaming machines, keno and 10 table games, including
blackjack, craps, roulette and poker. In addition, Plantation Station offers a
race and sports book which is leased to an independent race and sports book
operator and includes a 300-seat restaurant owned by Alliance. Plantation
Station is convenient to both Reno and Sparks and caters to the local market.
SALES AND MARKETING. Alliance's casinos target the cost-conscious market.
Alliance promotes its casinos primarily by providing quality food at reasonable
prices and through special promotional events. Alliance 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.
COMPETITION. Gaming of all types is available throughout Nevada in numerous
locations, including many locations similar to those at which Alliance operates
gaming machines. All of these gaming opportunities may compete directly or
indirectly with Alliance's casino operations. Many of Alliance's competitors
possess substantially greater financial and other resources than Alliance. Many
of such competitors include large casino-hotels which offer more variety and
amenities and may be perceived to have more favorable locations than Alliance.
The operation of casinos is 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. Plantation Station's
primary casino operations focus on the local market rather than the tourist
market. The Rainbow Casino generally appeals to both locals and visitors.
Accordingly, Alliance believes that the principal competition for Plantation
Station's operations comes from larger "locals" casinos. The Rainbow Casino
appeals to both locals and visitors to historic Vicksburg, Mississippi. 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.
BUSINESS DEVELOPMENT ACTIVITY
Through a wholly-owned subsidiary, Native American Investment, Inc.,
Alliance has a contract to develop Class II and III gaming opportunities with an
Indian tribe in California. Class II gaming includes bingo, pulltabs and
non-banking card games that are already permitted in a state, and is subject to
the concurrent jurisdiction of the National Indian Gaming Commission ("NIGC")
and the applicable Indian tribe. Class III gaming is a residual category
composed of all forms of gaming that are not Class I gaming (which consists of
non-commercial social games played solely for prizes of minimal value or
traditional forms of Indian gaming) or Class II gaming, including casino-style
gaming. The contract is subject to negotiations resulting in satisfactory
compacts with the state and approval of the contract by the National Indian
Gaming Commission. The Governor of California has to date refused to negotiate a
compact covering Class III electronic gaming machines and house-banked games in
California and is currently engaged in related litigation over the scope of
gaming issues with certain Indian tribes. There can be no assurance as to
ultimate outcome of these litigation activities or the successful completion or
operation of any part of this project.
On March 27, 1996, the United States Supreme Court ruled that a portion of
the Indian Gaming Regulatory Act was unconstitutional. As a result, Federal
courts cannot oversee negotiations between Indian tribes and state officials
about the scope of on-reservation gaming and Indian tribes cannot file suits
against states or state officials. Management of Alliance believes that this
ruling will have a materially adverse effect upon its Native American casino
development activities in California. Accordingly, management is considering
whether the current net book value of its investment in Native American
Investment, Inc., of $1,800,000 may not be fully recoverable under current
circumstances, necessitating a write-off of part or all of that balance during
the current quarter.
Alliance and Casino Magic Corporation, through wholly-owned subsidiaries,
are members in KGP and KFP, both Kansas limited liability companies. Under the
Option Agreement granted to KGP by Camptown and TRAK Southeast, KGP has been
granted the exclusive right, which right expires on September 13, 2013, to
operate gaming machines and/or casino-type gaming at Camptown's racing facility
in Frontenac, Kansas if and when such gaming is permitted in Kansas. In December
1994, Camptown received a $3,205,000 loan from Boatmens' Bank which was
guaranteed by KFP. Alliance and Casino Magic Corporation each invested
$1,580,000 in KFP which was used to purchase a certificate of deposit to
collateralize its guarantee.
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Construction of Camptown's racing facility was completed and the facility opened
for business in May 1995. The racing facility was temporarily closed on November
5, 1995 due to poor financial results. Camptown filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated an
intention to reopen for business following bankruptcy reorganization. Boatmen's
Bank demanded payment of the Camptown loan from KFP under the terms of the
guaranty. KFP paid the loan and Boatmen's Bank returned KFP's certificate of
deposit and KFP assumed Boatmen's Bank's position in the loan to Camptown which
is secured by a second mortgage on Camptown's greyhound racing facility in
Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by the
Option Agreement. KFP intends to vigorously pursue all of its rights and
remedies which may include, among other things, seeking authority from the
bankruptcy court to commence a foreclosure action. In the case of a foreclosure
action, KFP would be required to assume or pay the existing first mortgage of
approximately $2,000,000 if KFP becomes the purchaser at any such sale. The
Kansas legislature has considered gaming bills during the 1996 session although
none have passed. There can be no assurance that gaming of any type will ever be
legalized in Kansas and management intends to continue to evaluate the
recoverability of its investment.
As described in "Unaudited Pro Forma Condensed Combined Financial
Information," the Company intends to reduce Alliance development expenses, which
related to mergers, acquisitions and joint ventures, following the Transaction.
The reduction reflects the elimination of costs that were being incurred prior
to Alliance's accomplishment of its strategic plan to acquire a major electronic
gaming machine manufacturing company. To accomplish this reduction the Company
intends to reduce payroll costs and fees paid to consultants and legal costs
related to non-BGII transactions Alliance had been pursuing.
PATENTS, COPYRIGHTS AND TRADE SECRETS
Alliance 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.
Such copyrights expire at various dates from September 2056 to October 2065. 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. Such patents expire at various dates from May
2008 to March 2012.
BGII is obligated under several patent agreements to pay royalties ranging
from approximately $50 to $200 per game depending on the components in the
gaming machines. Additionally, based on an amendment to the trademark licensing
agreement between BGII and BEC dated March 31, 1995, BGII is obligated to pay a
royalty on new machines sold of $25 to $30 per machine beginning on March 31,
1995 with a minimum annual royalty payment of $500,000 for the initial five-year
term of the amended agreement, which is subject to annual renewals thereafter.
Royalty expense for the years ended December 31, 1993, 1994 and 1995 was $1.1
million, $2.9 million and $3.0 million, respectively.
Pursuant to a Trademark and License Agreement, as amended, between BEC and
BGII (the "License Agreement"), BGII licenses the name "Bally" from BEC for use
in the businesses of BGII. In 1992, BGII paid $3.5 million to BEC in the form of
an offset against a tax receivable which was owed by BEC to BGII for the
licensing rights. See "Notes to BGII's Consolidated Financial
Statements--Summary of Significant Accounting Policies--Intangible Assets." On
March 27, 1995, BEC filed an action in the United States District Court,
District of New Jersey seeking to revoke BGII's right to the use of the Bally
trade name under the terms of the License Agreement. On March 31, 1995, BGII and
BEC entered into a Trademark License and Settlement Agreement pursuant to which
the above-described action was settled. BGII agreed to pay BEC a per machine
royalty of $25 on the first 20,000 new machines sold annually on or after March
31, 1995 and $30 per machine for new machine unit sales in excess of 20,000
gaming machines, with a minimum annual royalty of $500,000 per year for the
initial five year term of the amended agreement and subject to annual renewal
thereafter. In addition, BGII agreed to rebate to BEC an amount for every new
gaming machine sold to BEC or its affiliates for two years. As part of the
settlement, BGII retained its right to the use of the Bally trade name for an
initial period of five years with annual extensions thereafter at the option of
BGII. The settlement has not had a significant impact on BGII's financial
position, results of operations
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or cash flows. BEC has asserted that its permission is required for the
surviving company in the Merger to continue to utilize the Bally trade name, an
assertion which BGII has denied. On February 16, 1996, BGII received notice from
BEC alleging that BGII had violated the License Agreement by, among other
things, granting to Marine Midland a security interest in general intangibles.
In such notice, BEC also stated that as a result of the foregoing, it was
immediately terminating the License Agreement. BGII does not believe that it has
violated the terms of the License Agreement and BGII will defend its position
against BEC's claims. See the description of related litigation under "Risk
Factors--Bally Trade Name" and "--Litigation Relating to the Merger."
In July 1992, BGII reached an agreement for an exclusive license until
December 31, 2005, subject to extension, of a patent relating to the use of
credit cards in gaming machines and acquired 1% of the stock of Scotch Twist,
Inc., the private company which granted this license in exchange for the
issuance of 100,001 shares of BGII's common stock. The licensing agreement
requires BGII to commit $1.2 million in research and development costs related
to the patent, plus any costs related to obtaining required regulatory approvals
and licenses. As of December 31, 1995, approximately $1.0 million had been spent
relating to this commitment.
In connection with a settlement agreement entered between BEC, Gaming, BGI
Enterprises, BGII and IGT on December 16, 1992, BGII sold its interest in the
Casino Interlink Multiple Location Progressive System (the "Progressive System")
to IGT. BGII reserved certain rights in the sale, including the rights to
continue to sell the Progressive System (i) within Europe, (ii) for use in
single locations, and (iii) worldwide in lottery applications. BGII agreed to
discontinue general sales of the Progressive System or any similar system
outside of Europe for a period of five years. This agreement is binding on all
successors and assigns of BGII, including the Company.
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.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1995, Alliance employed approximately 683 persons in the
State of Nevada and approximately 8 persons in various states related to its
business development activities, VSI employed approximately 73 persons in the
State of Louisiana, RCVP employed 374 persons in the State of Mississippi, and
BGII and its subsidiaries employed approximately 500 persons in various states
and 440 persons in Germany. None of such employees is covered by a collective
bargaining agreement. Wulff's employees, however, are covered by German
regulations which apply industry-wide and are developed, to some extent, through
negotiations between representatives of the metal working industry employers and
the trade union representing the employees. These regulations are in the nature
of collective bargaining agreements and cover the general terms and conditions
of such items as wages, vacations and work hours. The regulations codify what
are considered the common standards of employment in the German metal working
industry. The Company believes its relationships with its employees are
satisfactory.
LITIGATION RELATING TO THE MERGER
On or about June 19, 1995, three purported class actions were filed in the
Chancery Court of Delaware by BGII stockholders against BGII and its directors
(the "Fiorella, Cignetti and Neuman Actions") in connection with the
then-proposed merger of BGII with WMS (the "WMS Merger"). Also on or about June
19, 1995, a purported class action was filed in the Delaware Court of Chancery
by a BGII stockholder against BGII and its directors and Alliance (the "Strougo
Action") in connection with the tender offer and consent solicitation made by
Alliance (subsequently superseded by the execution of the Merger Agreement). On
or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman and
Strougo Actions (collectively, the "Stockholder Plaintiffs") filed with the
Court a motion to consolidate the four actions. On or about July 27, 1995,
certain of the Stockholder Plaintiffs filed an amended complaint that adopted
certain allegations concerning self-dealing by BGII directors in connection with
the merger agreement entered into with WMS (the "WMS Agreement"); added a claim
relating to BGII's alleged failure to hold an annual meeting as required; and
added WMS as defendant. The amended complaint also alleged that BGII intended,
in violation of Delaware law, to sell Wulff without first seeking stockholder
approval of the sale.
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The action sought an order enjoining defendants from proceeding with,
consummating or closing the WMS Merger, or rescinding it if it closed;
preventing the sale of Wulff without prior stockholder approval; declaring
invalid BGII's agreement to pay WMS a fee if the WMS Agreement is terminated by
BGII in certain circumstances; compelling an auction of BGII and the provision
of due diligence to Alliance; scheduling an immediate meeting of BGII
stockholders; and awarding compensatory damages. Management believes these
claims to be without merit and intends to vigorously defend these actions.
On October 23, 1995, WMS instituted a suit in New York State Court against
BGII for BGII's failure to pay $4.8 million upon termination of the WMS
Agreement. Management intends to vigorously defend this action. On November 22,
1995, BGII answered the complaint and brought counterclaims against WMS alleging
that WMS repudiated and breached the WMS Agreement by, among other things,
failing to act in good faith toward the consummation of the WMS Merger, advising
BGII that it would not perform as agreed but would impose new conditions on the
WMS Merger, acting in excess of its authority and undermining the ability of
BGII to perform the WMS Agreement. On February 8, 1996 WMS moved for summary
judgment. On April 2, 1996, BGII opposed WMS's motion and cross-moved for
summary judgment. Pursuant to the Merger Agreement, Alliance has agreed to
indemnify BGII against such a claim under certain circumstances.
On September 14, 1995, a stockholders' class and derivative action was
commenced by Richard Iannone, an Alliance stockholder, against Alliance, the
members of its current Board of Directors and certain of its former directors in
Federal District Court in Nevada asserting, among other matters, that Alliance
has wasted corporate assets in its efforts to acquire BGII by, among other
things, agreeing to onerous and burdensome financing arrangements that threaten
Alliance's ability to continue as a going concern and that Alliance had made
false and misleading statements and omissions in connection with that effort by
failing to disclose the need to refinance an additional $53 million of existing
BGII indebtedness, by failing to disclose how Alliance would recapitalize the
indebtedness of a combined Alliance/BGII and by failing to disclose the leading
role played by Richard Rainwater in Alliance's efforts to acquire control of
BGII which, given assurances made by Alliance to gaming regulators in Nevada
that the unlicensed Mr. Rainwater would not play an active role in the
management of Alliance, could expose Alliance to suspension or revocation of its
Nevada gaming license. In addition, the stockholder action against Alliance
alleges that (i) Alliance substantially inflated its results of operations by
selling gaming machines at inflated prices in exchange for promissory notes
(without any down payment) which Alliance knew could not be paid in full but
which Alliance nevertheless recorded at full value, (ii) Alliance doctored
reports sent to its route customers and (iii) the directors of Alliance had
caused Alliance to engage in self-dealing transactions with certain directors
which resulted in the exchange of Alliance assets for assets and services of
vastly lesser value. On September 21, 1995, a United States magistrate denied
the plaintiffs' request for expedited discovery, stating that Mr. Iannone was
not an adequate representative and was not likely to succeed on the merits. On
October 4, 1995, the defendants filed a motion to dismiss the action. On
December 18, 1995, the plaintiff filed an amended shareholder derivative
complaint. The plaintiff is no longer asserting any class claims. On March 5,
1996 the defendants filed a motion to dismiss the amended complaint.
In June 1995, BEC asserted that a certain agreement between BEC and BGII
(the "Noncompete Agreement") prohibits the use by BGII of the trade name "Bally"
if it is merged with a company that is in the casino business within or without
the United States and operates such business prior to January 8, 1999. BGII
believes such claim is entirely without merit since the restriction referred to
expired on January 8, 1996 and in any event does not relate to the use of the
"Bally" trade name, which is covered by the License Agreement. The restriction
in the Noncompete Agreement will not have any impact on the Company since the
Effective Time of the Merger contemplates a closing of the Merger after the
restriction in the Noncompete Agreement lapses. BEC has not reasserted this
position since it was informed by BGII in July 1995 that the restriction lapsed
on January 8, 1996. Consequently, management believes BEC has determined not to
contest BGII's position.
BEC has also asserted that a merger between BGII and the Merger Subsidiary
would violate the terms of the License Agreement. BGII has denied these claims
and management believes that the surviving company in the Merger will be
permitted to use the "Bally" trade name in accordance with the terms of such
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License Agreement. Management believes that no breach of such License Agreement
is caused by the Merger and the use of the "Bally" trade name by the surviving
corporation. In a letter dated November 9, 1995, BEC reasserted its position. On
November 20, 1995, Alliance, the Merger Subsidiary and BGII commenced an action
against BEC in Federal District Court in Delaware seeking a declaratory
judgment, among other things, that the surviving company in the Merger will be
permitted to use the "Bally" trade name in accordance with the terms of the
License Agreement, and seeking injunctive relief (the "Alliance Action"). On
November 28, 1995, BEC commenced an action against BGII, Gaming, Alliance and
the Merger Subsidiary in Federal District Court in New Jersey to enjoin the
defendants from using the "Bally" trade name (the "BEC Action"). On November 28,
1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the
Alliance Action pending resolution of the BEC Action. The BEC Action alleges
that BGII's continued use of the trade name after the Merger will (1) constitute
a prohibited assignment of BGII's rights to use the trade name and (2) exceed
the scope of the license granted to BGII because BGII will be under the control
of Alliance. On December 15, 1995, BEC filed a motion for a preliminary
injunction in the BEC Action. At a hearing on January 17, 1996, the court
declined to issue a preliminary injunction, but held BEC's motion in abeyance
pending the defendants' motion to dismiss and for summary judgment, which the
defendants had filed on December 26, 1995. Thereafter, the parties advised the
court that they are negotiating a settlement of the BEC Action. On March 29,
1996, at the court's request, the parties entered into a consent order providing
for the administrative dismissal of the BEC Action, subject to its reopening
should the settlement not be consummated. If the parties do not agree on a
settlement, BGII, Gaming, Alliance and the Merger Subsidiary intend to
vigorously defend their position in these actions. However, there can be no
assurance that BEC will not be successful in its action to prohibit the
surviving corporation in the Merger from using the "Bally" trade name. The loss
of the "Bally" trade name may have a material adverse effect on the gaming
machine operations of the Company.
On February 16, 1996, BGII received notice from BEC alleging that BGII had
violated the License Agreement by, among other things, granting to Marine
Midland a security interest in general intangibles. In such notice, BEC also
stated that as a result of the foregoing, it was immediately terminating the
License Agreement. Management does not believe that BGII has violated the terms
of the License Agreement and the Company will defend its position against BEC's
claims.
OTHER LITIGATION
In 1994, after an intensive Federal investigation of Gaming's former
Louisiana distributor, eighteen individuals were indicted on charges of
racketeering and fraud against Gaming and the Louisiana regulatory system. Among
those indicted were the former distributor's stockholders, directors, employees
and others alleged to be associated with organized crime. Fifteen entered pleas
of guilty before trial and the remaining three were convicted in October 1995.
In addition, Alan Maiss, a former director and president of BGII, pled guilty to
misprision of a felony in connection with such investigation. BGII, its
subsidiaries and its current employees were not subject to such investigation.
Prior to the conclusion of the Federal criminal case, BGII's activities with
regard to its former VLT distributor in Louisiana were the subject of inquiries
by gaming regulators and a report by the New Jersey Division of Gaming
Enforcement dated August 24, 1995. The New Jersey Commission has indicated that
it will hold a hearing on the matter, but no date has been set at this time. The
New Jersey report made no specific recommendations for action by the New Jersey
Commission. The Gaming Authorities in Ontario, Canada, who have investigated the
matter, issued a gaming registration to Gaming on February 8, 1996.
On September 25, 1995, BGII was named as a defendant in a class action
lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf
of himself and all others similarly situated (the "plaintiffs"). The plaintiffs
filed suit against the Company and approximately 45 other defendants (each a
"defendant," and collectively the "defendants"). Each defendant is involved in
the gaming business as either a gaming machine manufacturer, distributor, or
casino operator. The class action lawsuit arises out of alleged fraudulent
marketing and operation of casino video poker machines and electronic slot
machines. The plaintiffs allege that the defendants have engaged in a course of
fraudulent and misleading conduct intended to induce people into playing their
gaming machines based on a false belief concerning how those machines actually
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operate as well as the extent to which there is actually an opportunity to win
on any given play. The plaintiffs allege that the defendants' actions constitute
violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and
give rise to claims of common law fraud and unjust enrichment. The plaintiffs
are seeking monetary damages in excess of one billion dollars, and are asking
that any damage awards be trebled under applicable Federal law. Management
believes the plaintiffs' lawsuit to be without merit. The Company intends to
vigorously pursue all legal defenses available to it.
ENVIRONMENTAL MATTERS
The Company is subject to Federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances (together, "Environmental
Laws"). The Company uses certain substances and generates certain wastes that
are regulated or may be deemed hazardous under applicable Environmental Laws.
From time to time, the Company's operations may result in certain noncompliance
with applicable requirements under Environmental Laws. Any past noncompliance
with applicable requirements under Environmental Laws has not had a material
adverse effect on the Company's results of operations or financial condition.
Further, the Company believes that any noncompliance or cleanup liability under
current Environmental Laws would not have a material adverse effect on the
Company's results of operations or financial condition.
GAMING REGULATION AND LICENSING
The manufacture and distribution of gaming machines and the operation of
gaming facilities are subject to extensive Federal, state, local and foreign
regulation. Although the laws and regulations of the various jurisdictions in
which the Company operates and into which the Company may expand its gaming
operations vary in their technical requirements and are subject to amendment
from time to time, virtually all of these jurisdictions require licenses,
permits, documentation of qualification, including evidence of financial
stability, and other forms of approval for companies engaged in the manufacture
and distribution of gaming machines and the operation of gaming facilities, as
well as for the officers, directors, major stockholders and key personnel of
such companies.
Any person which acquires a controlling interest in the Company would have
to meet the requirements of all governmental bodies which regulate the Company's
gaming business. A change in the make-up of the Company's Board of Directors and
management would require the various Gaming Authorities to examine the
qualifications of the new board and management. The past conduct of management,
which may be re-examined in conjunction with hearings in Nevada, New Jersey and
Louisiana, would normally not be a controlling factor in passing upon the
suitability of a successor group when that prior management group would no
longer be in control of the Company. Absent actual approval of the successor
interests controlling the Company after a merger or other acquisition, there can
be no assurances that governmental authorities would give required approvals to
any particular persons or groups.
NEVADA
The ownership and operation of casino gaming facilities in Nevada, and the
manufacture, distribution and operation of gaming machines and cashless wagering
systems for use or play in Nevada, or for distribution outside of 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 machine route
operations (herein referred to as "gaming machine management operations") are
subject to the licensing and regulatory control of the Nevada State Gaming
Control Board (the "Nevada Board"), the Nevada Gaming Commission (the "Nevada
Commission"), the County Liquor and Gaming Licensing Board (the "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
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unsuitable persons from having any direct or indirect involvement with gaming at
any time in any capacity; (ii) the strict regulation of all persons, locations,
practices, associations and activities related to the operation of licensed
gaming establishments and the manufacture and distribution of gaming machines,
cashless wagering systems and associated equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) 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; (v)
the prevention of cheating and fraudulent practices; and (vi) 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 gaming
related operations conducted by the Company.
Alliance and BGII are each registered with the Nevada Commission as
publicly-traded corporations ("Registered Corporations"). The Company's direct
and indirect subsidiaries conduct gaming operations at various locations,
conduct gaming machine management operations and manufacture and distribute
electronic gaming machines (collectively, the "Alliance Nevada Subsidiaries").
Gaming, the operating subsidiary for BGII's domestic gaming operations, which
manufactures and distributes electronic gaming machines, is also required to be
licensed by the Nevada Gaming Authorities. The licenses held by the Alliance
Nevada Subsidiaries and Gaming require the periodic payments of fees, or fees
and taxes, and are not transferable. Alliance and BGII have been found suitable
to own the stock of the Nevada Subsidiaries and Gaming, respectively, each of
which is a corporate licensee (individually, a "Corporate Licensee" and
collectively, "Corporate Licensees") under the terms of the Nevada Act. As
Registered Corporations, Alliance and BGII are 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. Alliance, BGII and the 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 machine management operations, and in the manufacture and
distribution of gaming machines for use or play in Nevada or for distribution
outside of Nevada, as the case may be.
The Merger must be approved in advance by the Nevada Board and the Nevada
Commission. Hearings are currently scheduled before the Nevada Board on May 8,
1996 and before the Nevada Commission on May 23, 1996 to obtain the necessary
approvals.
All gaming machines and cashless wagering systems that are manufactured,
sold or distributed for use or play in Nevada, or for distribution outside of
Nevada, must be manufactured by licensed manufacturers and distributed or sold
by licensed distributors. All gaming machines manufactured for use or play in
Nevada must be approved by the Nevada Commission before distribution or exposure
for play. The approval process for gaming machines and cashless wagering systems
includes rigorous testing by the Nevada Board, a field trial and a determination
as to whether the gaming machines or cashless wagering system meets strict
technical standards that are set forth in the regulations of the Nevada
Commission. Associated equipment must be administratively approved by the
Chairman of the Nevada Board before it is distributed for use in 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 who, in addition to
their authority to deny an application for a finding of suitability or
licensure, have jurisdiction to disapprove a change in a corporate position.
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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 the 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 the 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 and 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 gaming related operations of the Company.
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 or her 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
Corporation'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.
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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, such as the Senior Secured Notes, Old
Convertible Debentures or New Convertible Debentures, to file applications, be
investigated and be found suitable to own the debt security if the Nevada
Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. 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 current stock ledgers 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 such as the
Preferred Stock, Senior Notes, New Convertible Debentures, Common Stock and
Series E Special Stock 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. The Company has filed an application for
approval of the Offerings, the Exchange Offer and related transactions,
including stock pledges, negative pledges and security interests in connection
with the Note Offering. However, there can be no assurance that the Offerings or
the Exchange Offer will be approved or that if approved, they will be approved
on a timely basis. 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 Alliance and BGII 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 such as the
Private Placement. The Company has filed a request for administrative approval
of the Private Placement. However, there can be no assurance that the Nevada
Board Chairman will approve the Private Placement or that he will approve it on
a timely basis.
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 or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
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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
Merger and certain related transactions require the prior approval of the Nevada
Commission.
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 effects 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 machines
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 Licensees 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 its 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 local
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
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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. The Louisiana
legislature recently passed a bill which would allow each parish to decide
whether to disallow video poker devices, riverboat casinos and, in Orleans
Parish, land-based casinos. If any parish in which the Company operates elects
to disallow video poker devices, the Company would have to cease its video poker
operations there by June 30, 1999. The Company cannot predict which parishes
will so elect; however, if all of the parishes in which the Company operates so
elect, the cessation of the Company's video poker operations would have a
material adverse effect on the operations of the Company. See "Risk Factors --
Strict Regulation by Gaming Authorities."
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. Another indirect subsidiary of the Company, VDSI, has
been granted a license as a distributor by the Division. Gaming has been granted
a license as a manufacturer by the Division. These gaming subsidiaries are
"Louisiana Licensees" under the terms of the Louisiana Act. The licenses held by
such 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 as a distributor 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.
In addition to licensure as a manufacturer of Devices under the Louisiana
Act, Gaming has been licensed by the Division as a manufacturer under the
Louisiana Riverboat Economic Development and Gaming Control Act (the "Louisiana
Riverboat Act"). Gaming's application for a permanent manufacturer's license as
it relates to the land-based casino was pending before LEDGC at the time the
operator of the land-based casino filed for bankruptcy reorganization and ceased
operations, resulting in the termination of funding for the LEDGC regulatory
operations and the effective closure of the LEDGC's operations. See "Risk
Factors--Ongoing BGII Regulatory Investigations" and "Business--Other
Litigation."
The Division notified Alliance that it would be necessary to obtain approval
from them prior to the Effective Time. To that effect, the Company has made all
requests necessary to obtain any such licenses, permits or approvals required to
be obtained prior to the Effective Time.
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MISSISSIPPI
The manufacture, distribution, ownership and operation of gaming machines 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 to own and operate gaming machines 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 RCVP must apply for renewal of such
licenses, which renewal cannot be assured. Gaming holds a license to manufacture
and distribute gaming machines. 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 who 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 Merger must be approved in advance by the Mississippi Commission. A
hearing is scheduled before the Mississippi Commission on May 16, 1996 to obtain
the necessary approval.
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 an
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 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and up to $134,000
per month and 8% 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 of Mississippi
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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 will 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 a revoked by the Mississippi
Commission, the licensee is not permitted to pay such person of 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 the Mississippi Regulations.
The law 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.
NEW JERSEY
BGII's subsidiary, Gaming, is licensed by the New Jersey Commission as a
gaming-related casino service industry ("CSI") in accordance with the New Jersey
Casino Control Act (the "Casino Control Act").
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<PAGE>
Prior to expiration of the initial license period, Gaming filed an
application for renewal of its license, which application has been deemed
complete by the New Jersey Commission. Consequently, pending formal renewal of
the license, Gaming is permitted to continue doing business with New Jersey
casino licenses.
Due to the change of control of BGII as a result of the Merger, BGII's
license as a CSI will be terminated. The Company will apply for a new CSI
license following the Merger; however, the Company's operations in New Jersey
are expected to continue uninterrupted pursuant to transactional waivers granted
by the New Jersey Commission on a sale-by-sale basis, as the New Jersey
Commission has indicated its willingness to provide such waivers to the Company.
In considering the qualifications of an applicant for a CSI license, the New
Jersey Commission may require that the officers, directors, key personnel,
financial sources and stockholders (in particular those with holdings in excess
of 5%) of the applicant and its holding and intermediary companies demonstrate
their qualifications. In this regard, such persons and entities may be
investigated and may be required to make certain regulatory filings and to
disclose and/or to provide consents to disclose personal and financial data. The
costs associated with such investigation are typically borne by the applicant.
ADDITIONAL DOMESTIC JURISDICTIONS
The Company, in the ordinary course of its business, routinely considers
business opportunities to expand its gaming operations into additional
jurisdictions.
Although the laws and regulations of the various jurisdictions in which the
Company operates or into which the Company may expand its gaming operations vary
in their technical requirements and are subject to amendment from time to time,
virtually all of those jurisdictions require licenses, permits, documentation of
qualification, including evidence of financial stability, and other forms of
approval for companies engaged in the manufacture and distribution of gaming
machines as well as for the officers, directors, major stockholders and key
personnel of such companies.
Alliance and BGII and their key personnel have obtained, or applied for, all
government licenses, registrations, findings of suitability, permits and
approvals necessary for the manufacture and distribution, and operation where
permitted, of their gaming machines in the jurisdictions in which Alliance and
BGII currently do business. The Company and the holders of its securities may be
subject to the provisions of the gaming laws of each jurisdiction where BGII or
its subsidiaries are licensed and/or conduct business, including, without
limitation, the States of Arizona, Colorado, Connecticut, Illinois, Indiana,
Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada,
New Jersey, New Mexico, South Dakota, Wisconsin, and the local regulatory
authority within each such state as well as Australian, Canadian and other
foreign gaming jurisdictions in which BGII and its subsidiaries are licensed or
conduct business. Following the consummation of the Merger, the Company and its
officers and directors will be required to apply for any government licenses,
permits and approvals necessary or required by each of these jurisdictions.
Holders of common stock of an entity licensed to manufacture and sell gaming
machines, and in particular those with holdings in excess of 5%, should note
that local laws and regulations may affect their rights regarding the purchase
of such common stock and may require such persons or entities to make certain
regulatory filings, or seek licensure, findings of qualification or other
approvals. In some cases this process may require the holder or prospective
holder to disclose and/or provide consents to disclose personal
and financial data in connection with necessary investigations, the costs of
which are typically borne by the applicant. The investigatory and approval
process can take three to six months to complete under normal circumstances. See
"Risk Factors--Strict Regulation by Gaming Authorities."
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 machines. All currently required filings have been made.
GERMANY
German legislative authorities regulate and monitor the wall machine
industry so as to ensure certain manufacturing standards and the fairness of
each machine to users. The most significant legislation presently
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<PAGE>
affecting the wall machine industry relates to prescribed licensing procedures,
the use, installation and operation of machines and the taxation of same. No
approval of the Merger is required to be obtained from German legislative or
regulatory authorities.
Wall machine manufacturers are dependent upon the successful introduction of
new products each year and currently are required to receive prior government
approval for each new product introduction. Manufacturers are required to apply
for licenses through an agency of the German federal Ministry of Economics. Such
agency maintains a policy of accepting only two licensing applications from an
individual applicant at any given time. Wulff, through affiliates and
subsidiaries, is in a position to file up to six concurrent applications. After
receiving a prototype of a machine for which the applicant seeks government
licensing approval, the federal agency deliberates for periods that range from
approximately 6 to 24 months. If that product is approved, the wall machine
manufacturer is permitted to reproduce the sample machine initially submitted
for government approval. Every wall machine carries with it a small license card
that permits the machine to be operated for up to four years from the initial
date of sale, after which it may not be used in Germany. In Germany, wall
machines sold via the secondary market may be operated by a new owner but only
for the residual time remaining on each machine's four-year life. In addition to
licensing requirements for manufacturers, any person or entity which intends to
operate a licensed wall machine must apply to local regulatory authorities for a
license, which will not be granted by the authorities if facts justify the
assumption that the applicant does not possess the requisite reliability. In
this proceeding, the applicant must furnish a police certificate of conduct.
German legislation prohibits the public play of wall machines by individuals
under age 18. Voluntary agreements among manufacturers and certain amusement
game trade associations, among other things, restrict wall machine advertising
and the ability of a player to play more than two machines at once, require all
machines to carry visible warning notices and provide that every wall machine is
automatically switched off for three minutes after one hour of continuous play.
In April 1993, the German government increased the maximum coin drop per
game effective May 7, 1993 from 30 pfennig (approximately $0.21) to 40 pfennigs
(approximately $0.28) although 30-pfennig machines are still permitted to be
manufactured and sold.
The Spielverordnung (gaming ordinance) specifically governs wall machines.
These regulations limit game payouts to DM 4.00 (approximately $2.80 per game),
require a minimum payout percentage, detail where the machines may be installed,
how many may be installed and by whom, which games are prohibited, the technical
requirements of the machines and technical review and approval. Operators must
comply with regulations which stipulate how many machines may operate within
defined square foot areas (15 square meters per machine, with a maximum of ten
machines per location). The Spielverordnung was modified in 1985 to achieve a
significant reduction of gaming machines. Gaming halls which through December
19, 1985 had more gaming machines than permitted under the revised regulations,
have a transition period through December 31, 1995 to comply with the revised
regulations. Such facilities were allowed to keep the 1985 number of wall
machines until December 31, 1990. During the period January 1, 1991 to December
31, 1995 they are entitled to two-thirds of such total number, but they must be
in compliance with the new limits by January 1, 1996. In taverns, restaurants,
hotels and certain other establishments, no more than two gaming machines are
permitted. See "Risk Factors--Operating History--Recent Losses."
The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate)
governs the zoning classification of land and the type and density of
development within the various zoning classifications. Effective January 27,
1990, the Baunutzungsverordnung was amended essentially to restrict the
development of larger gaming halls to core commercial areas, limit the
permissibility of smaller gaming halls in various types of mixed use zones and
to ban gaming halls in most types of residential and all types of industrial use
areas. Prior to such amendment, gaming halls, regardless of size, were generally
allowed in core, business, mixed and industrial zones. In addition, on a case by
case basis, each local zoning agency is authorized to exclude certain types of
otherwise permissible uses, including gaming halls.
Subject to certain exceptions, V.A.T. of 15% is generally assessed on the
sale or supply of any goods and services in Germany. Since the total amount paid
for particular goods or services is considered to be the gross
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<PAGE>
price in calculating such tax, the actual rate is 13.04%. With respect to
operators of gaming machines, prior to January 1, 1994, V.A.T. was to have been
assessed at a rate of 0.1304 times a multiplier of, with respect to the period
from January 1, 1991 through December 31, 1992, 2.0 times the amount remaining
in the cash box after payoffs to players and, with respect to the period from
January 1, 1993 through December 31, 1993, 2.5 times the amount remaining in the
cash box after payouts to players. Commencing January 1, 1994 the tax rate was
changed to 0.1304 times the cash handled by a machine. During mid-1994, the
German government effected a tax law revision based on a European Court ruling
whereby V.A.T. charged to the operators of wall machines was significantly
reduced. See "Business--German Operations--Industry." In accordance with the
ruling, for all cases arising on or after, or that were pending on, July 5,
1994, the basis for taxation has been the cash remaining in the machines. The
rule requiring a minimum payout percentage is applied to the amount remaining in
the cash box net of such V.A.T. Depending on the municipality in which a machine
is located, operators may also have to pay a monthly leisure tax on each machine
of up to DM 600 (approximately $419).
The business conducted by Wulff had benefitted from the Berlin Promotion
Act, a special tax statute which was intended to support the economy of West
Berlin in various ways. With the reunification of Germany, the need for benefits
provided by the law is perceived to have decreased. Consequently, the German
government has enacted amendments to the Berlin Promotion Act which are designed
to phase out, over a number of years, most of the tax benefits and incentives
provided by the law. These tax benefits and incentives have been changed in five
ways: (i) the V.A.T. rebates of up to 10% to enterprises located in West Berlin
for sales to German customers outside West Berlin were eliminated by January 1,
1994, which began with an initial 30% decrease on January 1, 1992, and continued
with further decreases of 20% on July 1, 1992, 25% on January 1, 1993 and 25% on
January 1, 1994; (ii) the V.A.T. rebates of 4.2% for German (other than West
Berlin) enterprises which purchase goods from West Berlin taxpayers' enterprises
were abolished effective July 1, 1991; (iii) special accelerated depreciation
allowances which permitted West Berlin taxpayers to pay to write off 75% of the
cost of qualifying fixed assets at any time during the first three years after
acquisition have been modified to limit the write off to 50%; (iv) certain
special investment subsidies have been restricted and were completely eliminated
by the end of 1994; and (v) tax credits on German federal income taxes were
reduced from 22.5% in 1990 to 20% in 1991, 13.5% in 1992, 9.0% in 1993 and 4.5%
in 1994, and were phased out completely by December 31, 1994.
During 1995, Wulff increased the amount of V.A.T. reserves by $1.0 million
as a result of developments to date in an ongoing quadrennial audit of Wulff's
tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million.
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MANAGEMENT
The name, age, present principal occupation or employment and five-year
employment history of each of the directors and executive officers of the
Company as of April , 1996 is set forth below. No director or executive officer
is related by blood, marriage or adoption to any other director or executive
officer.
ALLIANCE
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Steve Greathouse 45 Chairman of the Board, President and Chief Executive Officer
Anthony DiCesare 33 Director and Executive Vice President--Development
Craig Fields 49 Vice Chairman of the Board
Joel Kirschbaum 44 Director and Consultant
David Robbins 36 Director
Alfred H. Wilms 51 Director
Christopher Baj 36 Director
Shannon L. Bybee 56 Executive Vice President--Government Affairs and Special Advisor to the
Board of Directors
John W. Alderfer 51 Senior Vice President--Finance and Administration; Chief Financial
Officer and Treasurer
David D. Johnson 44 Senior Vice President, General Counsel and Secretary
Robert L. Miodunski 45 Senior Vice President--Nevada Route Group
Robert M. Hester 40 Vice President--Human Resources and Administration
Johnann F. McIlwain 49 Vice President--Marketing
Robert L. Saxton 42 Vice President--Casino Group
Robert A. Woodson 46 Vice President--Regulatory Compliance
</TABLE>
Steve Greathouse joined the Company as President and Chief Executive Officer
in August 1994, was appointed a director in October 1994, and became Chairman of
the Board in March 1995. Mr. Greathouse, who has held various positions in the
gaming industry since 1974, most recently served as the President of the
Harrah's Casino Hotels Division of The Promus Companies Incorporated from
September 1993 to July 1994. 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 (from
1990) Chief Operating Officer of Harrah's Southern Nevada, overseeing the
operations of Harrah's Las Vegas and Harrah's Laughlin. From 1990 to July 1991,
Mr. Greathouse served as Executive Vice President of Harrah's Southern Nevada.
Mr. Greathouse is an active member and has served as the Chairman of the Board
of the Nevada Resort Association and is on the Executive Committee of United Way
of Southern Nevada. 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.
Anthony L. DiCesare was employed by KIC from April 1991 to July 1994 and
joined the Company as Executive Vice President--Development and as a director in
July 1994. Prior to that time and following his graduation from business school
in 1989 he was employed as an associate at Wasserstein, Perella & Co., Inc. from
September 1989 to April 1991, where he worked in the Mergers and Acquisitions
group.
Dr. Craig Fields was appointed a director in October 1994 and became Vice
Chairman of the Board in March 1995. Dr. Fields was employed by the U.S.
Department of Defense Advanced Research Projects Agency ("ARPA") from 1974 to
1990. He joined the Microelectronics and Computer Technology Corporation ("MCC")
in 1990 as President and later became Chairman and CEO. He left MCC in 1994, and
serves as director of two publicly-traded corporations in addition to the
Company, Ensco, Inc. and Projectavision, Inc.
Joel Kirschbaum was appointed a director in July 1994 and served as Chairman
of the Board from July 1994 to March 1995. Mr. Kirschbaum is the sole
stockholder, director and officer of KIC, which is the sole
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<PAGE>
general partner in Kirkland, and of GSA, Inc. ("GSI"), the sole general partner
in GSA. He has been engaged in operating the businesses of KIC and Kirkland
since January 1991 when KIC and Kirkland were established, and GSI and GSA since
June 1993. Prior to that time, he worked at Goldman, Sachs & Co. for 13 years,
during the last six of which he was a General Partner. When he established KIC
and Kirkland, Mr. Kirschbaum resigned his general partnership interest in
Goldman, Sachs & Co. and became a limited partner. Mr. Kirschbaum resigned his
limited partnership interest in Goldman, Sachs & Co. in November 1993.
David Robbins was appointed a director in July 1994. Mr. Robbins has been an
attorney with O'Sullivan, Graev & Karabell from September 1995 to the present.
From May 1993 to September 1995, Mr. Robbins was an attorney with Kramer, Levin,
Naftalis, Kamin & Frankel. From September 1984 to May 1993, Mr. Robbins was an
attorney with Cahill Gordon & Reindel.
Alfred H. Wilms has served as a director of the Company since November 1983.
He served as Chief Executive Officer of the Company from December 1984 to July
1994 and as Chairman of the Board of the Company from August 1986 to July 1994.
From 1976 through 1989, Mr. Wilms served as President of Wilms Distributing
Company, Inc. and Wilms Export Company, N.V., a Belgian company engaged in the
distribution of amusement and gaming equipment. From 1971 through 1976, Mr.
Wilms held various positions with Bally Continental, including positions in
research and development, marketing, sales, gaming operation and management,
and, from 1974 through 1979, he served as a director of Bally Manufacturing
Corp. Mr. Wilms is currently President and a director of Aqualandia, the largest
waterpark in Europe; President and a director of Gibsa, a real estate company
located in Spain; and a director of Jardin Parks, a real estate company located
in Spain. Mr. Wilms is a citizen and resident of Belgium.
Christopher Baj has provided financial and operational consulting services
to various clients since April 1987. From January 1993 to December 1995, Mr. Baj
was also employed as the senior manager of Stanley L. Levin, CPA. From April
1987 to December 1992, Mr. Baj was employed as the senior consultant at Levin,
Callaghan & Nawrocki, CPA's. Mr. Baj is a Certified Public Accountant.
Shannon L. Bybee joined the Company in July 1993 and served as President and
Chief Operating Officer until July 1994. In July 1994, Mr. Bybee assumed the
roles of Executive Vice President--Government Affairs and Special Advisor to the
Board of Directors and also took a position as Associate Professor with the
William F. Harrah College of Hotel Administration and the UNLV International
Gaming Institute at the University of Nevada, Las Vegas. Mr. Bybee 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 from August 1989 to July 1993. 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.).
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--Finance and Administration, in December 1993. Prior to
joining the Company, Mr. Alderfer was the Chief Financial Officer of The Bicycle
Club, a Los Angeles--based card casino, from February 1989 to September 1990.
David D. Johnson joined the Company as Senior Vice President, General
Counsel and Secretary 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, a Nevada law firm
where he was employed from January 1987 to April 1995. Prior to joining Schreck,
Jones, Bernhard, Woloson & Godfrey, 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.
Robert L. Miodunski joined the Company as Senior Vice President--Nevada
Route Group in March 1994. From January 1991 to March 1994, Mr. Miondunski was
President of Mulholland-Harper
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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.
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 and Casino in Las Vegas.
Johnann F. McIlwain joined the Company in June 1994 as Vice
President--Marketing. From 1991 to 1992, Ms. McIlwain was Vice President of
Marketing of 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, Inc. Ms. McIlwain served as Director of
Advertising for the Resorts International Casino Hotel and the Trump Taj Mahal
Casino Hotel.
Robert L. Saxton joined the Company in 1982 as Corporate Controller and was
elected Vice President--Casino Group 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.
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.
Following consummation of the Merger, the Company intends to evaluate the
composition of its Board of Directors to insure that the Board includes
individuals having appropriate skills and experience in light of the expanded
scope of the Company's operations following the Merger. With the exception of
Hans Kloss, who will continue as President of BGII and Managing Director of
Wulff, and Robert Conover, who will continue as President of Systems, and
Richard Gillman and Neil Jenkins, who will not continue with the Company, the
current executive officers of BGII, if any, who will be employed by the Company
after the Merger have not yet been determined. The Company expects that a
substantial number of BGII officers will remain employed by the Company
following consummation of the Merger.
Hans Kloss has been a Director of BGII since August 1991 and President and
Chief Operating Officer of BGII since May 1993. Mr. Kloss has been the Managing
Director of BGII's German subsidiaries, Bally Wulff Automaten GmbH and Bally
Wulff Vertriebs GmbH, since 1981 and has been employed by those companies since
1970.
Robert Conover is the President of Systems and has held that position since
November 1990. Mr. Conover also serves as Vice-President and Chief Information
Officer of BEC and has served as such since December 1992. Mr. Conover is also
Senior Vice-President in charge of Management Information Systems Operations at
the BEC subsidiaries that operate casino hotels, and has held that position
since 1983.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
HOLDERS AND MANAGEMENT
The following table sets forth certain information as of April , 1996 with
respect to the beneficial ownership of the Common Stock, which constitutes the
Company's only outstanding class of voting securities, by (i) each person who,
to the knowledge of the Company, beneficially owned more than 5% of the Common
Stock, (ii) each director of the Company, (iii) the named executive officers of
the Company (as defined in the Exchange Act) and (iv) all executive officers and
directors of the Company as a group:
<TABLE>
<CAPTION>
POST-TRANSACTION
AMOUNT OF PRE-TRANSACTION PERCENT OF
SHARES PERCENT OF CLASS(1) CLASS(1)(2)(3)
--------------- --------------------- -----------------------
<S> <C> <C> <C>
Alfred H. Wilms.............................. 7,034,082(4) 46.9% 26.2%
Donaldson, Lufkin & Jenrette Securities 1,695,500(5) 11.6% 6.4%
Corporation ................................
277 Park Avenue
New York, New York 10172
Joel Kirschbaum ............................. 1,333,333(6) 10.3% 5.4%
Kirkland Investment Corporation
Kirkland-Ft. Worth Corporation
Investment Partners, L.P.
535 Madison Avenue
New York, New York 10022
Gaming Systems Advisors, L.P. ............... --(7) -- --
535 Madison Avenue
New York, New York 10022
Steve Greathouse............................. 333,333(8) 1.9% 1.4%
Anthony L. DiCesare.......................... --(9) -- --
Craig Fields................................. 125,000(10) * *
David Robbins................................ 20,000(11) * *
Christopher Baj.............................. -- -- --
Shannon L. Bybee............................. 210,000(12) 1.6% *
John W. Alderfer............................. 162,000(13) 1.2% *
David D. Johnson............................. 66,667(14) -- --
Robert L. Miodunski.......................... 56,667(15) * *
All executive officers and directors as a
group....................................... 9,321,082(16) 46.5% 29.3%
</TABLE>
- ------------------------
* Less than 1%.
(1) Excludes the effect of (a) the issuance of (i) 2,750,000 shares subject to
warrants to KIC in connection with the Kirkland Investment, (ii) 1,250,000
shares subject to warrants to GSA pursuant to the GSA Advisory Agreement on
September 21, 1993 and 2,500,000 shares subject to additional warrants
issuable to GSA upon consummation of the Merger, both of which become
exercisable in equal amounts only when the stock price reaches $11, $13 and
$15, and (iii) 750,000, 250,000 and 30,000 shares subject to warrants
issued to Donaldson, Lufkin & Jenrette Securities Corporation, Oppenheimer
& Co. Inc. ("Oppenheimer") and L.H. Friend, Weinress & Frankson, Inc.
("Friend"), respectively, in connection with the issuance of the
Convertible Debentures, and (iv) 250,000 shares subject to warrants issued
to Canyon Partners, Inc., in September 1995, and (b) shares covered by
employee stock options other than those deemed beneficially owned by
executive officers and directors.
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(2) Assumes the issuance of approximately 692,000 shares to BGII stockholders
in the Merger, approximately 1,176,000 shares in the Private Placement,
approximately 932,000 shares in partial satisfaction of BGII employee
contract termination costs and performance unit awards and approximately
9,000,000 shares in the Exchange Offer and Automatic Conversion.
(3) Excludes the effect of BGII obligations assumed by Alliance with respect to
each outstanding stock option and warrant to purchase shares of BGII common
stock, which options and warrants represented an aggregate of 752,500 and
1,498,000 shares of BGII common stock, respectively.
(4) Includes 2,000,000 shares represented by the warrants issued to Mr. Wilms.
Mr. Wilms' mailing address is 4380 Boulder Highway, Las Vegas, Nevada
89121. See "Certain Relationships and Related Transactions."
(5) Donaldson, Lufkin & Jenrette Securities Corporation and certain affiliated
entities filed on February 14, 1995, as amended on February 14, 1996, a
Schedule 13G indicating ownership as of December 31, 1995, of (i) 1,193,500
shares issuable upon conversion of Old Convertible Debentures held by it,
(ii) 500,000 shares which may be acquired upon exercise of certain warrants
issued to Donaldson, Lufkin & Jenrette Securities Corporation and (iii)
2,000 shares. Excludes warrants exercisable for 250,000 shares issued to
Donaldson, Lufkin & Jenrette Securities Corporation which will vest when
the price of the Common Stock reaches $13 per share following consummation
of the Merger or any similar transaction.
(6) Based upon information contained in a Schedule 13D filed on June 23, 1994,
as amended on September 28, 1995 and November 6, 1995, and provided to
Alliance by such persons (except as to percent of class) which indicated
that each of them held sole voting and disposition over all such shares. Of
such shares, certain amounts have been or may be sold or distributed to
Friend, Mr. DiCesare and, possibly, certain other persons, as set forth in
the Schedule 13D provided to Alliance by Mr. Kirschbaum, KIC, Kirkland and
GSA.
(7) Based upon information contained in a Schedule 13D filed on June 23, 1994,
as amended on September 28, 1995 and November 6, 1995 and provided to
Alliance by such person jointly with Mr. Kirschbaum, KIC and Kirkland.
(8) Includes options to purchase shares of Common Stock pursuant to the
Alliance 1991 Plan, a portion of which vested in 1995, and excludes
warrants exercisable for 250,000 shares portions of which become
exercisable in equal amounts only when the stock price reaches $11, $13 and
$15.
(9) Based upon information contained in a Schedule 13D filed on June 23, 1994,
as amended on September 28, 1995 and November 6, 1995 and provided to
Alliance by Mr. Kirschbaum, KIC, Kirkland and GSA. As set forth in such
Schedule 13D, as amended, Mr. DiCesare has certain rights to receive a
portion of the securities that KIC would be entitled to receive upon
dissolution of Kirkland and that GSI would be entitled to receive upon
dissolution of GSA.
(10) Includes 125,000 shares subject to options that are currently exercisable
or will become exercisable within 60 days. Excludes warrants exercisable
for 250,000 shares portions of which become exercisable in equal amounts
only when the stock price reaches $11, $13 and $15 and options exercisable
for 150,000 shares which will be issued within 30 days of the consummation
of the Merger. See "Certain Relationships and Related Transactions".
(11) Pursuant to options granted to Mr. Robbins by Kirkland. Based on
information contained in the Schedule 13D referred to in Note 5 above.
(12) Includes 210,000 shares subject to options that are currently exercisable
or will become exercisable within 60 days.
(13) Includes 162,000 shares subject to options that are currently exercisable
or will become exercisable within 60 days.
144
<PAGE>
(14) Includes 66,667 shares subject to options that are currently exercisable or
will become exercisable within 60 days.
(15) Includes 17,000 shares subject to options that are currently exercisable or
will become exercisable within 60 days.
(16) Includes 2,676,000 shares subject to options and warrants that are
currently exercisable or will become exercisable within 60 days.
STOCKHOLDERS AGREEMENT
On July 14, 1994, as contemplated by the Stockholders Agreement dated as of
September 21, 1993 by and among the Company, KIC, GSA, Kirkland and Mr. Wilms
(as amended, the "Stockholders Agreement"), the Alliance Board of Directors was
reconfigured to consist of four persons designated by KIC (Messrs. Kirschbaum,
DiCesare, David Robbins and Jay R. Gottlieb) and three persons designated by Mr.
Wilms (Messrs. Wilms, David A. Scheinman and Sidney Sosin). The Stockholders
Agreement and related transactions are more fully described in the Alliance
Forms 8-K dated June 25, 1993, September 21, 1993 and July 14, 1994 and in its
Information Statement dated June 29, 1994. On October 20, 1994, the Stockholders
Agreement was amended to reconfigure the Board of Directors of Alliance to
consist of four persons designated by KIC (Messrs. Kirschbaum, DiCesare, Robbins
and Gottlieb), one person designated by Mr. Wilms (Mr. Wilms) and two new
directors designated by a majority of the Board of Directors of Alliance. The
Stockholders Agreement obligates Mr. Wilms to vote his shares for such persons
nominated by KIC. On October 20, 1994 Mr. Greathouse and Dr. Fields were
appointed to the Board to fill vacancies created upon the resignation of Messrs.
Scheinman and Sosin. As amended, the Stockholders Agreement also provides that
Mr. Wilms may designate two persons (currently Messrs. Scheinman and Sosin) (the
"Advisors") who will be observers of, and advisors to, the Board of Directors
and who will be entitled to attend all of the Alliance Board of Directors'
meetings and receive all information furnished to members of the Board. Mr.
Wilms and/or at least one Advisor will be entitled to attend all meetings of the
committees of Alliance's and its subsidiaries' Boards of Directors. In addition,
Mr. Wilms is contractually obligated until September 21, 1997 to vote his shares
of Common Stock in favor of four nominees of KIC to the Alliance Board of
Directors.
OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES
Immediately following the Transaction (and assuming $50.0 million principal
amount of New Convertible Debentures are exchanged and converted to Common Stock
pursuant to the Automatic Conversion), the Company will have outstanding
options, warrants and convertible securities which will be exercisable in the
aggregate for approximately 16,800,000 shares of Common Stock, as described
below.
ALLIANCE
OPTIONS. Alliance has two stock option plans currently in effect: the United
Gaming, Inc. 1991 Long-Term Incentive Plan (previously defined as the Alliance
1991 Stock Option Plan) and the Gaming and Technology, Inc. 1984 Employee Stock
Option Plan (previously defined as the Alliance 1984 Stock Option Plan).
Pursuant to these two plans, an aggregate of 5,000,000 shares of Common Stock
are issuable, as to which options covering 2,168,834 shares were outstanding and
options covering 987,310 shares were exercisable as of December 31, 1995. In
addition, Alliance has agreed to issue to Dr. Fields options exercisable for
150,000 shares within 30 days of the consummation of the Merger.
WARRANTS. Alliance has issued warrants to purchase shares of Common Stock to
the following persons in the amounts set forth below:
(1) Mr. Wilms: warrants to purchase 2,000,000 shares at a purchase price of
$2.50 per share (and in certain circumstances in a "cashless" transaction), and
which expire on September 1, 1998, issued in connection with the VSI Loan;
(2) Kirkland: warrants to purchase 2,750,000 shares at a purchase price of
$1.50 per share, divided equally among warrants which become exercisable when
the price of the Common Stock reaches $11, $13 and $15 per share and which
expire on September 21, 1999, issued in connection with the Kirkland Investment;
145
<PAGE>
(3) GSA: warrants to purchase 1,250,000 shares at a purchase price of $1.50
per share, divided equally among warrants which become exercisable when the
price of the Common Stock reaches $11, $13 and $15 per share and which expire on
September 21, 1999 issued in connection with Alliance's retention of GSA for
financial advisory services, and additional warrants to purchase 2,500,000
shares issuable on the same terms (other than their respective expiration dates)
upon consummation of the Merger;
(4) Donaldson, Lufkin & Jenrette Securities Corporation: warrants to
purchase 500,000 shares of Common Stock at a purchase price of $8.25 per share,
issued in connection with the issuance of the Old Convertible Debentures, and
additional warrants to purchase 250,000 shares at a purchase price of $8.25 per
share which will vest when the price of the Common Stock reaches $13 per share
following consummation of the Merger or any similar transaction, all of which
expire on September 21, 1999;
(5) Oppenheimer & Co. Inc.: warrants to purchase 250,000 shares of Common
Stock at a purchase price of $8.25 per share and which expire on September 21,
1999, issued in connection with the issuance of the Old Convertible Debentures;
(6) Canyon Partners, Inc. and Cerberus Partners, L.P.: warrants to purchase
250,000 shares of Common Stock at a purchase price of $3.75 per share, issued in
connection with a firm commitment by Cerberus Partners, L.P. and affiliates of
Canyon Partners, Inc. to Alliance in September 1995 relating to financing for
Alliance's tender offer and consent solicitation;
(7) Mr. Greathouse: warrants to purchase 250,000 shares on terms
substantially the same as the warrants issued to GSA described in clause (3)
above and which expire on August 15, 2000, issued in connection with his
employment;
(8) Dr. Fields: warrants to purchase 250,000 shares on terms substantially
the same as the warrants issued to GSA described in clause (3) above and which
expire on September 21, 2000, issued in connection with an agreement between Dr.
Fields and Alliance upon his becoming a director; and
(9) Friend: warrants to purchase 30,000 shares of Common Stock at a purchase
price of $8.25 per share divided equally among warrants which become exercisable
when the price of Common Stock reaches $11, $13 and $15 per share and which
expire on September 21, 1999, issued in connection with the issuance of the Old
Convertible Debentures.
BGII
OPTIONS. BGII has three stock option plans currently in effect: the 1991
Incentive Plan (previously defined as the BGII 1991 Incentive Plan), the 1991
Non-employee Directors' Option Plan (previously defined as the BGII 1991
Directors' Plan) and the 1994 Stock Option Plan for Non-Employee Directors
(previously defined as the BGII 1994 Plan). Under the BGII 1991 Incentive Plan,
852,500 options were issued to employees of BGII, including 365,000 options held
by executive officers. Under the BGII 1991 Directors' Plan, 100,000 options were
issued to non-employee directors of BGII. Under the BGII 1994 Plan, 100,000
options were issued to non-employee directors of BGII.
Pursuant to the Merger Agreement, Alliance will assume BGII's obligations
with respect to each outstanding option, and such options will be exercisable
for the Merger consideration per share of BGII common stock subject to such
options, except that at the election of any employee of BGII (other than Messrs.
Gillman, Jenkins and Kloss) immediately prior to the effective time, any such
options held (not more than 552,500 in the aggregate) will be instead
exercisable for a number of shares of Common Stock equal to the number of shares
of BGII common stock subject thereto at an exercise price equal to the Alliance
Average Trading Price. See "The Merger and Related Financings."
WARRANTS. BGII issued warrants to purchase 1.2 million shares of BGII
common stock at a purchase price of $12.50 per share, exercisable after the BGII
common stock has traded at or above a price of $20 per share for 20 consecutive
trading days and under certain other circumstances, expiring on July 29, 1998,
which were issued in connection with the private placement of its 10 3/8% Senior
Secured Notes due July 1998. In addition, BGII issued warrants to purchase
300,000 shares of BGII common stock at a purchase price of $15 per share,
exercisable during a four-year period ending November 11, 1996, issued to the
underwriters of the initial public offering of BGII's common stock, of which
2,000 warrants have been exercised.
146
<PAGE>
Pursuant to the Merger Agreement, Alliance will assume BGII's obligation
with respect to each outstanding warrant, and such warrants will be exercisable
for the Merger consideration per share of BGII common stock subject to such
warrants. See "The Merger and Related Financings".
PERFORMANCE UNITS. Under the BGII 1992 Restricted Stock Performance Plan,
BGII granted awards of performance units comprised of stock and cash to certain
members of its senior management based upon specific performance objectives.
Such performance units vest under certain circumstances following a change in
control, including as a result of the Merger. Alliance has agreed to make
payments to certain executive officers in connection with their employment
agreements and performance unit awards. See "The Merger and Related Financings".
DESCRIPTION OF CAPITAL STOCK
Alliance's Articles of Incorporation, as amended (the "Articles of
Incorporation"), authorize the issuance of 185,000,000 shares of capital stock,
of which 175,000,000 shares are designated as Common Stock, par value $0.10 per
share, and 10,000,000 shares are designated as Special Stock, par value $0.10
per share. As of December 31, 1995, approximately 12,988,000 shares of Common
Stock were issued and outstanding and no shares of Special Stock were issued and
outstanding. See "Security Ownership of Certain Beneficial Holders and
Management". Alliance expects to issue approximately 603,000 shares of Common
Stock to BGII stockholders and 813,000 shares of Common Stock in partial
satisfaction of BGII employee contract termination costs and performance unit
awards, and 350,000 shares of Preferred Stock pursuant to the Merger Agreement
(in each case, based on 10,799,501 shares of BGII common stock outstanding, less
1,000,000 shares owned by Alliance and a Common Stock price of $ per share
and a Preferred Stock price of $100 per share) and expects to issue
approximately shares of Common Stock and shares of Series E
Special Stock upon Automatic Conversion of the New Convertible Debentures
assuming the exchange of $50 million principal amount of New Convertible
Debentures and the election by the holders of $ principal amount of New
Convertible Debentures to receive Series E Special Stock in the conversion and
shares of Common Stock in the Private Placement (based on a Common Stock
price of $4.56 per share), shares of Common Stock in the Common Stock
Offering and shares of Preferred Stock in the Preferred Stock Offering
(in each case, based on a Common Stock price of $ per share and a Preferred
Stock price of $100 per share).
COMMON STOCK
Holders of Common Stock are entitled to cast one vote per share on all
matters on which the Company's stockholders are entitled to vote. The number of
votes required to take any action by the Company's stockholders are as provided
in Title 7 of the Nevada Revised Statutes (the "Nevada Revised Statutes") or the
Articles of Incorporation. Holders of Common Stock are not entitled to cumulate
their votes. Holders of Common Stock are entitled to receive dividends when and
as declared by the Company's Board of Directors (the "Board") out of funds
legally available for the payment thereof. The Articles of Incorporation provide
that once the subscription price or par value of any share of Common Stock has
been paid in, such share shall be non-assessable and shall not be subject to
assessment to pay the debts of Alliance. Subject to any preferential rights
which may be granted to holders of certain series of Preferred Stock, holders of
Common Stock are entitled to share ratably in all assets of the Company that are
legally available for distribution to its stockholders in the event of its
liquidation or dissolution. Holders of Common Stock have no preemptive rights
nor are there any subscription, redemption or conversion privileges associated
with the Common Stock.
The Common Stock is listed on the NASDAQ NMS under the symbol "ALLY".
SPECIAL STOCK
The Articles of Incorporation provide that the Special Stock may be issued
from time to time upon such terms and conditions and for such consideration as
may be provided by the Board. The Special Stock may be issued in one or more
series, each series having such designations, rights, preferences and privileges
as may be determined by the Board at the time of issuance. The Company has no
current intention to issue any series of Special Stock with the exception of the
Preferred Stock described herein.
147
<PAGE>
15% NON-VOTING JUNIOR SPECIAL STOCK, SERIES B
The Company's Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions thereof (the "Certificate of
Designations") of the 15% Non-Voting Junior Special Stock, Series B (previously
defined as the "Preferred Stock") provides that holders of shares of Preferred
Stock are entitled to receive quarterly dividends, as and when declared by the
Board, in an amount per share equal to $3.75 payable in cash, except that the
Company may at its option pay any such dividend accruing through and including
the Dividend Payment Date (as defined below) occurring next after the seventh
anniversary of the Effective Time in whole or in part in additional shares of
Preferred Stock (or fractions thereof) in an amount equal to such dividend, with
each share of Preferred Stock valued at $100 (the "Liquidation Value"), provided
that after the first Dividend Payment Date (as defined below) occurring next
after the fifth anniversary of the Effective Time the portion of any such
dividend that may be so paid is limited to $2.00. Dividends are payable on the
first day of the first, fourth, seventh and tenth months of each year following
the date of initial issuance beginning on the first day of the fourth month
following the date of initial issuance or such other dates as set by the Board
(each a "Dividend Payment Date"). Dividends are cumulative and shall accrue from
and after the date of initial issuance. Dividends payable for any partial
dividend period (including the period from the date of initial issuance until
the first day of the month next following the month in which the date of initial
issuance occurred) will be computed on the basis of the actual days elapsed in
such period over a year of 365 or 366 days. Unless all dividends that have
accrued are paid on the Preferred Stock, no dividend or other distribution can
be paid to holders of any equity security ranking junior to or pari passu with
the Preferred Stock and no shares of such junior security can be purchased or
redeemed by the Company. The Company currently expects that so long as the
Preferred Stock remains outstanding, it will, subject to the terms thereof, pay
dividends accruing through the first dividend payment date occurring after the
seventh anniversary of the Effective Time on the Preferred Stock in additional
shares of such stock.
Upon liquidation, the holders of shares of Preferred Stock are entitled
(subject to prior preferences and other rights of any senior equity securities
and on a parity with other securities ranking equally) to be paid out of assets
of the Company in cash or property valued at its fair market value (as
determined in good faith by the Board) an amount equal to the Liquidation Value
plus an amount equal to all accrued and unpaid dividends and distributions
thereon. While the Company has the ability to issue equity securities ranking
senior in right of payment to the Preferred Stock, it does not presently intend
to issue any such securities. Therefore, immediately following the Merger, no
equity security will be senior to or pari passu with the Preferred Stock and
only the Common Stock and Series E Special Stock will be junior to the Preferred
Stock.
The Preferred Stock has no voting rights except as required by law and
except in the case where dividends payable on shares of the Preferred Stock have
been in arrears for six consecutive Dividend Payment Dates, at which time the
number of directors constituting the Board will be increased by two and the
holders of shares of Preferred Stock will have the right, voting separately as a
class, to elect two directors to the Board until all dividends accumulated on
such shares have been paid or set apart for payment in full.
The Company may at its option redeem all, or any number less than all, of
the outstanding shares of Preferred Stock at any time at a price per share equal
to the Liquidation Value per share plus an amount equal to all accrued and
unpaid dividends and distributions thereon to the date of redemption. The
Company is required to redeem at the above mentioned price all of the
outstanding shares of Preferred Stock by , 2004. If the Company fails
to redeem such shares on that date, then the number of directors constituting
the Board will be increased by two and the holders of the shares of Preferred
Stock will have the right to elect two directors to the Board. The total number
of directors which the holders of Preferred Stock shall have the right to elect
may not exceed two. Holders of the Preferred Stock have no other remedy than
those described above if the Company fails to redeem all the outstanding shares
of Preferred Stock on such date. The terms of the Senior Secured Notes will
restrict the Company's ability to effect any such redemption so long as any
Senior Secured Notes remain outstanding. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources of the Company (Pro Forma)".
148
<PAGE>
Fractional shares of Preferred Stock will entitle the holder to receive
dividends and distributions and to exercise voting rights in proportion to the
fractional holding.
The Company has applied for NASDAQ NMS quotation for the Preferred Stock
under the symbol "ALLYP".
SERIES E SPECIAL STOCK
The Series E Special Stock consists of 1,530,000 authorized shares. All
shares of the Series E Special Stock will be reserved for issuance in connection
with the Automatic Conversion. Each one one-tenth of a share of the Series E
Special Stock has the same rights as one share of Common Stock, except that the
Series E Special Stock has no voting rights and a $.10 liquidation preference
per share of Series E Special Stock. Each share of Series E Special Stock will
be convertible (subject to necessary gaming approvals) into ten shares of Common
Stock.
PROVISIONS APPLICABLE TO CERTAIN HOLDERS
The Nevada Revised Statutes contains a control share provision with respect
to the acquisition of more than 20% of the voting shares of a Nevada
corporation. The Company, however, has opted out of this provision in accordance
with the Nevada Revised Statutes by adopting an amendment to its by-laws to such
effect.
EXPERTS
The consolidated financial statements of Alliance Gaming Corporation and
subsidiaries as of June 30, 1994 and 1995, and for each of the years in the
three-year period ended June 30, 1995 included herein have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP
refers to a change in the method of accounting for income taxes, effective July
1, 1993. As noted under "Forecast of Operating Income and Adjusted Operating
Cash Flow", KPMG Peat Marwick LLP has not examined the Forecast presented under
"Forecast of Operating Income and Adjusted Operating Cash Flow" and,
accordingly, does not express an opinion or any other form of assurance with
respect thereto.
The consolidated balance sheets of BGII as of December 31, 1994 and 1995,
and the consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995 included
herein have been included herein in reliance upon the report of Coopers &
Lybrand L.L.P., independent accountants, appearing elsewhere herein, given on
the authority of that firm as experts in accounting and auditing. As noted under
"Forecast of Operating Income and Adjusted Operating Cash Flow", Coopers &
Lybrand L.L.P. neither examined nor compiled nor had any other involvement with
the preparation of the Forecast presented under "Forecast of Operating Income
and Adjusted Operating Cash Flow" and accordingly does not express an opinion or
any other form of assurance with respect thereto, nor do they assume any
responsibility for the Forecast.
149
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ALLIANCE GAMING CORPORATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ F-2
Consolidated Balance Sheets as of June 30, 1994 and 1995............................................ F-3
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-5
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 1993, 1994 and
1995............................................................................................... F-7
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-6
Notes to Consolidated Financial Statements.......................................................... F-8-F-21
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1995 (audited) and December 31, 1995
(unaudited)........................................................................................ F-22
Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 1994
and 1995........................................................................................... F-23
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1994
and 1995........................................................................................... F-24
Notes to Unaudited Condensed Consolidated Financial Statements...................................... F-25-F-29
BALLY GAMING INTERNATIONAL, INC.
Report of Independent Accountants................................................................... F-31
Consolidated Balance Sheets, December 31, 1994 and 1995............................................. F-32
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995.......... F-33
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and
1995............................................................................................... F-34
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995.......... F-35
Notes to Consolidated Financial Statements.......................................................... F-36-F-64
</TABLE>
F-1
<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
Las Vegas, Nevada
September 1, 1995
F-2
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
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>
(Continued)
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
JUNE 30, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
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 8,610
---------- ----------
Total current liabilities............................................................. 10,044 14,363
---------- ----------
Long-term debt, less current maturities................................................... 89,222 97,402
Deferred tax liabilities.................................................................. 1,218 1,205
Other liabilities......................................................................... 3,587 2,750
---------- ----------
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, $.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, net................................... (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-4
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Gaming:
Routes................................................................... $ 96,282 $ 102,830 $ 106,827
Casinos and taverns...................................................... 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
Casinos 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) (8,133)
Minority share of income................................................... -- (506) (397)
Equity in income of affiliate.............................................. -- -- 31
Other, net................................................................. 450 (167) (524)
---------- ---------- ----------
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-5
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
RETAINED LOSS ON
TOTAL COMMON STOCK SPECIAL STOCK EARNINGS SECURITIES
STOCKHOLDERS' --------------- ---------------- PAID-IN (ACCUMULATED AVAILABLE
EQUITY SHARES DOLLARS SHARES DOLLARS CAPITAL DEFICIT) FOR SALE
------------ ------ ------- ------ ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1992............ $23,661 9,409 $ 942 -- $ -- $18,321 $ 4,398 $--
Net loss......................... (3,650) -- -- -- -- -- (3,650 ) --
Common stock warrants issued..... 559 -- -- -- -- 559 -- --
Shares issued upon exercise of
options......................... 2,096 591 59 -- -- 2,037 -- --
------------ ------ ------- ------ ------- ------- -------- -----
Balances, June 30, 1993............ 22,666 10,000 1,001 -- -- 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 -- --
Net change in unrealized loss on
securities available for sale... 105 -- -- -- -- -- -- 105
Shares issued upon exercise of
options......................... 465 186 18 -- -- 447 -- --
------------ ------ ------- ------ ------- ------- -------- -----
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
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
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 (used in) provided by financing activities........................... 2,430 45,742 (2,660)
--------- --------- ---------
Cash and cash equivalents:
Increase (decrease) 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-7
<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-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)
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:
<TABLE>
<S> <C>
31-39
Building and improvements....................................... years
Gaming equipment................................................ 5-7 years
Furniture, fixtures and equipment............................... 3-10 years
Leasehold improvements.......................................... 5-20 years
</TABLE>
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.
At each balance sheet date, management evaluates the realizability of
goodwill based on expectations of non-discounted cash flows and operating income
for each subsidiary having a material goodwill balance. Based upon its most
recent analysis, management believes that no material impairment of goodwill
exists at June 30, 1995.
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.
The carrying value of intangible assets is periodically reviewed by
management and impairment losses are recognized when the expected non-discounted
future operating cash flows derived from such intangible assets are less than
their carrying value.
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.
F-9
<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)
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 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.
Receivables at June 30 consist of the following:
<TABLE>
<CAPTION>
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
F-10
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
2. RECEIVABLES (CONTINUED)
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.
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
Long-term debt at June 30 consists of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
7.5% Convertible subordinated debentures due 2003, unsecured.................... $ 85,000 $ 85,000
Due to stockholder, net of discount of $983,709 (1994) and $747,619 (1995),
secured by the assets of VSI................................................... 4,390 3,309
Hospitality Franchise Systems, secured by the assets of Rainbow Vicksburg....... -- 9,065
Other, secured by related equipment............................................. 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-11
<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.
Maturities of long-term debt for each of the five years ending subsequent to
June 30, 1995 are as follows:
<TABLE>
<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>
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,
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)
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>
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.
F-13
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
5. STOCKHOLDERS' EQUITY (CONTINUED)
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.
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
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 differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
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 and 1994 are presented below.
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
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.
F-15
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
6. INCOME TAXES (CONTINUED)
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>
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
--------- ---------
--------- ---------
</TABLE>
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-16
<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>
<CAPTION>
PRIMARY
INCOME
TOTAL NET (LOSS) (LOSS) PER
REVENUES INCOME SHARE
--------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
1994
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>
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 stockholder (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-17
<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 Executive
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>
TOTAL
MINIMUM SUBLEASE NET MINIMUM
YEAR ENDED JUNE 30 RENTALS INCOME RENTALS
- ----------------------------------------------------------------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <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 $ 58,487
----------- ----------- -----------
----------- ----------- -----------
</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 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
F-18
<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)
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. The Company owns 50% of the equity of KFP which is accounted for under
the equity method. The Company has not guaranteed the obligations of KFP.
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 12, 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 shareholders. The 55% general partnership interest in RCVP was held by RCC.
In connection with the completion of the casino, 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). 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 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. This transaction was accounted for as an acquisition using
the purchase method. Accordingly, the purchase price
F-19
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
11. ACQUISITIONS (CONTINUED)
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.
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
-------------------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNT)
<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. 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 filed lawsuits against the Company alleging numerous public
misrepresentations had been made by the Company with regards to the WMS-
F-20
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
12. RECENT DEVELOPMENTS (UNAUDITED) (CONTINUED)
BGII agreement, the Company's tender offer and the level of cooperation of
BGII's board of directors. 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.
F-21
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and securities available for sale............................. $ 37,414 $ 29,468
Receivables, net..................................................................... 3,316 3,110
Inventories.......................................................................... 714 672
Prepaid expenses..................................................................... 4,148 2,984
Other................................................................................ 517 411
---------- ------------
Total current assets............................................................... 46,109 36,645
---------- ------------
Property and equipment, net............................................................ 50,352 50,870
Receivables, net....................................................................... 5,309 4,809
Excess of costs over net assets of an acquired business, net of accumulated
amortization.......................................................................... 3,842 3,733
Intangible assets, net of accumulated amortization..................................... 12,405 11,638
Investment in minority owned subsidiary................................................ 1,585 1,585
Other.................................................................................. 6,746 7,592
---------- ------------
Total assets..................................................................... $ 126,348 $ 116,872
---------- ------------
---------- ------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt.................................. $ 3,995 $ 4,054
Accounts payable...................................................... 1,758 2,295
Accrued expenses, including due to related parties.................... 8,610 10,187
--------- ---------
Total current liabilities........................................... 14,363 16,536
Long-term debt, less current maturities................................. 97,402 96,052
--------- ---------
Other liabilities....................................................... 3,955 4,082
--------- ---------
Total liabilities................................................... 115,720 116,670
--------- ---------
Commitments and contingencies
Minority interest....................................................... 643 919
Stockholders' equity (deficiency):
Common stock, $.10 par value; authorized 175,000,000 shares; issued
and outstanding 11,654,150 and 12,987,483.......................... 1,165 1,298
Special stock, $.10 par value; authorized 10,000,000 shares; issued
and outstanding 1,333,333 and 0.................................... 133 --
Paid-in capital..................................................... 32,134 32,134
Unrealized loss on securities available for sale, net............... (316) (1,587)
Accumulated deficit................................................. (23,131) (32,562)
--------- ---------
Total stockholders' equity (deficiency)............................. 9,985 (717)
--------- ---------
Total liabilities and stockholders' equity (deficiency)........... $ 126,348 $ 116,872
--------- ---------
--------- ---------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Revenues:
Gaming:
Routes.................................................................................. $ 52,511 $ 52,621
Casinos and taverns..................................................................... 7,861 21,679
Food and beverage sales................................................................... 1,950 1,923
Net equipment sales....................................................................... 16 6
--------- ---------
62,338 76,229
--------- ---------
Costs and expenses:
Cost of gaming:
Routes.................................................................................. 39,214 40,361
Casinos and taverns..................................................................... 4,653 9,887
Cost of food and beverage................................................................. 1,414 1,426
Cost of equipment sales................................................................... 9 1
Selling, general and administrative....................................................... 6,486 9,398
Business development expenses............................................................. 3,508 10,737
Corporate expenses........................................................................ 4,302 3,037
Depreciation and amortization............................................................. 4,613 4,906
--------- ---------
64,199 79,753
--------- ---------
Operating loss............................................................................ (1,861) (3,524)
Other income (expense):
Interest income........................................................................... 1,504 818
Interest expense.......................................................................... (3,915) (4,288)
Minority share of income.................................................................. (169) (276)
Other, net................................................................................ (286) (1,373)
--------- ---------
Loss before income taxes.................................................................... (4,727) (8,643)
Income tax expense.......................................................................... (290) (788)
--------- ---------
Net loss.................................................................................... $ (5,017) $ (9,431)
--------- ---------
--------- ---------
Loss per share of common stock.............................................................. $ (.45) $ (.79)
--------- ---------
--------- ---------
Weighted average common shares outstanding.................................................. 11,101 11,879
--------- ---------
--------- ---------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-23
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................ $ (5,017) $ (9,431)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization......................................................... 4,613 4,906
Loss on sale of property and equipment................................................ 560 240
Write off of other assets............................................................. 361 201
Provision for losses on receivables................................................... 261 20
Amortization of debt discounts........................................................ 179 118
Equity in losses of affiliate......................................................... 405 --
Deferred income tax provision......................................................... -- 655
Net change in operating assets and liabilities:
Decrease in:
Inventories........................................................................... 28 12
Prepaid expenses...................................................................... 1,577 1,163
Refundable income taxes............................................................... -- 312
Other assets.......................................................................... 615 143
Increase (decrease) in:
Accounts and slot contracts payable................................................... 101 537
Accrued expenses...................................................................... (1,333) 1,577
Minority interests.................................................................... 168 276
Other liabilities..................................................................... (424) (223)
---------- ----------
Net cash provided by operating activities........................................... $ 2,094 $ 506
---------- ----------
Cash flows from investing activities:
Additions to property and equipment..................................................... (2,905) (5,004)
Proceeds from sale of property and equipment............................................ 265 2,218
Additions to receivables................................................................ (12,303) (6,296)
Cash collections on receivables......................................................... 9,272 6,564
Investment in subsidiary................................................................ (1,580) --
Proceeds from sale (purchase) of securities available for sale.......................... (133) 8,015
Additions to intangible assets.......................................................... (162) (420)
Additions to other long-term assets..................................................... (1,959) (2,179)
---------- ----------
Net cash (used in) provided by investing activities................................... (9,505) 2,898
---------- ----------
Cash flows from financing activities:
Reduction of long-term debt............................................................. (1,594) (2,091)
Proceeds from long-term debt............................................................ -- 682
Issuance of stock....................................................................... 109 --
---------- ----------
Net cash (used in) financing activities............................................... (1,485) (1,409)
---------- ----------
Cash and cash equivalents:
Increase (decrease) for period.......................................................... (8,896) 1,995
Balance, beginning of period............................................................ 37,085 13,734
---------- ----------
Balance, end of period................................................................ $ 28,189 $ 15,729
---------- ----------
---------- ----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-24
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
1. ADJUSTMENTS FOR FAIR PRESENTATION
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial condition, results of operations and
cash flows of the Company for the respective periods presented. The results of
operations for an interim period are not necessarily indicative of the results
to be expected for a full year.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying condensed
consolidated financial statements be read in conjunction with the financial
statements and notes in the Company's annual report on Form 10-K. All
intercompany accounts and transactions have been eliminated in consolidation.
2. RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial
statements to conform with current period presentations.
3. RECEIVABLES
The Company's gaming route operations from time to time involve making loans
to location operators in order to participate in revenues over extended periods
of time. These loans, generally made for buildouts, tenant improvements and
initial operating expenses, are generally guaranteed on a full recourse basis by
the location owner and are secured by the assets of the location. The majority
of the loans are interest bearing and are expected to be repaid over a period of
time not to exceed the life of the related revenue sharing agreement. The loans
have varying payment terms requiring either weekly or monthly payments. Annual
interest rates on the loans range from prime plus 1.5% to stated rates of 12%
with various maturity dates ranging through 2007. The loans are expected to be
repaid from the locations' cash flows or proceeds from the sale of the
leaseholds.
Receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DEC. 31
1995 1995
--------- ---------
(In thousands)
<S> <C> <C>
Notes receivable-location operators...................................... $ 7,760 $ 7,764
Other receivables........................................................ 865 155
--------- ---------
8,625 7,919
Less current amounts..................................................... 3,316 3,110
--------- ---------
Long-term receivables, excluding current amounts......................... $ 5,309 $ 4,809
--------- ---------
--------- ---------
</TABLE>
Receivables are presented net of an allowance for doubtful accounts of
approximately $1,659,000 and $1,435,000 as of June 30, 1995 and December 31,
1995, respectively. The allowance is allocated between current and long-term
receivables on a pro rata basis related to notes receivable from location
operators.
F-25
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
4. DEBT
Long-term debt at June 30, 1995 and December 31, 1995 consists of the
following:
<TABLE>
<CAPTION>
JUNE 30 DEC 31
1995 1995
---------- ----------
(In thousands)
<S> <C> <C>
Convertible subordinated debentures due 2003, 7.5%.............................. $ 85,000 $ 85,000
Due to stockholder due 1998, 200 basis points over the London Inter Bank Offer
Rate (current rate 7.97%), net of discount of $747,619 and $629,573............ 3,309 2,797
Hospitality Franchise Systems due 2001, 7.5%.................................... 9,065 8,476
National Gaming Mississippi due 2002, 10.0%..................................... 631 1,224
Other debt...................................................................... 3,392 2,609
---------- ----------
101,397 100,106
Less current maturities......................................................... 3,995 4,054
---------- ----------
Long-term debt, less current maturities......................................... $ 97,402 $ 96,052
---------- ----------
---------- ----------
</TABLE>
Accrued interest of approximately $1,991,000 (June 30) and $1,973,000
(December 31) is included in accrued expenses in the unaudited condensed
consolidated balance sheets. Amounts due to stockholder include amounts owed to
affiliates of Alfred H. Wilms, the Company's largest stockholder and a member of
the Board of Directors of the Company, relating to funding of the Company's
majority-controlled subsidiary, Video Services, Inc.'s ("VSI") gaming device
route operations.
5. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Financial Accounting Standard No. 109 Accounting for Income Taxes. Under the
asset and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Due to losses and the lack of available carrybacks, the Company recognized
no federal income tax expense or benefit for the six month period ended December
31, 1994 and 1995 other than the tax effects of changes in the unrealized gains
(losses) on securities available for sale. At December 31, 1995, the Company had
estimated net operating loss carryforwards for federal income tax purposes of
approximately $35,000,000 which are available to offset future federal taxable
income, if any, expiring 2007 through 2009. The deferred tax asset related to
the net operating losses has been fully reserved.
6. INTANGIBLE ASSETS
Intangible Assets includes $4,272,000, net of $1,232,000 of accumulated
amortization, for costs related to the commissions, discounts and other issuance
costs of the Company's private placement of $85,000,000 aggregate principal
amount of 7.5% Convertible Subordinated Debentures due 2003. Such costs are
being amortized on a straight line basis over the term of the debentures.
7. INVESTMENT IN MINORITY OWNED SUBSIDIARY
The Company and Casino Magic Corporation, through wholly owned subsidiaries,
are members in Kansas Gaming Partners, L.L.C. ("KGP") and Kansas Financial
Partners, L.L.C. ("KFP"), both Kansas limited liability companies. Under an
option agreement (the "option agreement") granted to KGP by
F-26
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
7. INVESTMENT IN MINORITY OWNED SUBSIDIARY (CONTINUED)
Camptown Greyhound Racing, Inc. ("Camptown") and The Racing Association of
Kansas-Southeast ("TRAK Southeast"), KGP has been granted the exclusive right,
which right expires on September 13, 2013, to operate gaming devices and/or
casino-type gaming at Camptown's racing facility in Frontenac, Kansas if and
when such gaming is permitted in Kansas. In December 1994, Camptown received a
$3,205,000 loan from Boatmen's Bank which was guaranteed by KFP. The Company and
Casino Magic Corporation each invested $1,580,000 in KFP which was used to
purchase a certificate of deposit to collateralize its guaranty. Construction of
Camptown's racing facility has been completed and the facility opened for
business in May 1995. The racing facility was temporarily closed on November 5,
1995 due to poor financial results. Camptown filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated an
intention to reopen for business following bankruptcy reorganization. Boatmen's
Bank demanded payment of the Camptown loan from KFP under the terms of the
guaranty. KFP paid the loan and Boatmen's Bank returned KFP's certificate of
deposit and KFP assumed Boatmen's Bank's position in the loan to Camptown which
is secured by a second mortgage on Camptown's greyhound racing facility in
Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by the
Option Agreement. KFP intends to vigorously pursue all of its rights and
remedies which may include, among other things, seeking authority from the
bankruptcy court to commence a foreclosure action. In the case of a foreclosure
action, KFP would be required to assume or pay the existing first mortgage of
approximately $2,000,000 if KFP becomes the purchaser at any such sale. The
Company intends to continue to monitor its investment in KFP. While the Company
is encouraged by the positive movement in Kansas towards considering legislation
that would legalize the operation of gaming devices at pari-mutuel track
locations, there can be no assurance as to Camptown's ability to maintain its
license at the location, or any successful completion or operation of any part
of this project.
8. CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE FOR SALE
For balance sheet presentation the following account balances have been
combined:
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash
equivalents............... $ 13,734 $ 15,729
Securities available for
sale...................... 23,680 13,739
------------- -------
Total...................... $ 37,414 $ 29,468
------------- -------
------------- -------
</TABLE>
As of June 30, 1995, unrealized loss for securities available for sale was
$316,000, net of the tax effect of $161,000. As of December 31, 1995, unrealized
loss for securities available for sale was $1,587,000 net of the tax effect of
$817,000. These amounts are included as components of stockholders' equity.
9. INTANGIBLE ASSETS
Intangible Assets includes $4,272,000 net of $1,232,000 of accumulated
amortization, for costs related to the commissions, discounts and other issuance
costs of the Company's private placement of $85,000,000 aggregate principal
amount of 7.5% Convertible Subordinated Debentures due 2003. Such costs are
being amortized on a straight line basis over the term of the debentures.
10. PROPOSED BGII MERGER TRANSACTION
On October 18, 1995, the Company and Bally Gaming International, Inc.
("BGII") entered into a definitive merger agreement ("Merger") under which the
outstanding shares of BGII common stock would each be exchanged for $13 in cash
and shares of the Company's common stock.
F-27
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
10. PROPOSED BGII MERGER TRANSACTION (CONTINUED)
On January 22, 1996, the parties reached an agreement to amend the terms of
the Merger. Under the amended agreement, each share of BGII common stock
outstanding (10,799,501 as of September 30, 1995 less the 1,000,000 shares
already owned by the Company) will receive $7.83 per share in cash, $3.57 per
share in the Company's Series B Special Stock which is a Pay-in-Kind (PIK)
preferred stock, and $0.30 per share of the Company's common stock totaling
$11.70 per share of BGII common stock. The PIK preferred stock has an eight-year
maturity and has a dividend rate of 15% as follows: PIK at 15% for the first
five years; 8% PIK and 7% cash for years six and seven; and 15% cash in the
eighth year of the term. All shares of Series B Special Stock are mandatorily
redeemable by the eighth anniversary of the date of initial issuance. If the
Company fails to redeem such shares by that date, then the number of directors
constituting the Company's Board will be increased by two and the holders of the
shares of Series B Special Stock will have the right to elect no more than two
directors total to the Company's Board. The holders of Series B Special Stock
will have no other remedies upon such failure to redeem the outstanding shares
of Series B Special Stock by such date. Other than as described herein, the
holders of shares of Series B Special Stock have no other voting rights except
as stated by law. The Company intends to seek to have the Series B Special Stock
quoted on NASDAQ. The aggregate amount of cash is unchanged from the previous
agreement.
The transaction is subject to approval by shareholders, obtaining customary
regulatory approvals, the securing of $150,000,000 in permanent financing by the
Company including $15,000,000 through a registered public offering of the Series
B Special Stock, and certain other conditions. The Merger is expected to occur
in late April 1996.
11. LEGAL PROCEEDINGS
In June 1995, Bally Entertainment Corporation ("BEC") asserted that a
certain agreement between BEC and BGII (the "Noncompete Agreement") prohibits
the use of the trade name "Bally" if it is merged with a company that is in the
casino business within or without the United States and operates such business
prior to January 8, 1996. BGII believes such claim is entirely without merit
since the restriction referred to expires on January 8, 1996 and in any event
does not relate to the use of the "Bally" trade name, which is covered by the
License Agreement. The restriction in the Noncompete Agreement will not have any
impact on the combined company after the Merger since the effective time of the
Merger contemplates a closing of the Merger after the restriction in the
Noncompete Agreement lapses. BEC has not reasserted this position since it was
informed by BGII in July 1995 that the restriction lapses on January 8, 1996.
Consequently, BGII believes BEC has determined not to contest with BGII's
position.
BEC has also asserted that its permission is required for use of the "Bally"
trade name by any entity other than BGII and that a merger between BGII and
another company would violate the terms of the License Agreement. BGII has
denied these claims and believes that the surviving company in a merger will be
permitted to use the "Bally" trade name in accordance with the terms of such
License Agreement. BGII believes that no breach of such License Agreement is
caused by the Merger and the use of the "Bally" trade name by the surviving
corporation. In a letter dated November 9, 1995, BEC reasserted its position. On
November 20, 1995 the Company, the Company's Merger Subsidiary, and BGII
commenced an action against BEC in Federal District Court in Delaware seeking a
declaratory judgment, among other things, that the surviving company in the
Merger will be permitted to use the "Bally" trade name in accordance with the
terms of the License Agreement, and seeking injunctive relief (the "Alliance
Action"). On November 28, 1995, BEC commenced an action against BGII, Bally
Gaming (a BGII subsidiary), the Company, and the Company's Merger Subsidiary in
Federal District Court in New Jersey to enjoin the defendants from using the
"Bally" trade name (the "BEC Action"). The BEC Action alleges that BGII's
continued use of the trade name after the Merger will (1) constitute a
prohibited assignment of BGII's rights to use the trade name and (2) exceed the
scope of the license granted to BGII because BGII will be under control of the
Company. Also on November 28, 1995, BEC filed a motion to dismiss, transfer to
New Jersey, or stay the Alliance
F-28
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
11. LEGAL PROCEEDINGS (CONTINUED)
Action pending resolution of the BEC Action. BGII, Bally Gaming, the Company,
and the Company's Merger Subsidiary intend to vigorously defend their position
in these actions. However, there can be no assurance that BEC will not be
successful in its action to prohibit the surviving corporation in the Merger
from using the "Bally" trade name. The loss of the "Bally" trade name may have a
material adverse effect on the gaming machine operations of the surviving
corporation in the Merger.
12. INITIAL SERIES SPECIAL STOCK
In September 1993, Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland")
invested $5,000,000 in the Company in exchange for 1,333,333 shares of the
Company's Non-Voting Junior Convertible Special Stock, which are convertible on
a share for share basis into shares of the Company's Common Stock, and warrants
to purchase up to 2,750,000 shares of common stock subject to certain
conditions. In December 1995, Kirkland elected to convert the entire 1,333,333
shares of Special Stock into shares of the Company's Common Stock.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bally Gaming International, Inc.
We have audited the accompanying consolidated balance sheets of Bally Gaming
International, Inc. as of December 31, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bally Gaming
International, Inc. as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Las Vegas, Nevada
February 13, 1996
F-30
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 9,204 $ 5,526
Accounts and notes receivable, net of allowance for doubtful accounts of $12,282 and
$16,281................................................................................ 84,632 87,176
Inventories, net:
Raw materials and work-in-process..................................................... 21,082 16,066
Finished goods........................................................................ 28,377 35,525
---------- ----------
49,459 51,591
Other current assets.................................................................... 5,074 3,983
---------- ----------
Total current assets................................................................ 148,369 148,276
Long-term notes receivable, net of allowance for doubtful accounts
of $8,198 and $7,869.................................................................... 5,558 9,981
Property, plant and equipment, at cost:
Land.................................................................................... 1,357 1,357
Buildings and leasehold improvements.................................................... 19,262 19,871
Machinery and equipment................................................................. 26,636 30,328
Furniture, fixtures and equipment....................................................... 6,075 6,162
Less accumulated depreciation........................................................... (28,972) (34,474)
---------- ----------
Property, plant and equipment, net.................................................... 24,358 23,244
Intangible assets, less accumulated amortization of $12,609 and $13,720................... 11,410 10,814
Other assets.............................................................................. 2,547 2,001
---------- ----------
$ 192,242 $ 194,316
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 19,272 $ 18,556
Accrued liabilities and other payables:
Compensation and benefit related liabilities............................................ 5,962 5,608
Other................................................................................... 11,363 11,798
---------- ----------
17,325 17,406
Current maturities of long-term debt.................................................... 16,000 14,957
---------- ----------
Total current liabilities........................................................... 52,597 50,919
10 3/8% Senior Secured Notes due 1998, net of unamortized discount
of $458 and $344........................................................................ 39,542 39,656
Other long-term debt, less current maturities............................................. 14,220 15,331
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; 5,000,000 shares authorized, none issued............... -- --
Common stock; $.01 par value; 30,000,000 shares authorized, 10,749,501
and 10,799,501 issued and outstanding.................................................. 107 108
Additional paid-in-capital.............................................................. 67,758 68,345
Retained earnings....................................................................... 5,235 1,842
Cumulative translation adjustments...................................................... 13,560 18,662
Unearned compensation................................................................... (777) (547)
---------- ----------
Total stockholders' equity.......................................................... 85,883 88,410
---------- ----------
$ 192,242 $ 194,316
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-31
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS,)EXCEPT PER SHARE
DATA
Revenues:
Sales...................................................................... $ 164,571 $ 231,318 $ 244,471
Other...................................................................... 4,136 4,874 4,841
---------- ---------- ----------
168,707 236,192 249,312
---------- ---------- ----------
Costs and expenses:
Cost of sales.............................................................. 121,710 157,059 163,131
Selling, general and administrative........................................ 57,357 59,989 65,289
Provision for doubtful receivables......................................... 8,176 5,763 6,712
Unusual charges............................................................ -- -- 5,816
---------- ---------- ----------
187,243 222,811 240,948
---------- ---------- ----------
Operating income (loss)...................................................... (18,536) 13,381 8,364
Interest expense............................................................. 4,424 6,768 6,853
---------- ---------- ----------
Income (loss) before income taxes and extraordinary gain..................... (22,960) 6,613 1,511
Provision for income taxes................................................... 4,242 2,820 4,904
---------- ---------- ----------
Income (loss) before extraordinary gain...................................... (27,202) 3,793 (3,393)
Extraordinary gain on early extinguishment of debt........................... 3,759 -- --
---------- ---------- ----------
Net income (loss)............................................................ $ (23,443) $ 3,793 $ (3,393)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common share:
Income (loss) before extraordinary gain.................................... $ (2.54) $ 0.35 $ (0.31)
Extraordinary gain on early extinguishment of debt......................... 0.35 -- --
---------- ---------- ----------
Net income (loss).......................................................... $ (2.19) $ 0.35 $ (0.31)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares and common stock equivalents
outstanding................................................................. 10,685 10,727 10,776
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-32
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN- RETAINED TRANSLATION UNEARNED STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENTS COMPENSATION EQUITY
----------- ----------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.................. $ 106 $ 65,757 $ 24,885 $ 11,662 $ (1,133) $ 101,277
Net loss.................................... -- -- (23,443) -- -- (23,443)
Issuance of restricted Company common stock
award..................................... 1 1,149 -- -- (1,150) --
Exercise of warrants........................ -- 30 -- -- -- 30
Amortization of unearned compensation....... -- -- -- -- 951 951
Foreign currency translation adjustment..... -- -- -- (4,536) -- (4,536)
Issuance of stock warrants.................. -- 600 -- -- -- 600
----- ----------- ----------- ------------- ------- -------------
Balance at December 31, 1993.................. 107 67,536 1,442 7,126 (1,332) 74,879
Net income.................................. -- -- 3,793 -- -- 3,793
Amortization of unearned compensation....... -- -- -- -- 555 555
Foreign currency translation adjustment..... -- -- -- 6,434 -- 6,434
Issuance of Company common stock under
compensation agreement.................... -- 222 -- -- -- 222
----- ----------- ----------- ------------- ------- -------------
Balance at December 31, 1994.................. 107 67,758 5,235 13,560 (777) 85,883
----- ----------- ----------- ------------- ------- -------------
Net loss.................................... -- -- (3,393) -- -- (3,393)
Exercise of stock options................... 1 587 -- -- -- 588
Amortization of unearned compensation....... -- -- -- -- 230 230
Foreign currency translation adjustment..... -- -- -- 5,102 -- 5,102
----- ----------- ----------- ------------- ------- -------------
Balance at December 31, 1995.................. $ 108 $ 68,345 $ 1,842 $ 18,662 $ (547) $ 88,410
----- ----------- ----------- ------------- ------- -------------
----- ----------- ----------- ------------- ------- -------------
<CAPTION>
COMMON
STOCK
SHARE AMOUNTS (IN THOUSANDS) ISSUED
- ---------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.................. 10,623
Issuance of restricted Company common stock
award..................................... 100
Exercise of warrants........................ 2
-------------
Balance at December 31, 1993.................. 10,725
Issuance of Company common stock under
compensation agreement.................... 25
-------------
Balance at December 31, 1994.................. 10,750
Exercise of stock options................... 50
-------------
Balance at December 31, 1995.................. 10,800
-------------
-------------
</TABLE>
See accompanying notes.
F-33
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ (23,443) $ 3,793 $ (3,393)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Extraordinary gain on early extinguishment of debt.......................... (3,759) -- --
Depreciation and amortization............................................... 8,103 8,271 8,953
Deferred income taxes....................................................... 163 (296) (778)
Provision for doubtful receivables.......................................... 8,176 5,763 6,712
Provision for writedown of building to be sold.............................. -- -- 812
Provision for inventory valuation........................................... 6,156 2,230 1,955
(Gain) loss on disposals of property, plant and equipment................... 64 (83) 48
Changes in operating assets and liabilities:
Accounts and notes receivable............................................. (17,648) (15,823) (10,304)
Inventories............................................................... (15,077) (3,889) (2,167)
Other current assets...................................................... (1,534) (713) 1,279
Accounts payable and accrued liabilities.................................. 9,717 2,730 578
Other, net.................................................................. (466) (759) 100
---------- ---------- ----------
Cash provided by (used in) operating activities........................... (29,548) 1,224 3,795
---------- ---------- ----------
Cash flows from investing activities:
Net assets of distribution business acquired.................................. (8,382) -- --
Purchases of property, plant and equipment.................................... (6,467) (9,537) (8,240)
Proceeds from disposals of property, plant and equipment...................... 1,091 1,749 1,757
Other......................................................................... 351 1,397 250
---------- ---------- ----------
Cash used in investing activities......................................... (13,407) (6,391) (6,233)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured Notes and Common Stock Warrants...... 40,000 -- --
Net change in lines of credit................................................. 28,711 21,423 359
Repayments of long-term debt.................................................. (29,761) (13,192) (2,908)
Exercise of stock warrants and stock options.................................. 30 -- 588
---------- ---------- ----------
Cash provided by financing activities....................................... 38,980 8,231 (1,961)
Effect of exchange rate changes on cash....................................... (389) 704 721
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.............................. (4,364) 3,768 (3,678)
Cash and cash equivalents, beginning of year.................................. 9,800 5,436 9,204
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 5,436 $ 9,204 $ 5,526
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flows information:
Operating activities include cash payments for interest and income taxes as
follows:
Interest paid............................................................... $ 2,910 $ 5,972 $ 6,888
Income taxes paid, net of refunds........................................... 6,454 4,020 1,801
Investing activities exclude the following non-cash activities:
Exchange of income tax receivable for intangible assets and equipment....... 1,969 -- --
Long-term note received from sale of assets................................. -- 517 --
Financing activities exclude the following non-cash activities:
Issuance of restricted stock awards......................................... 1,150 -- --
Issuance of Company common stock under compensation agreement............... -- 222 --
Issuance of note payable for license agreement.............................. -- 1,465 --
</TABLE>
See accompanying notes.
F-34
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Bally Gaming International, Inc. (the "Company") was formed in August 1991
by Bally Entertainment Corporation ("BEC") to consolidate the gaming machine
manufacturing and distribution operations of BEC. These operations are conducted
in Germany under the name Bally Wulff ("Wulff") and in the United States under
the name Bally Gaming ("Gaming") and Bally Systems ("Systems"). Wulff designs,
manufactures (through the Company's wholly-owned subsidiary "Automaten") and
distributes (through the Company's wholly-owned subsidiary "Vertriebs")
wall-mounted, coin-operated, armless gaming devices similar to slot machines
known as wall machines and also distributes recreational and amusement machines
manufactured by third parties. Gaming designs, manufactures and distributes
electronic slot machines and video gaming machines. Systems designs, assembles
and sells computerized monitoring systems for slot and video gaming machines. In
three transactions dated November 1991, July 1992 and September 1993, BEC
divested substantially all its interests in the Company.
Certain reclassifications have been made to prior years' financial
statements to conform with the 1995 presentation.
Hereafter, references to the Company are to the consolidated operations of
Wulff, Gaming and Systems including the predecessor operations.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less which are readily convertible into cash.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Cost elements included for work-in-process and
finished goods include raw materials, freight, direct labor and manufacturing
overhead.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided by using the straight-line method over the
estimated economic lives of the related assets and the terms of the applicable
leases for leasehold improvements, which range from 3 to 30 years.
Significant replacements and improvements are capitalized; other maintenance
and repairs are expensed. The cost and accumulated depreciation of assets
retired or otherwise disposed of are eliminated from the accounts and any
resulting gain or loss is credited or charged to income as appropriate.
INTANGIBLE AND OTHER ASSETS
Intangible assets include the cost in excess of net assets of acquired
businesses, which are being amortized using the straight-line method over
periods ranging up to 40 years from dates of acquisition.
In July 1992, the Company reached an agreement for an exclusive license
until December 31, 2005, subject to extension, of a patent relating to the use
of credit cards in gaming machines, and acquired 1% of the stock of Scotch
Twist, Inc., a private company which granted this license, in exchange for the
issuance of 100,001 shares of the Company's Common Stock. The licensing
agreement requires the Company to commit
F-35
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
$1.2 million in research and development costs related to the patent, plus any
costs related to obtaining required regulatory approvals and licenses. As of
December 31, 1995 approximately $1 million has been spent relative to this
commitment.
In July 1992 and again in March 1995, the Company and BEC amended a
trademark license agreement ("License Agreement") pursuant to which the Company
licensed the use of the name "Bally" for its use in the gaming machine business
worldwide. Prior to 1995, the trademark licensing rights were being amortized
using the straight-line method over a 20 year period. Pursuant to the terms of
the March 1995 amendment, the Company reduced the remaining amortization period
to five years effective March 31, 1995, resulting in an increase in amortization
expense of approximately $315,000 for the year ended December 31, 1995.
In January 1993, as part of an amendment to an intercorporate agreement
between the Company and BEC, a long-term income tax receivable from BEC of
$1,971,000 was exchanged for certain assets owned by BEC but managed by the
Company, a reduction in the period from six years to three years of certain non-
competition restrictions previously imposed on the Company by BEC and the
settlement of certain other intercompany service arrangements with BEC. This
transaction resulted in an increase to intangible assets of approximately
$1,515,000 which is being amortized over a 6 year period.
In June 1994, the Company acquired a paid up license for use of a patent on
slot machines manufactured or sold during the life of the patent. The owner of
the patent had recently filed an infringement action against various casinos in
Atlantic City alleging infringement of a certain patent by these casino
companies. As a result of the agreement, the casino operator defendants will be
released from any claims relating to the past and future use of certain gaming
machines manufactured by the Company. The Company agreed to pay $2 million over
a 5 year period, without interest, for the paid up license. The asset is fully
amortized as of December 31, 1995.
The carrying value of intangible assets is periodically reviewed by
management and impairment losses, if any, are recognized when the expected
non-discounted future operating cash flows derived from such intangible assets
is less than their carrying value. In 1995, Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121") was issued which will be
effective for the Company's year ended December 31, 1996. This statement
requires that long-lived assets and certain identifiable intangible assets to be
held and used be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. Management believes that if SFAS No. 121 had been early adopted at
December 31, 1995, it would not have had a material effect on the financial
position, results of operations or cash flows of the Company.
INCOME TAXES
Taxes on income of Wulff are provided at the tax rates applicable to the tax
jurisdictions in Germany, as Wulff files separate foreign income tax returns.
German withholding taxes and related United States federal income taxes are
provided on Wulff earnings.
REVENUE RECOGNITION
The Company sells products on normal credit terms (90 days or less), over
longer term installments of up to 36 months or more or through payments from the
net winnings of the machines until the purchase price is paid.
Revenue from sales of gaming machines and recreational and amusement
equipment is normally recognized at the time products are shipped and title has
passed to the customer. Revenue from sales of software included in computerized
management systems is recognized at the time the systems are accepted by the
customer, which normally coincides with installation of the equipment. Revenue
from sales of hardware included in computerized management systems is recognized
at the time the product is shipped.
F-36
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency of Wulff is the Deutsche Mark. Assets and
liabilities of Wulff are translated at the rate of exchange at the end of the
period, and the statements of operations are translated at the average rate of
exchange for the period. Translation adjustments are reflected as a separate
component of stockholder's equity. Gains and losses on foreign currency
transactions are included in net income.
RESEARCH AND DEVELOPMENT
The Company expenses product research and development costs as incurred.
Research and development costs for the years ended December 31, 1993, 1994 and
1995 were $7.8 million, $8.7 million and $9.2 million, respectively.
STOCK-BASED EMPLOYEE COMPENSATION AWARDS
The Company accounts for its stock-based employee compensation awards in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price
of the Company's employee stock options and stock performance rights equals the
market price on date of grant, no compensation expense is recognized.
In 1995, Statement of Financial Accounting Standards No. 123, "Accounting
for Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") was issued
which will be effective for the Company's year ended December 31, 1996. SFAS No.
123 provides alternative accounting treatment to APB No. 25 with respect to
stock-based compensation and requires certain additional disclosures, including
disclosures if the Company elects not to adopt the accounting requirements of
SFAS No. 123. At this point, the Company does not anticipate adopting the
accounting requirements of SFAS No. 123 and therefore in future years would
expect to provide the required additional disclosures in the footnotes to the
consolidated financial statements.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding totaling 10,685,054, 10,726,556 and 10,775,699 for the
years ended December 31, 1993, 1994 and 1995.
Common stock equivalents were not included in the computation of earnings
(loss) per common share as their effect would have been antidilutive or
immaterial.
MERGER AGREEMENT, TENDER OFFER AND RELATED LITIGATION
On October 17, 1995, the Board of Directors of the Company approved an
Agreement and Plan of Merger with Alliance Gaming Corporation ("Alliance") which
was subsequently amended as of January 23, 1996 ("Merger Agreement"). Pursuant
to the Merger Agreement, the Company will merge with a subsidiary of Alliance
("Alliance Merger Subsidiary") with the Company being the surviving corporation
and becoming a wholly-owned subsidiary of Alliance ("Alliance Merger"). The
Merger Agreement provides that the Company's stockholders will have the right to
receive, in exchange for each of their issued and outstanding shares of the
Company's common stock (i) an amount of cash determined by dividing $76,700,000
by the number of shares of the Company's common stock outstanding immediately
prior to the effective time of the Merger (other than shares which are held by
the Company, Alliance or their respective subsidiaries) ("Converted Shares"),
(ii) a fraction of a share of common stock, $.10 par value, of Alliance
("Alliance
F-37
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Common Stock") having a value determined in accordance with the Merger Agreement
of $.30 (the "Common Stock Consideration") and (iii) that number of shares (or
fractions thereof) of 15% Non-Voting Junior Special Stock, Series B, $.10 par
value, of Alliance (the "Series B Special Stock") having a value determined in
accordance with the Merger Agreement equal to $11.40 less the cash consideration
described in clause (i) above. The obligations of Alliance and the Company to
consummate the Alliance Merger are subject to various conditions, including
obtaining requisite stockholder and regulatory approvals and Alliance's
obtaining $150 million in financing on commercially reasonable terms, at least
two-thirds of which must be in the form of bank debt, other debt having a term
of at least four years or equity. In conjunction with the Merger Agreement,
Alliance terminated its unsolicited tender offer and consent solicitation and
withdrew its litigation against the Company and the Company withdrew its
litigation against Alliance.
BUSINESS SEGMENT
The business of the Company is conducted in one industry segment: the
design, manufacture and distribution of gaming machines, computerized monitoring
systems and recreational and amusement equipment. All of Wulff's sales are to
customers outside the United States while Gaming and Systems sell to domestic
and foreign customers. See "Commitments and Contingencies."
The Company has operations based in Germany and the United States. The table
below presents information as to the Company's operations by geographic region.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Germany................................................ $ 112,601 $ 111,068 $ 130,655
United States.......................................... 60,533 131,228 129,140
Eliminations........................................... (4,427) (6,104) (10,483)
---------- ---------- ----------
Consolidated........................................... $ 168,707 $ 236,192 $ 249,312
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS):
Germany................................................ $ 9,702 $ 9,232 $ 5,581
United States.......................................... (27,658) 4,184 2,982
Eliminations........................................... (580) (35) (199)
---------- ---------- ----------
Consolidated........................................... $ (18,536) $ 13,381 $ 8,364
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS:
Germany................................................ $ 81,899 $ 97,537 $ 100,207
United States.......................................... 90,613 99,478 100,643
Eliminations........................................... (1,682) (4,773) (6,534)
---------- ---------- ----------
Consolidated........................................... $ 170,830 $ 192,242 $ 194,316
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Wulff's customers are a diverse group of operators of arcades, hotels,
restaurants and taverns, primarily in Germany. Gaming's and Systems' customers
are primarily casinos and gaming machine distributors in the United States and
abroad. Receivables of Wulff, Gaming and Systems are generally collateralized by
the related equipment. See "Concentration of Credit Risk."
F-38
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Export sales (including sales to Wulff) from Gaming's and Systems'
operations for the years ended December 31, 1993, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Europe....................................................... $ 8,651 $ 10,889 $ 12,890
Far East..................................................... 223 860 998
Latin America................................................ 2,030 4,015 5,392
Canada....................................................... 1,589 3,254 6,185
Other........................................................ -- 556 1,824
--------- --------- ---------
$ 12,493 $ 19,574 $ 27,289
--------- --------- ---------
--------- --------- ---------
</TABLE>
ACCOUNTS AND NOTES RECEIVABLE
The Company grants certain customers extended payment terms under contracts
of sale. These contracts are generally for terms of one to three years, with
interest at prevailing rates, and are generally collateralized by the related
equipment sold although the value of such equipment, if repossessed, may be less
than the receivable balance outstanding. See "Concentration of Credit Risk."
The following table represents, at December 31, 1995, scheduled collections
of accounts and notes receivable (net of allowances for doubtful accounts) by
year:
<TABLE>
<S> <C>
1996............................................................... $ 87,176
1997............................................................... 8,250
1998............................................................... 1,731
---------
$ 97,157
---------
---------
</TABLE>
LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt and lines of credit consist of the following at December 31,
1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
10 3/8% Senior Secured Notes due 1998, net of unamortized discount of
$458 and $344........................................................ $ 39,542 $ 39,656
OTHER LONG-TERM DEBT:
Wulff revolving lines of credit....................................... 15,853 15,905
Bally Gaming, Inc. revolving line of credit........................... 7,768 9,400
Notes payable, 5% to 12%.............................................. 6,599 4,983
Less current maturities............................................... (16,000) (14,957)
---------- ----------
$ 14,220 $ 15,331
---------- ----------
---------- ----------
</TABLE>
In July 1993, the Company completed a private placement of $40 million
principal amount of 10 3/8% Senior Secured Notes due July 1998 and Common Stock
Purchase Warrants to purchase 1.2 million shares of Common Stock exercisable at
$12.50 per share after the Common Stock has traded at an average of $20 per
share for a twenty consecutive trading day period and under certain other
circumstances. The warrants became exercisable during November 1993. The Company
allocated $600,000 of the $40 million gross proceeds to the warrants and
accordingly recorded the Senior Secured Notes at $39.4 million with unamortized
discount of $600,000 (the effective yield of the Senior Secured Notes is
10.77%). The Company used $21.6 million of the gross proceeds of $40 million
from the sale of the notes and warrants to redeem all of its outstanding 6%
Senior Convertible Debentures due 2002. The Company realized an extraordinary
gain of approximately $3.8 million from the redemption of the Convertible
Debentures in 1993. The gain represents the difference between the carrying
amount of the debt retired and related deferred financing costs ($25.4
F-39
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
million) and the redemption price of $21.6 million. The Senior Secured Notes are
collateralized by a pledge of the outstanding capital stock of Automaten and
Vertriebs and a guarantee by Bally Gaming, Inc. The Notes are subject to
redemption, at the option of the Company, at a redemption price equal to 103%
and 101.5% of the principal amount of the Notes if redeemed during the twelve
month period beginning on the anniversary of the issue date in the years 1996
and 1997, respectively.
During March 1993, Vertriebs obtained two bank lines of credit for the
purpose of financing the acquisition of assets acquired from an independent
distributor. The agreements provide for borrowings of DM2,250,000 and
DM16,000,000 (approximately $1,600,000 and $11,200,000) at December 31, 1995,
respectively. Availability of the DM2,250,000 line of credit is reduced by
DM250,000 per quarter and expires on March 31, 1998. Borrowings under this line
of credit bear interest at 6.95%. The working capital revolving credit line of
DM16,000,000 bears interest at a rate tied to an international borrowing rate
plus 1% (5.3% at December 31, 1995) and is due on demand. These lines are
collateralized by a pledge of the assets acquired. Approximately $12,751,000 was
outstanding under these lines at December 31, 1995. In May 1993, Vertriebs
obtained a DM16,300,000 (approximately $11,400,000 at December 31, 1995)
revolving line of credit for general working capital purposes. This agreement
bears interest at a rate tied to an international borrowing rate plus 1% (4.8%
at December 31, 1995) and is due on demand. This line is collateralized by the
receivables of Vertriebs. Approximately $3,144,000 was outstanding under this
line at December 31, 1995. Vertriebs and Automaten are jointly and severally
liable under these lines of credit.
In March 1993, Bally Gaming, Inc. obtained a bank revolving line of credit
which, as amended, provides for borrowings tied to a percentage of Bally Gaming,
Inc.'s eligible (as defined in the credit agreement) inventory and accounts
receivable with a maximum borrowing capacity of $15,000,000. Borrowings under
this agreement, which expires March 31, 1997, bear interest at one and one-half
percent above the bank's prime rate (10% at December 31, 1995). The Company must
pay an annual facility fee of one-half of one percent of the maximum borrowing
capacity and a monthly unused line fee of one-quarter of one percent of the
difference between the maximum borrowing capacity and the average daily
outstanding balance during any month. This line of credit is collateralized by
property, plant and equipment and the eligible inventory and accounts
receivable. The agreement and subsequent amendments also contain certain
financial and other restrictive covenants, including the maintenance by Bally
Gaming, Inc. of specified levels of minimum net working capital, working capital
ratio, tangible net worth, net worth ratio, and minimum net income after taxes,
all as defined in the credit agreement. Eligible borrowing capacity under this
agreement at December 31, 1995 was approximately $15,000,000. Approximately
$9,400,000 was outstanding at December 31, 1995.
Aggregate annual maturities of long-term debt for the five years after
December 31, 1995 are $14.9 million, $11.5 million, $43.6 million, $.3 million
and none.
STOCK PLANS, AWARDS AND RIGHTS
1991 INCENTIVE PLAN
On November 6, 1991, the Company adopted the 1991 Incentive Plan of Bally
Gaming International, Inc. (the "Plan") for directors (employee directors that
are not members of the Compensation and Stock Option Committee of the Board of
Directors), officers, key employees and consultants (collectively
"Participants"). The Plan provides for the grant of stock options, stock
appreciation rights ("SARs") and restricted stock (collectively "Awards"). The
aggregate number of shares of common stock which may be delivered under the Plan
and the 1991 Non-Employee Directors' Option Plan described below may not exceed
1,250,000 shares. No awards may be granted after November 6, 2001.
The Plan provides for granting incentive as well as nonqualified stock
options. Unless the Compensation and Stock Option Committee of the Board of
Directors, in its discretion, determines otherwise,
F-40
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
nonqualified stock options will be granted with an option price equal to the
fair market value of the shares of common stock at the date of grant. Incentive
stock options must be granted at not less than the fair market value of the
shares of common stock at the date of grant.
SARs are rights granted to Participants to receive shares of common stock
and/or cash in an amount equal to the excess of (i) the fair market value of the
shares of common stock on the date the SARs are exercised over (ii) the fair
market value of the shares of common stock on the date the SARs were granted or,
at the discretion of the Compensation and Stock Option Committee of the Board of
Directors, the date the option was granted, if granted in tandem with an option
granted on a different date.
Restricted stock awards are rights granted to an employee to receive shares
of common stock without payment but subject to forfeiture and other restrictions
as set forth in the Plan. Generally, the restricted stock awarded, and the right
to vote such stock or to receive dividends thereon, may not be sold, exchanged
or otherwise disposed of during the restricted period. The Compensation and
Stock Option Committee of the Board of Directors, in its discretion, will
determine the restrictions and the forfeiture provisions applicable to
restricted stock awards. The Plan provides that, at the discretion of the
Compensation and Stock Option Committee of the Board of Directors, the Company
may pay cash to Participants to insure that the Participant will receive the
common stock net of all taxes imposed on such Participant related to the receipt
of common stock and cash payments under the Plan. During 1991, restricted stock
awards for 72,500 shares of common stock were granted under the Plan to key
employees effective January 1, 1992. These awards are fully vested at December
31, 1995. In 1993, 100,000 shares of restricted common stock were granted to an
officer of the Company. This award vests ratably over a five-year period. As of
December 31, 1995, 40,000 shares of this award were vested.
The Plan is administered by the Compensation and Stock Option Committee
which will determine the participants to whom awards will be granted, the
provisions applicable to each award and the time periods during which the awards
may be exercised. Each option and SAR granted under the Plan may be exercisable
for a term of not more than ten years after the date of grant. Incentive stock
options and SARs granted in tandem with incentive stock options may only be
exercised when the fair market value of common stock is greater than the option
price. Certain other restrictions apply in connection with the timing of
exercise. In the event of a change of control (as defined in the Plan), the date
on which all SARs and options outstanding under the Plan may first be exercised
is accelerated, and restrictions on restricted stock awards lapse. Generally,
all SARs and options terminate 90 days after a change of control.
1991 NON-EMPLOYEE DIRECTORS' OPTION PLAN
The 1991 Non-Employee Directors' Option Plan of the Company (the "Directors'
Plan") was also adopted in November 1991. The Directors' Plan provides for the
granting of stock options at the Company's initial public offering price to
persons who, on the consummation of the Company's initial public offering, were
members of the Board of Directors and who are not employees of the Company or
its subsidiaries ("Non-Employee Directors"), and thereafter, options are granted
at fair market value to persons who become members of the Board of Directors
after the Company's initial public offering and who are not employees of the
Company or its subsidiaries at the time they become members of the Board of
Directors. Each of the Non-Employee Directors received, or will receive, an
option, for ten years, to purchase 25,000 shares of common stock that vests over
three years. Administration, the term of the Directors' Plan and change of
control features for the Directors' Plan are consistent with the above described
Plan.
F-41
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
At December 31, 1995, 35,000 shares were reserved for future grant under the
Plan and the Directors' Plan. A summary of shares granted, canceled and
exercisable (excluding restricted stock grants of 172,500) are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------- -----------------
<S> <C> <C>
Outstanding at December 31, 1992.............................. 845,000 $11.75 - $14.50
Granted..................................................... 188,000 $12.38 - $12.75
Canceled.................................................... (9,000) $14.50
----------
Outstanding at December 31, 1993.............................. 1,024,000 $11.75 - $14.50
Granted..................................................... 58,000 $ 8.06 - $12.88
Canceled.................................................... (53,000) $12.00 - $14.50
----------
Outstanding at December 31, 1994.............................. 1,029,000 $ 8.06 - $14.50
Granted..................................................... 30,000 $7.88
Canceled.................................................... (16,500) $12.00 - $14.50
Exercised................................................... (50,000) $11.75
----------
Outstanding at December 31, 1995.............................. 992,500 $ 7.88 - $14.50
---------- -----------------
---------- -----------------
Exercisable at December 31, 1995.............................. 871,320 $ 8.06 - $14.50
---------- -----------------
---------- -----------------
</TABLE>
1992 RESTRICTED STOCK PERFORMANCE PLAN
On November 3, 1992, the Company's Board of Directors adopted the Bally
Gaming International, Inc. 1992 Restricted Stock Performance Plan (the
"Performance Plan"). The purpose of the Performance Plan is to benefit the
Company through increased incentive on the part of key employees, officers,
directors and consultants of the Company and its subsidiaries by permitting the
Company to make awards of Restricted Stock and/or Performance Units comprised of
stock and cash to such persons based upon specific performance objectives. Up to
600,000 shares of the Company's common stock have been reserved under this plan.
In February 1993, 200,000 Performance Units were granted in connection with an
employment agreement entered into by the Company with its Chairman of the Board
and Chief Executive Officer. In May 1993, 200,000 Performance Units were granted
in connection with an employment agreement entered into by the Company and Bally
Gaming, Inc. with its new President. In December 1993, an additional 120,000
Performance Units were granted to other members of senior management of the
Company, of which 40,000 units were canceled during the year ended December 31,
1994.
Under the terms of the award agreements as amended June 8, 1994, the
Performance Units will vest if either (i) the cumulative annual growth rate for
any three consecutive years during the Performance Period (as defined in the
Performance Plan) is at least 35% (the "EPS Growth Target") or (ii) the fair
market value of the Common Stock (as determined based on the market price of the
Common Stock) equals or exceeds $40 per share for at least twenty of thirty
consecutive trading days (the "Market Price Target") or (iii) under certain
circumstances following a change in control or (iv) the Company enters into a
business combination or (v) the Company obtains a capital infusion of at least
$30,000,000 provided however if (i) the Company's earnings per share growth in
any consecutive three years during the Performance Period (as defined in the
Performance Plan) is at least 85% of the EPS Growth Target, at least 70% of the
Performance Units will vest, or (ii) the Company's stock price at any time in
the Performance Period (as defined in the Performance Plan) is at least 85% of
the Market Price Target, at least 70% of the Performance Units will vest. Each
Performance Unit is equal in value to one share of the Company's Common Stock,
plus an additional amount in cash equal to fifty percent (50%) of the value of
one share of Common Stock, based on the fair market value of the Common Stock at
the date the award vests. Payments are to be made in common stock and/or cash as
determined by the Compensation Committee. No accruals have been recorded in the
Company's financial statements as of December 31, 1995 as such performance
objectives have not yet begun to be met.
F-42
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1994 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The 1994 Stock Option Plan for Non-Employee Directors (the "1994 Directors'
Plan") was adopted in April 1994 and provides for the granting of stock options
of the Company's Common Stock exercisable at fair market value to Non-Employee
Directors. Each of the Non-Employee Directors received an option, for ten years,
to purchase 25,000 shares of Common Stock that vests over three years. The
option price was $12.875. The 1994 Directors' Plan has change in control
features similar to those contained in the 1991 Directors' Plan. 250,000 shares
of the Company's Common Stock were reserved for future issuance under the 1994
Directors' Plan. At December 31, 1995, 125,000 shares had been granted of which
33,333 shares were exercisable, 25,000 had been canceled and none had previously
been exercised.
STOCK PERFORMANCE RIGHTS ("SPRS")
Stock Performance Rights ("SPRs") are rights granted to individuals to
receive cash in an amount equal to the excess of (i) the fair market value of
the shares of common stock on the date the SPRs are exercised over (ii) the fair
market value of the shares of common stock on the date the SPRs were granted.
In 1993, 100,000 SPRs were granted to an officer of the Company at a fair
market value on date of grant of $11.625 in connection with the signing of a
five-year employment agreement. These SPRs vest ratably over the term of the
employment agreement and become exercisable at the end of each vesting period.
As of December 31, 1995, 40,000 of the SPRs were exercisable, and none had been
previously exercised.
WARRANTS
The Company issued warrants to the underwriters of the initial public
offering of the Company's common stock to purchase an aggregate of 300,000
shares of its common stock. The warrants are exercisable during a four-year
period ending November 11, 1996 at an exercise price of $15 per share. For the
year ended December 31, 1993, 2,000 warrants were exercised and no other
warrants have since been exercised.
In 1993, the Company issued warrants to purchase 1.2 million shares of its
common stock at $12.50 per share in connection with the private placement of the
Senior Secured Notes. These warrants are currently exercisable and expire on
July 29, 1998. At December 31, 1995 none of these warrants were exercised. See
"Long-term Debt and Lines of Credit."
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1995 shares of the Company's Common Stock were reserved for
future issuance as follows:
<TABLE>
<S> <C>
Warrants related to the 10 3/8% Senior Secured Notes............. 1,200,000
1991 Incentive Plan and Directors' Plan.......................... 1,200,000
1992 Restricted Stock Performance Plan........................... 600,000
1994 Stock Option Plan for Non-Employee Directors................ 250,000
Warrants to underwriters......................................... 298,000
---------
3,548,000
---------
---------
</TABLE>
OTHER REVENUES
Other revenues for the years ended December 31, 1993, 1994 and 1995 were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest......................................................... $ 3,795 $ 3,538 $ 3,615
Currency transaction gain (loss)................................. (245) (30) (53)
Other............................................................ 586 1,366 1,279
--------- --------- ---------
$ 4,136 $ 4,874 $ 4,841
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-43
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
UNUSUAL CHARGES
During the year ended December 31, 1995, the Company incurred approximately
$4.0 million in legal, accounting, investment banking, public and investor
relations and printing costs in connection with a merger agreement with WMS
Industries, Inc., which has been terminated, Alliance's tender offer and consent
solicitation and the pending Alliance Merger. All of these costs have been
expensed as incurred. Such costs will continue to be incurred in 1996.
During the fourth quarter of 1995, Vertriebs recorded a non-recurring charge
of $.8 million to writedown to net realizable value a building to be sold. The
provision was based on a strategic decision to sell the building as Wulff's
other distribution offices adequately covered the geographic region that would
have been served by this facility.
During 1995, Wulff increased the amount of value added tax reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million. The Company has accrued the liability as, based on current
developments, the Company's estimate of the ultimate outcome and its experience
in contesting these matters, it is probable that a liability has been incurred
and a range of costs can be reasonably estimated. As the scope of the liability
is better determined, there could be changes in the estimate of the ultimate
liability. Management believes that the preliminary proposed adjustments are
without merit and the ultimate results of the audit will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes" which requires recognition of deferred tax
assets and liabilities for temporary differences and net operating loss ("NOL")
and tax credit carryforwards. Under SFAS No. 109, deferred income taxes are
established based on enacted tax rates expected to be in effect when temporary
differences are scheduled to reverse and NOL and tax credit carryforwards are
expected to be utilized. The cumulative effect of the adoption of SFAS No. 109
had an immaterial effect on net income for the year ended December 31, 1993.
The provision (credit) for foreign and domestic income taxes for the years
ended December 31, 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
FEDERAL:
Current........................................................ $ 476 $ 220 $ 260
Deferred....................................................... -- -- --
--------- --------- ---------
476 220 260
--------- --------- ---------
--------- --------- ---------
FOREIGN:
Current........................................................ 3,603 2,896 4,586
Deferred....................................................... 163 (296) 58
--------- --------- ---------
3,766 2,600 4,644
--------- --------- ---------
Total provisions for income taxes................................ $ 4,242 $ 2,820 $ 4,904
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-44
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The major components of the net deferred tax asset as of December 31, 1994,
and 1995 were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Property, plant and equipment......................................... $ 1,075 $ 1,193
Other................................................................. 131 --
---------- ----------
Total deferred tax liabilities.................................... 1,206 1,193
---------- ----------
Bad debt reserves..................................................... 4,933 5,876
Inventory reserves.................................................... 5,527 4,736
Wulff corporate reorganization........................................ 235 366
Net operating loss carryforwards...................................... -- 391
Foreign tax credit carryforwards...................................... 8,382 12,955
AMT tax credit carryforwards.......................................... 384 570
Intangibles........................................................... 2,432 909
Accrued liabilities................................................... 1,201 562
Deferred compensation................................................. 696 476
Other................................................................. 31 500
---------- ----------
Total deferred tax assets......................................... 23,821 27,341
---------- ----------
Valuation allowance................................................... (21,460) (24,667)
---------- ----------
Net deferred tax assets........................................... $ 1,155 $ 1,481
---------- ----------
---------- ----------
</TABLE>
At December 31, 1994 and 1995, net deferred tax assets resulted from German
net operating loss carryforwards and, inventory and intangible assets book/tax
basis differences. At December 31, 1995 the Company has foreign tax credit
carryforwards of approximately $13.0 million and alternative minimum tax ("AMT")
credit carryforwards of approximately $.6 million. Foreign tax credits are
available to offset future taxes due in the U.S. on future foreign taxable
income and expire between 1997 and 2001 unless utilized prior to such time. AMT
credits are available to be carried forward indefinitely and may be utilized
against regular U.S. corporate income tax to the extent it does not exceed tax
computed under AMT calculations.
The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Taxes at federal statutory rate................................. $ (7,806) $ 2,248 $ 529
Losses with no current tax benefit.............................. 11,528 -- --
Federal alternative minimum tax................................. 143 200 200
Foreign earnings at other than U.S. statutory rate.............. 238 (2) 3,529
Foreign withholding on dividends................................ 333 353 450
Other........................................................... 34 21 196
Impact of SFAS 109 adoption..................................... (228) -- --
--------- --------- ---------
$ 4,242 $ 2,820 $ 4,904
--------- --------- ---------
--------- --------- ---------
</TABLE>
RELATED PARTY TRANSACTIONS
In connection with the Company's initial public offering, BEC granted
restricted stock awards for shares of the Company's common stock owned by BEC to
certain senior executives of the Company. These restricted stock awards
represent compensation from the Company equal to the fair market value of the
F-45
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
shares on the date of the awards and are recorded as unearned compensation and a
capital contribution in the accompanying financial statements. Unearned
compensation is charged to operations over the vesting periods of the awards.
In connection with the Company's initial public offering, the Company and
BEC entered into an intercorporate agreement which was amended in July 1992, and
again in January 1993, which provided, among other things, that BEC would
perform certain accounting, tax, treasury, legal, data processing, employee
benefits and other services which the Company reasonably requests, and that the
Company would reimburse BEC for the reasonable cost of all services rendered,
including salaries and expenses of BEC's employees while they are rendering such
services. Charges by BEC to the Company under the intercorporate agreement for
the years ended December 31, 1993, 1994 and 1995 were $295,000, $90,000 and
none, respectively.
The Company participated in BEC's insurance program for general liability
and directors' and officers' liability coverage through June 1993. Under these
programs, insurance expenses were charged to the Company based on claims
experience and for reimbursements of premium payments made by BEC. Insurance
expense charged to the Company was $281,000, none, and none for the years ended
December 31, 1993, 1994 and 1995, respectively.
The Company had a long-term income tax receivable from BEC totaling
$1,971,000 at December 31, 1992. As part of an amendment to the intercorporate
agreement between the Company and BEC, which was entered into in January 1993,
the income tax receivable of $1,971,000 was exchanged for certain assets
previously owned by BEC but managed by the Company, a reduction in the period
from six years to three years of certain non-competition restrictions previously
imposed on the Company by BEC and settlement of certain other intercompany
service arrangements with BEC. This transaction resulted in an increase to
intangible assets of approximately $1,515,000 which is being amortized over a
six-year period.
Waters, McPherson, McNeill, P.C., a law firm of which Mr. McPherson, a
director of the Company, is Senior Lawyer and Chairman, provides legal services
to the Company, primarily relating to litigation involving the Company's former
distributor in Louisiana. As of December 31, 1994 and 1995, the Company was
indebted to the firm for approximately $200,000 and $480,000, respectively, for
legal services rendered. During the years ended December 31, 1993, 1994 and
1995, Waters, McPherson, McNeill, P.C. billed the Company approximately $1.0
million, $1.3 million and $1.5 million, respectively, for legal services
provided to the Company.
EMPLOYEE BENEFIT PLANS
Until February 28, 1994 the Company participated in BEC's defined
contribution plans which covered certain full-time employees and which were
considered part of the Company's overall retirement program. Effective March 1,
1994, the Company ceased its participation in BEC's defined contribution plans
and formed its own plan. This program consists of a savings plan to which
employees may contribute a percentage of their compensation. Employee
contributions to the savings plan, up to certain limits, may be matched by the
Company. The Company's contribution accrued for the savings plan for the years
ended December 31, 1993, 1994 and 1995 was approximately $91,000, $120,000 and
$140,000, respectively.
COMMITMENTS AND CONTINGENCIES
The Company is obligated under several patent agreements to pay royalties
ranging from approximately $50 to $200 per game depending on the components in
the gaming machines. Additionally, based on an amendment to the trademark
licensing agreement between the Company and BEC dated March 31, 1995, the
Company is obligated to pay a royalty on new machines sold of $25 to $30 per
machine beginning on March 31, 1995 with a minimum annual royalty payment of
$500,000 for the initial five-year term of the amended agreement, which is
subject to annual renewals thereafter. Royalty expense for the years ended
December 31, 1993, 1994 and 1995 was $1.1 million, $2.9 million and $3.0
million, respectively.
F-46
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum lease
payments at December 31, 1995 under operating leases that have initial or
remaining lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1996............................................................... $ 3,136
1997............................................................... 2,753
1998............................................................... 1,754
1999............................................................... 1,361
2000............................................................... 1,121
Thereafter......................................................... 1,844
---------
$ 11,969
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 was $2.6
million, $2.7 million and
$3.6 million, respectively.
The Company has entered into employment contracts with several of its
executives. These contracts are for periods ranging from one to five years and
require certain minimum annual payments. Future minimum annual payments under
these contracts are as follows:
<TABLE>
<S> <C>
1996................................................................ $ 3,573
1997................................................................ 2,299
1998................................................................ 1,700
---------
$ 7,572
---------
---------
</TABLE>
In conjunction with sales by Gaming, with recourse to Gaming and/or the
Company, of certain trade receivables to third parties, Gaming and/or the
Company have guaranteed amounts due from various customers of approximately
$18.2 million at December 31, 1995. A charge was recognized as a result of these
sales of receivables which aggregated approximately $.5 million, $1.0 million
and $.1 million during 1993, 1994 and 1995, respectively. It is possible that
one or more of Gaming's customers whose obligation has been guaranteed by Gaming
may be unable to make payments as such become due. In this case Gaming may
become responsible for repayment of at least a portion of such amounts over the
term of the receivables. At December 31, 1995, amounts due from one customer
under three contracts totaling $3.5 million were past due and these amounts and
subsequent installments have not been paid. In general, under the terms of these
contracts, the Company may be responsible for monthly payments of the
outstanding obligations. The third party holder of these contracts has not yet
asserted demands under these contracts although such demands may be imminent.
The Company intends to pursue a restructuring of the contracts although no
assurance can be given that such a restructuring would be successfully
negotiated. The outcome of this issue is not anticipated to have a material
effect on the financial position, results of operations or cash flows of the
Company. A provision for doubtful accounts of approximately $3.5 million and
$6.3 million on all receivables with recourse is included in the Company's
allowance for doubtful accounts at December 31, 1994 and 1995, respectively.
On or about June 19, 1995, three purported class actions were filed in the
Chancery Court of Delaware by Company's stockholders against the Company and its
directors (the "Fiorella, Cignetti and Neuman Actions"). The Fiorella and Neuman
Actions, in identical complaints alleged that the Company's directors had
breached their fiduciary duties of good faith, fair dealing, loyalty and candor
by approving the Merger Agreement with WMS ("WMS Merger") instead of the
unsolicited tender offer transaction proposed by Alliance ("Alliance Proposal"),
by not properly exposing the Company for sale, and by failing to take all
reasonable steps to maximize stockholder value. These actions sought injunctions
to prevent the Company from proceeding with, consummating or closing the WMS
Merger, and to rescind it should it be consummated, as well as compensatory
damages. The Cignetti Action made similar allegations, and also alleged that
F-47
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
the Company had in place a shareholders' right plan, commonly know as a "poison
pill." The Cignetti Action sought an injunction requiring the Company to
negotiate with all bona fide parties or other potential acquirees or to conduct
an unencumbered market check in a manner designed to maximize shareholder value,
and preventing the Company from implementing any unlawful barriers to the
acquisition of the Company by any third party or taking other actions that would
lessen its attractiveness as an acquisition candidate. The Cignetti Action also
specifically requested an injunction barring triggering of the Company's alleged
"poison pill" until full consideration was given to the Alliance Proposal
(subsequently superseded by the execution of the Merger Agreement with
Alliance), and sought compensatory damages.
Also on or about June 19, 1995, a purported class action was filed in the
Delaware Court of Chancery by a Company stockholder against the Company and its
directors and Alliance (the "Strougo Action"). The Strougo Action alleged that
the Alliance Proposal (subsequently superseded by the execution of the Alliance
Merger Agreement) to acquire the Company stock was at a grossly unfair and
inadequate price; that the Company's directors had breached their fiduciary
duties by failing seriously to consider potential purchasers for the Company
other than Alliance; and that the transaction proposed by Alliance was wrongful,
unfair and harmful to the Company's public stockholders. The Strougo Action
sought a declaration that defendants had breached their fiduciary duties; an
injunction preventing the consummation of the Alliance transaction or requiring
its rescission; an order requiring defendants to permit a stockholders'
committee to participate in any process undertaken in connection with the sale
of the Company; and compensatory damages.
On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman
Actions and the Strougo Action (collectively, the "Stockholder Plaintiffs")
filed with the Court a motion to consolidate the four actions.
On or about July 27, 1995, certain of the Stockholder Plaintiffs filed an
amended complaint (the "Amended Fiorella Action") that adopted certain
allegations concerning self-dealing by the Company's directors in connection
with the WMS Merger; added a claim relating to the Company's alleged failure to
hold an annual meeting as required and added WMS as defendant. The Amended
Fiorella Action also alleged that the Company intended, in violation of Delaware
law, to sell Wulff without first seeking stockholder approval of the sale. The
action sought an order enjoining defendants from proceeding with, consummating
or closing the WMS Merger, or rescinding it if it closed; preventing the sale of
Wulff without prior stockholder approval; declaring invalid the Company's
agreement to pay WMS a fee if the WMS Merger is terminated by the Company in
certain circumstances; compelling an auction of the Company and the provision of
due diligence to Alliance; scheduling an immediate meeting of the Company
stockholders; and awarding compensatory damages. The Company believes these
lawsuits to be without merit and intends to vigorously defend these actions.
On October 23, 1995, WMS instituted a suit in New York State Court against
the Company for the Company's failure to pay $4.8 million upon termination of
the WMS Merger. The Company believes this lawsuit to be without merit and
intends to vigorously defend this action. On November 22, 1995, the Company
answered the complaint and brought counterclaims against WMS alleging that WMS
repudiated and breached the WMS Merger by, among other things, failing to act in
good faith toward the consummation of the WMS Merger, advising the Company that
it would not perform as agreed but would impose new conditions on the WMS
Merger, acting in excess of its authority and undermining the ability of the
Company to perform the WMS Merger. On February 8, 1996 WMS moved for summary
judgement. The Company's response to that action is presently due on March 15,
1996. Pursuant to the Merger Agreement, Alliance has agreed to indemnify the
directors and officers of the Company in certain circumstances.
In June 1995, BEC asserted that a certain agreement between BEC and the
Company (the "Non-compete Agreement") prohibits the use by the Company of the
tradename "Bally" if it is merged with a company that is in the casino business
within or without the United States and operates such business prior to January
8, 1999. The Company believes such a claim is entirely without merit since the
restriction referred
F-48
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
to expired on January 8, 1996 and in any event does not relate to the use of the
"Bally" tradename, which is covered by the License Agreement. The restriction in
the Non-compete Agreement will not have any impact on the combined company after
the Merger since the effective time of the Alliance Merger contemplates a
closing of the Alliance Merger after the restriction in the Non-compete
Agreement lapses. BEC has not reasserted this position since it was informed by
the Company in July 1995 that the restriction lapses on January 8, 1996.
Consequently, the Company believes BEC has determined not to contest the
Company's position.
On February 16, 1996, the Company received notice from BEC alleging that the
Company has violated the License Agreement by, among other things, granting to
Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which
provides Bally Gaming, Inc.'s revolving line of credit, a security interest in
general intangibles. In such notice, BEC also stated that as a result of the
foregoing, it was immediately terminating the License Agreement. The Company
does not believe that it has violated the terms of the License Agreement and the
Company will defend its position against BEC's claims.
BEC has also asserted that its permission is required for use of the "Bally"
tradename by any entity other than the Company and that a merger between the
Company and another company would violate the terms of the License Agreement.
The Company has denied these claims and believes that the surviving company in
the Alliance Merger will be permitted to use the "Bally" tradename in accordance
with the terms of such License Agreement. The Company believes that no breach of
such License Agreement is caused by the Alliance Merger and use of the "Bally"
tradename by the surviving corporation. In a letter dated November 9, 1995, BEC
reasserted its position. On November 20, 1995, Alliance, the Alliance Merger
Subsidiary and the Company commenced an action against BEC in Federal District
Court in Delaware seeking a declaratory judgment, among other things, that the
surviving company in the Alliance Merger will be permitted to use the "Bally"
tradename in accordance with the terms of the License Agreement, and seeking
injunctive relief (the "Alliance Action"). On November 28, 1995, BEC commenced
an action against the Company, Bally Gaming, Inc., Alliance and the Alliance
Merger Subsidiary in Federal District Court in New Jersey to enjoin the
defendants from using the "Bally" tradename (the "BEC Action"). The BEC Action
alleges that the Company's continued use of the tradename after the Alliance
Merger will (1) constitute a prohibited assignment of the Company's rights to
use the tradename and (2) exceed the scope of the license granted to the Company
because the Company will be under the control of Alliance. Also on November 28,
1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the
Alliance Action pending resolution of the BEC Action. On December 15, 1995 BEC
filed a motion to dismiss, transfer to New Jersey or stay the Alliance Action
pending resolution of the BEC Action. On December 15, 1995, BEC filed a motion
for a preliminary injunction in the BEC Action. At a hearing on January 17,
1996, the court declined to issue a preliminary injunction, but held BEC's
motion in abeyance pending the defendant's motion to dismiss and for summary
judgment, which defendants had filed on December 26, 1995. After a second
hearing on February 20, 1996 the court stated it would attempt to rule on both
motions in fourteen days. The Company, Bally Gaming Inc., Alliance and the
Alliance Merger Subsidiary intend to vigorously defend their position in these
actions.
In 1994, after an intensive federal investigation of Gaming's former
distributor, eighteen individuals were indicted on charges of racketeering and
fraud against Gaming and the Louisiana regulatory system. Among those indicted
were the former distributor's stockholders, directors, employees and others
alleged to be associated with organized crime. Fifteen entered pleas of guilty
before trial and the remaining three were convicted in October 1995. Gaming was
never a subject or target of the federal investigation.
Prior to the conclusion of the federal case, the Company's activities with
regard to its former VLT distributor in Louisiana were the subject of inquiries
by gaming regulators and a report by the New Jersey Division of Gaming
Enforcement ("DGE") dated August 24, 1995. The New Jersey Casino Control
Commission ("CCC") has indicated that it may hold a hearing on the matter, but
no date has been set at this time.
F-49
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The New Jersey report makes no specific recommendations for action by the CCC.
The gaming authorities in Ontario, Canada, who have investigated the matters,
have issued a gaming registration to the Company's subsidiary Bally Gaming, Inc.
on February 8, 1996.
The DGE's report is similar in many respects to one prepared by the
President of the Louisiana Economic Development and Gaming Corporation ("LEDGC")
in January 1995. Hearings on that report were held in January 1995 and on
February 7, 1995 the Board of Directors of the LEDGC found all of the
allegations in its President's report to be without merit and granted a license
to the Company and has announced that it will continue to monitor the Company's
conduct in light of any further information disclosed as a result of the trial
of the eighteen defendants (all of whom have now plead, or been found, guilty)
and other regulatory proceedings. In November 1995, the operator of the land
based casino in New Orleans filed for bankruptcy reorganization and ceased
operations. That action resulted in the termination of funding for the LEDGC
regulatory operations and, shortly thereafter, the Attorney General of Louisiana
took control of the agency and effectively closed its operations. LEDGC's
President and employees were dismissed. The foregoing occurred prior to the
completion of review of the Company's pending application.
The Company believes that the information contained in the DGE's report does
not differ in any material respect from the prior report to the LEDGC the
conclusions of which were found to be without merit in February 1995. An adverse
determination by a gaming regulator in any jurisdiction could result in the loss
of the Company's ability to do business in that jurisdiction. Further regulatory
scrutiny in other jurisdictions would be likely to follow. The Company would
appeal any adverse finding, as was the case when the Company successfully
appealed the LEDGC President's decision in January 1995.
On September 25, 1995, the Company was named as defendant in a class action
lawsuit filed in the United States District Court, District of Nevada, by Larry
Schreier on behalf of himself and all others similarly situated (the
"plaintiffs"). The plaintiffs filed suit against the Company and approximately
45 other defendants (each a "defendant," and collectively the "defendants").
Each defendant is involved in the gaming business as either a gaming machine
manufacturer, distributor, or casino operator. The class action lawsuit arises
out of alleged fraudulent marketing and operation of casino video poker machines
and electronic slot machines. The plaintiffs allege that the defendants have
engaged in a course of fraudulent and misleading conduct intended to induce
people in playing their gaming machines based on a false belief concerning how
those machines actually operate as well as the extent to which there is actually
an opportunity to win on any given play. The plaintiffs allege that the
defendants' actions constitute violations of the Racketeer Influenced and
Corrupt Organizations Act ("RICO") and give rise to claims of common law fraud
and unjust enrichment. The plaintiffs are seeking monetary damages in excess of
one billion dollars, and are asking that any damage awards be trebled under
applicable federal law. The Company believes the plaintiffs' lawsuit to be
without merit and intends to vigorously defend these actions.
While the ultimate results of the matters described above are not presently
known, management does not expect that the results will have a material adverse
effect on the Company's results of operations, financial position or cash flows.
The Company and its subsidiaries are from time to time also subject to
litigation incidental to the conduct of their business. The Company believes
that the results of such litigation and other pending legal proceedings will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
CONCENTRATION OF CREDIT RISK
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts and notes
receivable and customer obligations guaranteed by the Company.
F-50
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Product sales and the resulting receivables are concentrated in specific
legalized gaming regions. The Company also distributes its products through
third party distributors resulting in distributor receivables. At December 31,
1995 net accounts and notes receivable, including obligations of various
customers which are guaranteed by the Company, by region as a percentage to
total net receivables are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-----------------------------------------------------
WULFF GAMING SYSTEMS TOTAL
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Germany............................................... 47.0% --% --% 47.0%
Mississippi Riverboats................................ -- 9.5 -- 9.5
Other Riverboat Casinos............................... -- 1.3 -- 1.3
Nevada................................................ -- 15.0 1.8 16.8
Atlantic City......................................... -- 2.0 2.0 4.0
International......................................... -- 8.0 1.6 9.6
Louisiana............................................. -- 1.6 .1 1.7
New Mexico Indian Casinos............................. -- 5.6 .2 5.8
Other Indian Casinos.................................. -- 1.8 .3 2.1
Others individually less than 5%...................... -- 2.2 -- 2.2
--
--- --- -----
47.0% 47.0% 6.0% 100.0%
--
--
--- --- -----
--- --- -----
</TABLE>
Gaming's receivables and customer obligations guaranteed by Gaming and/or
the Company, from riverboat casinos and casinos on Indian land generally
represent sales to recently opened casinos and, in many cases, new customers to
Gaming. Approximately 43% of the accounts and notes receivable and customer
obligations guaranteed by the Company at December 31, 1995 relate to these
emerging markets including approximately 25% to three customers operating in
Mississippi. Receivables and customer obligations guaranteed by the Company from
emerging market customers contain increased risk factors compared to receivables
at Wulff or other traditional markets for Gaming.
In early 1995, the Governor of the State of New Mexico signed compacts with
certain Indian tribes to permit casino gaming on tribal lands in New Mexico.
These compacts went through appropriate federal approval processes and a number
of casinos began operating. In July 1995 the Supreme Court of New Mexico found
that the Governor did not have proper authority to sign the compacts. The Indian
tribes have filed a lawsuit in federal court to seek resolution to this issue.
Gaming and Systems had sold product to the Indian tribes prior to this ruling.
At December 31, 1995, the Company has $5.5 million in accounts and notes
receivable from an operator of two casinos for two different Indian tribes
including $2.1 million of trade receivables sold to a third party with recourse
to Gaming. This operator is currently four months ahead on payments. No
provision for doubtful accounts for this customer has been included in the
accompanying financial statements at December 31, 1995. Management believes the
receivable is properly valued at December 31, 1995. As events change during 1996
management will reevaluate its estimate of the realizability of the receivable.
CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements are presented to provide
information regarding Bally Gaming, Inc., as guarantor of the Senior Secured
Notes, and Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH, because
substantially all of the common stock of these entities is pledged as collateral
for the Senior Secured Notes. The results herein are presented by each legal
entity rather than by business segment as presented elsewhere in these financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations. Such business segment information of Bally Gaming, Inc.,
Automaten and Vertriebs includes an allocation of parent company revenues and
expenses whereas the following consolidating financial statements do not reflect
these allocations to the subsidiaries. The notes to consolidating financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto.
F-51
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY BALLY CONSOLIDATING BALLY GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
--------- --------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 1,362 $ 7,487 $ 355 $ -- $ -- $ 9,204
Accounts and notes receivable, net of
allowance for doubtful accounts of
$19, $5,659 and $6,604 for Automaten,
Vertriebs and Gaming................. 2,813 46,342 38,773 2,903 (6,199) 84,632
Inventories, net:
Raw materials and work-in-process... 5,063 -- 16,019 -- -- 21,082
Finished goods...................... 2,442 9,413 17,599 -- (1,077) 28,377
--------- --------- -------- -------- ------------- --------------
7,505 9,413 33,618 -- (1,077) 49,459
Other current assets.................. 1,446 2,957 650 196 (175) 5,074
--------- --------- -------- -------- ------------- --------------
Total current assets.............. 13,126 66,199 73,396 3,099 (7,451) 148,369
Long-term notes receivables, net of
allowance for doubtful accounts of $35
and $8,163 for Vertriebs and Gaming.... -- 1,186 4,372 -- -- 5,558
Long-term receivables from affiliate.... 23,314 -- -- 29,014 (52,328) --
Property, plant and equipment, at cost:
Land.................................. -- 332 1,025 -- -- 1,357
Buildings and leasehold
improvements......................... 1,648 7,705 9,909 -- -- 19,262
Machinery and equipment............... 11,174 7,072 8,390 -- -- 26,636
Furniture, fixtures and equipment..... 828 2,181 5,335 -- (2,269) 6,075
Less accumulated depreciation......... (11,615) (5,978) (11,844 ) -- 465 (28,972)
--------- --------- -------- -------- ------------- --------------
Property, plant and equipment,
net.............................. 2,035 11,312 12,815 -- (1,804) 24,358
Intangible assets, less accumulated
amortization of $197, $11,131, $69 and
$1,212 for Automaten, Vertriebs, Gaming
and Parent............................. -- 5,773 181 5,456 -- 11,410
Investment in subsidiaries.............. -- -- -- 90,766 (90,766) --
Other assets............................ 337 586 113 1,511 -- 2,547
--------- --------- -------- -------- ------------- --------------
$38,812 $85,056 $90,877 $129,846 $(152,349) $192,242
--------- --------- -------- -------- ------------- --------------
--------- --------- -------- -------- ------------- --------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable...................... $ 411 $ 4,064 $18,880 $ 891 $ (4,974) $ 19,272
Accrued liabilities and other
payables:
Compensation and benefit related
liabilities........................ 2,287 612 2,433 630 -- 5,962
Interest............................ -- -- -- 1,890 -- 1,890
Other............................... 1,461 4,065 4,495 186 (734) 9,473
--------- --------- -------- -------- ------------- --------------
3,748 4,677 6,928 2,706 (734) 17,325
Current maturities of long-term
debt................................. -- 13,756 1,350 894 -- 16,000
--------- --------- -------- -------- ------------- --------------
Total current liabilities......... 4,159 22,497 27,158 4,491 (5,708) 52,597
Long-term payables to affiliate......... -- 26,741 29,014 -- (55,755) --
10 3/8% Senior Secured Notes due 1998,
net of unamortized discount of $458.... -- -- -- 39,542 -- 39,542
Other long-term debt, less current
maturities............................. -- 5,006 7,927 1,287 -- 14,220
Commitments and contingencies
Stockholders' equity:
Preferred stock....................... -- -- -- -- -- --
Common stock.......................... 2,638 15,142 -- 107 (17,780) 107
Additional paid-in-capital............ 19,191 6,455 34,596 73,852 (66,336) 67,758
Retained earnings (accumulated
deficit)............................. 6,199 1,433 (7,818 ) 11,550 (6,129) 5,235
Cumulative translation adjustments.... 6,625 7,782 -- (206) (641) 13,560
Unearned compensation................. -- -- -- (777) -- (777)
--------- --------- -------- -------- ------------- --------------
Total stockholders' equity.......... 34,653 30,812 26,778 84,526 (90,886) 85,883
--------- --------- -------- -------- ------------- --------------
$38,812 $85,056 $90,877 $129,846 $(152,349) $192,242
--------- --------- -------- -------- ------------- --------------
--------- --------- -------- -------- ------------- --------------
</TABLE>
See accompanying notes.
F-52
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY
BALLY BALLY BALLY CONSOLIDATING GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,353 $ 3,240 $ 933 $ -- $ -- $ 5,526
Accounts and notes receivable, net of
allowance for doubtful accounts of $19,
$7,201, and $9,061 for Automaten, Vertriebs
and Gaming................................. 1,804 51,110 38,948 4,772 (9,458) 87,176
Inventories, net:
Raw materials and work-in-process........... 4,974 -- 11,092 -- -- 16,066
Finished goods.............................. 3,548 12,340 21,020 -- (1,383) 35,525
----------- ----------- --------- --------- ------------- -------------
8,522 12,340 32,112 -- (1,383) 51,591
Other current assets........................ 1,236 1,443 651 560 93 3,983
----------- ----------- --------- --------- ------------- -------------
Total current assets...................... 12,915 68,133 72,644 5,332 (10,748) 148,276
Long-term notes receivables, net of allowance
for doubtful accounts of $48 and $7,821 for
Vertriebs and Gaming......................... -- 1,654 8,327 -- -- 9,981
Long-term receivables from affiliate.......... 23,208 -- -- 28,380 (51,588) --
Property, plant and equipment, at cost:
Land........................................ -- 332 1,025 -- -- 1,357
Buildings and leasehold improvements........ 1,571 8,375 9,925 -- -- 19,871
Machinery and equipment..................... 11,913 9,617 8,798 -- -- 30,328
Furniture, fixtures and equipment........... 812 2,520 5,909 -- (3,079) 6,162
Less accumulated depreciation............... (12,964) (8,787) (13,587) -- 864 (34,474)
----------- ----------- --------- --------- ------------- -------------
Property, plant and equipment, net.......... 1,332 12,057 12,070 -- (2,215) 23,244
Intangible assets, less accumulated
amortization of $11,527, $94 and $2,099 for
Vertriebs, Gaming and Parent................. -- 6,089 156 4,569 -- 10,814
Investment in subsidiaries.................... -- -- -- 90,766 (90,766) --
Other assets.................................. 332 561 113 497 498 2,001
----------- ----------- --------- --------- ------------- -------------
$ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316
----------- ----------- --------- --------- ------------- -------------
----------- ----------- --------- --------- ------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 557 $ 6,386 $ 19,342 $ 31 $ (7,760) $ 18,556
Accrued liabilities and other payables:
Compensation and benefit related
liabilities.............................. 2,335 955 2,318 -- -- 5,608
Interest.................................. -- -- -- 1,890 -- 1,890
Other..................................... 1,472 3,546 4,293 617 (20) 9,908
----------- ----------- --------- --------- ------------- -------------
3,807 4,501 6,611 2,507 (20) 17,406
Current maturities of long-term debt........ -- 14,333 212 412 -- 14,957
----------- ----------- --------- --------- ------------- -------------
Total current liabilities................. 4,364 25,220 26,165 2,950 (7,780) 50,919
Long-term payables to affiliate............... -- 26,421 28,380 -- (54,801) --
10 3/8% Senior Secured Notes due 1998, net of
unamortized discount of $344................. -- -- -- 39,656 -- 39,656
Other long-term debt, less current
maturities................................... -- 4,721 9,435 1,175 -- 15,331
Commitments and contingencies
Stockholders' equity:
Preferred stock............................. -- -- -- -- -- --
Common stock................................ 2,638 15,142 -- 108 (17,780) 108
Additional paid-in-capital.................. 19,191 6,455 34,596 74,439 (66,336) 68,345
Retained earnings(accumulated deficit)...... 2,155 286 (5,273) 11,969 (7,295) 1,842
Cumulative translation adjustments.......... 9,439 10,249 7 (206) (827) 18,662
Unearned compensation....................... -- -- -- (547) -- (547)
----------- ----------- --------- --------- ------------- -------------
Total stockholders' equity................ 33,423 32,132 29,330 85,763 (92,238) 88,410
----------- ----------- --------- --------- ------------- -------------
$ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316
----------- ----------- --------- --------- ------------- -------------
----------- ----------- --------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-53
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales.............................. $ 42,437 $ 100,287 $ 59,709 $ -- $ (37,862) $ 164,571
Other.............................. 1,497 3,083 807 1,479 (2,730) 4,136
----------- ---------- ---------- --------- ------------- -------------
43,934 103,370 60,516 1,479 (40,592) 168,707
----------- ---------- ---------- --------- ------------- -------------
Costs and expenses:
Cost of sales...................... 26,937 81,611 51,888 -- (38,726) 121,710
Selling, general and
administrative.................... 6,737 19,608 24,498 6,531 (17) 57,357
Provision (credit) for doubtful
receivables....................... (13) 326 7,363 500 -- 8,176
----------- ---------- ---------- --------- ------------- -------------
33,661 101,545 83,749 7,031 (38,743) 187,243
----------- ---------- ---------- --------- ------------- -------------
Operating income (loss).............. 10,273 1,825 (23,233) (5,552) (1,849) (18,536)
Interest expense..................... 21 1,873 2,849 2,180 (2,499) 4,424
----------- ---------- ---------- --------- ------------- -------------
Income (loss) before income taxes and
extraordinary gain.................. 10,252 (48) (26,082) (7,732) 650 (22,960)
Provision (benefit) for income
taxes............................... 3,705 (557) 10 -- 1,084 4,242
----------- ---------- ---------- --------- ------------- -------------
Income (loss) before extraordinary
gain................................ 6,547 509 (26,092) (7,732) (434) (27,202)
Extraordinary gain on early
extinguishment of debt.............. -- -- 3,759 -- -- 3,759
----------- ---------- ---------- --------- ------------- -------------
Net income (loss).................... $ 6,547 $ 509 $ (22,333) $ (7,732) $ (434) $ (23,443)
----------- ---------- ---------- --------- ------------- -------------
----------- ---------- ---------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-54
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales............................. $ 47,419 $ 99,218 $ 130,452 $ -- $ (45,771) $ 231,318
Other............................. 1,189 3,578 776 2,856 (3,525) 4,874
----------- ---------- ---------- --------- ------------- -------------
48,608 102,796 131,228 2,856 (49,296) 236,192
----------- ---------- ---------- --------- ------------- -------------
Costs and expenses:
Cost of sales..................... 30,988 79,589 91,107 -- (44,625) 157,059
Selling, general and
administrative................... 6,656 19,408 28,135 5,862 (72) 59,989
Provision for doubtful
receivables...................... 11 1,894 3,858 -- -- 5,763
----------- ---------- ---------- --------- ------------- -------------
37,655 100,891 123,100 5,862 (44,697) 222,811
----------- ---------- ---------- --------- ------------- -------------
Operating income (loss)............. 10,953 1,905 8,128 (3,006) (4,599) 13,381
Interest expense.................. 2 1,648 3,871 4,486 (3,239) 6,768
----------- ---------- ---------- --------- ------------- -------------
Income (loss) before income taxes... 10,951 257 4,257 (7,492) (1,360) 6,613
Provision (benefit) for income
taxes.............................. 3,885 (1,019) 1,685 (1,465) (266) 2,820
----------- ---------- ---------- --------- ------------- -------------
Net income (loss)................... $ 7,066 $ 1,276 $ 2,572 $ (6,027) $ (1,094) $ 3,793
----------- ---------- ---------- --------- ------------- -------------
----------- ---------- ---------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-55
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY
BALLY BALLY CONSOLIDATING GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales............................ $ 52,263 $ 117,618 $ 127,985 $ -- $ (53,395) $ 244,471
Other............................ 889 3,477 1,155 2,911 (3,591) 4,841
----------- ---------- ---------- ---------- ------------- -------------
53,152 121,095 129,140 2,911 (56,986) 249,312
----------- ---------- ---------- ---------- ------------- -------------
Costs and expenses:
Cost of sales.................... 35,337 95,483 85,270 -- (52,959) 163,131
Selling, general and
administrative.................. 7,433 22,492 30,365 5,044 (45) 65,289
Provision for doubtful
receivables..................... -- 1,697 5,015 -- -- 6,712
Unusual charges.................. 799 1,038 125 3,854 -- 5,816
----------- ---------- ---------- ---------- ------------- -------------
43,569 120,710 120,775 8,898 (53,004) 240,948
----------- ---------- ---------- ---------- ------------- -------------
Operating income................... 9,583 385 8,365 (5,987) (3,982) 8,364
Interest expense................... 1 1,398 4,155 4,613 (3,314) 6,853
----------- ---------- ---------- ---------- ------------- -------------
Income (loss) before income
taxes............................. 9,582 (1,013) 4,210 (10,600) (668) 1,511
Provision (benefit) for income
taxes............................. 3,987 134 1,665 (1,380) 498 4,904
----------- ---------- ---------- ---------- ------------- -------------
Net income (loss).................. $ 5,595 $ (1,147) $ 2,545 $ (9,220) $ (1,166) $ (3,393)
----------- ---------- ---------- ---------- ------------- -------------
----------- ---------- ---------- ---------- ------------- -------------
</TABLE>
See accompanying notes.
F-56
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 6,547 $ 509 $ (22,333) $ (7,732) $ (434) $ (23,443)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Extraordinary gain on early extinguishment
of debt...................................... -- -- (3,759) -- -- (3,759)
Depreciation and amortization................. 1,609 2,466 2,221 1,557 250 8,103
Deferred income taxes......................... -- 163 -- -- -- 163
Provision for doubtful receivables............ (13) 326 7,363 500 -- 8,176
Provision for inventory valuation reserves.... -- -- 6,156 -- -- 6,156
(Gain) loss on disposals of property, plant
and equipment................................ (40) 15 89 -- -- 64
Changes in operating assets and liabilities:
Accounts and notes receivable............... 6,842 (3,384) (15,213) (957) (4,936) (17,648)
Inventories................................. (2,987) 3,411 (15,290) -- (211) (15,077)
Other current assets........................ (824) 481 126 (423) (894) (1,534)
Accounts payable and accrued liabilities.... (2,759) (5,814) 12,060 423 5,807 9,717
Other........................................... -- -- -- -- (466) (466)
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) operating
activities................................. 8,375 (1,827) (28,580) (6,632) (884) (29,548)
----------- ----------- ----------- --------- ------------- -------------
Cash flows from investing activities:
Net assets of distribution business acquired.... -- (8,382) -- -- -- (8,382)
Purchases of property, plant and equipment...... (1,541) (3,298) (1,628) -- -- (6,467)
Proceeds from disposals of property, plant and
equipment...................................... 57 585 449 -- -- 1,091
Other........................................... -- -- 110 -- 241 351
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) investing
activities................................. (1,484) (11,095) (1,069) -- 241 (13,407)
----------- ----------- ----------- --------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured Notes.... -- -- -- 40,000 -- 40,000
Net change in lines of credit..................... -- 20,825 5,667 2,219 -- 28,711
Repayments of long-term debt...................... -- (7,376) (415) (21,970) -- (29,761)
Change in payables to/receivables from
affiliates....................................... -- -- 21,170 (21,813) 643 --
Exercise of stock warrants........................ -- -- -- 30 -- 30
Intercompany dividends............................ (8,167) -- -- 8,167 -- --
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) financing
activities................................. (8,167) 13,449 26,422 6,633 643 38,980
Effect of exchange rate changes on cash........... (69) (320) -- -- -- (389)
----------- ----------- ----------- --------- ------------- -------------
Increase (decrease) in cash and cash
equivalents...................................... (1,345) 207 (3,227) 1 -- (4,364)
Cash and cash equivalents, beginning of period.... 1,844 4,400 3,556 -- -- 9,800
----------- ----------- ----------- --------- ------------- -------------
Cash and cash equivalents, end of period.......... $ 499 $ 4,607 $ 329 $ 1 $ -- $ 5,436
----------- ----------- ----------- --------- ------------- -------------
----------- ----------- ----------- --------- ------------- -------------
Supplemental cash flows information:
Operating activities include cash payments
(receipts) for interest and income taxes as
follows:
Interest paid................................. $ 22 $ 942 $ 327 $ 1,619 $ -- $ 2,910
Income taxes paid (received).................. 5,732 1,077 -- (355) -- 6,454
Investing activities exclude the following
non-cash activities:
Exchange of income tax receivable for
intangible assets and equipment.............. -- -- 454 1,515 -- 1,969
Financing activities exclude the following
non-cash activities:
Issuance of restricted stock awards........... -- -- -- 1,150 -- 1,150
</TABLE>
SEE ACCOMPANYING NOTES.
F-57
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 7,066 $ 1,276 $ 2,572 $ (6,027) $ (1,094) $ 3,793
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation and amortization............... 2,556 2,491 1,974 1,342 (92) 8,271
Deferred income taxes....................... (415) (56) -- -- 175 (296)
Provision for doubtful receivables.......... 11 1,894 3,858 -- -- 5,763
Provision for inventory valuation........... -- -- 2,230 -- -- 2,230
(Gain) loss on disposals of property, plant
and equipment.............................. -- 6 (89) -- -- (83)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts and notes receivable............. (2,237) (3,099) (9,783) (644) (60) (15,823)
Inventories............................... 1,096 476 (5,573) -- 112 (3,889)
Other current assets...................... 286 (1,711) 139 572 1 (713)
Accounts payable and accrued
liabilities.............................. 1,708 (342) 2,396 (912) (120) 2,730
Other....................................... 450 (759) -- 183 (633) (759)
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) operating
activities............................. 10,521 176 (2,276) (5,486) (1,711) 1,224
----------- ----------- ----------- --------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.... (3,086) (4,363) (2,088) -- -- (9,537)
Proceeds from disposals of property, plant and
equipment.................................... -- 1,414 335 -- -- 1,749
Other......................................... -- -- 268 -- 1,129 1,397
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) investing
activities............................. (3,086) (2,949) (1,485) -- 1,129 (6,391)
----------- ----------- ----------- --------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in lines of credit................. -- 16,192 4,419 812 -- 21,423
Repayments of long-term debt.................. -- (11,675) (704) (813) -- (13,192)
Change in payables to/receivables from
affiliates................................... -- -- 72 (654) 582 --
Dividends to/from affiliate................... (6,654) 514 -- 6,140 -- --
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) financing
activities............................. (6,654) 5,031 3,787 5,485 582 8,231
Effect of exchange rate changes on cash....... 82 622 -- -- -- 704
----------- ----------- ----------- --------- ------------- -------------
Increase (decrease) in cash and cash
equivalents.................................. 863 2,880 26 (1) -- 3,768
Cash and cash equivalents, beginning of
year......................................... 499 4,607 329 1 -- 5,436
----------- ----------- ----------- --------- ------------- -------------
Cash and cash equivalents, end of year........ $ 1,362 $ 7,487 $ 355 $ -- $ -- $ 9,204
----------- ----------- ----------- --------- ------------- -------------
----------- ----------- ----------- --------- ------------- -------------
SUPPLEMENTAL CASH FLOWS INFORMATION:
Operating activities include cash payments
(receipts) for interest and income taxes as
follows:
Interest paid............................... $ 3 $ 981 $ 789 $ 4,199 $ -- $ 5,972
Income taxes paid (received)................ 4,038 (105) 12 75 -- 4,020
INVESTING ACTIVITIES EXCLUDE THE FOLLOWING
NON-CASH ACTIVITIES:
Capital contribution to affiliate........... -- -- -- (5,492) -- (5,492)
Long-term note received from sale of
assets..................................... -- -- 517 -- -- 517
FINANCING ACTIVITIES EXCLUDE THE FOLLOWING
NON-CASH ACTIVITIES:
Capital contribution from affiliate......... 899 4,593 -- -- -- 5,492
Issuance of Company common stock under
compensation agreement..................... -- -- -- 222 -- 222
Issuance of note payable for license
agreement.................................. -- -- -- 1,465 -- 1,465
</TABLE>
See accompanying notes.
F-58
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 5,595 $ (1,147) $ 2,545 $ (9,220) $ (1,166) $ (3,393)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation and amortization............... 2,602 3,120 2,029 1,312 (110) 8,953
Deferred income taxes....................... -- 63 -- -- (841) (778)
Provision for doubtful receivables.......... -- 1,697 5,015 -- -- 6,712
Provision for inventory valuation........... -- -- 1,955 -- -- 1,955
Provision for writedown of building to be
sold....................................... -- 812 -- -- -- 812
(Gain) loss on disposals of property, plant
and equipment.............................. (17) 67 (2) -- -- 48
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts and notes receivable............... 1,223 (2,855) (8,672) -- -- (10,304)
Inventories................................. (393) (2,140) 142 -- 224 (2,167)
Other current assets........................ (119) 1,763 (1) (364) -- 1,279
Accounts payable and accrued liabilities.... 239 1,240 (1,235) (1,139) 1,473 578
Other, net.................................... (1) (402) 7 819 (323) 100
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) operating
activities............................... 9,129 2,218 1,783 (8,592) (743) 3,795
----------- ----------- ----------- --------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment.................................... (1,694) (5,468) (1,078) -- -- (8,240)
Proceeds from disposals of property, plant and
equipment.................................... 24 1,728 5 -- -- 1,757
Other......................................... -- -- (10) -- 260 250
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) investing
activities............................... (1,670) (3,740) (1,083) -- 260 (6,233)
----------- ----------- ----------- --------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in lines of credit................. -- (1,273) 1,632 -- -- 359
Repayments of long-term debt.................. -- (2) (2,287) (620) 1 (2,908)
Change in payables to/receivables from
affiliates................................... 2,058 (2,058) 533 (1,015) 482 --
Exercise of stock options..................... -- -- -- 588 -- 588
Dividends to/from affiliates.................. (9,639) -- -- 9,639 -- --
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) financing
activities............................... (7,581) (3,333) (122) 8,592 483 (1,961)
Effect of exchange rate changes on cash....... 113 608 -- -- -- 721
----------- ----------- ----------- --------- ------------- -------------
Increase (decrease) in cash and cash
equivalents.................................. (9) (4,247) 578 -- -- (3,678)
Cash and cash equivalents, beginning of
period....................................... 1,362 7,487 355 -- -- 9,204
----------- ----------- ----------- --------- ------------- -------------
Cash and cash equivalents, end of period...... $ 1,353 $ 3,240 $ 933 $ -- $ -- $ 5,526
----------- ----------- ----------- --------- ------------- -------------
----------- ----------- ----------- --------- ------------- -------------
SUPPLEMENTAL CASH FLOWS INFORMATION:
OPERATING ACTIVITIES INCLUDE CASH PAYMENTS
(RECEIPTS) FOR INTEREST AND INCOME TAXES AS
FOLLOWS:
Interest paid............................... $ 1 $ 1,335 $ 1,178 $ 4,374 $ -- $ 6,888
Income taxes paid (refunded), net........... 3,104 (1,694) 85 306 -- 1,801
</TABLE>
See accompanying notes.
F-59
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
These notes to consolidating financial statements should be read in
conjunction with the consolidated financial statements and notes thereto.
Certain reclassifications have been made to prior years' financial
statements to conform with the 1995 presentation.
Hereafter, references to the Company are to the subsidiaries of Bally Gaming
International, Inc.
RESEARCH AND DEVELOPMENT
The Company expenses product research and development costs as incurred.
Research and development costs for the years ended December 31, 1993, 1994 and
1995 were:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. INC.
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1993................................... $ 3,350 $ -- $ 4,440 $ 7,790
----------- ----- ------ ------
----------- ----- ------ ------
1994................................... $ 3,546 $ -- $ 5,199 $ 8,745
----------- ----- ------ ------
----------- ----- ------ ------
1995................................... $ 3,561 $ -- $ 5,639 $ 9,200
----------- ----- ------ ------
----------- ----- ------ ------
</TABLE>
ACCOUNTS AND NOTES RECEIVABLE
The following table represents, at December 31, 1995, scheduled collections
of accounts and notes receivable (net of allowances for doubtful accounts) by
year:
<TABLE>
<CAPTION>
CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF BALLY AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS GAMING, INC. PARENT ADJUSTMENTS INC.
----------- ----------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1996.................... $ 1,804 $ 51,110 $ 38,948 $ 4,772 $ (9,458) $ 87,176
1997.................... -- 1,464 6,786 -- -- 8,250
1998.................... -- 190 1,541 -- -- 1,731
----------- ----------- ------------ --------- ------------- -------------
$ 1,804 $ 52,764 $ 47,275 $ 4,772 $ (9,458) $ 97,157
----------- ----------- ------------ --------- ------------- -------------
----------- ----------- ------------ --------- ------------- -------------
</TABLE>
LONG-TERM DEBT
Aggregate annual maturities of long-term debt for the five years after
December 31, 1995 are:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY GAMING, INTERNATIONAL,
VERTRIEBS INC. PARENT INC.
----------- ------------- --------- -------------
<S> <C> <C> <C> <C>
1996..................................... $ 14,333 $ 212 $ 412 $ 14,957
1997..................................... 1,572 9,435 456 11,463
1998..................................... 3,149 -- 40,468 43,617
1999..................................... -- -- 251 251
2000..................................... -- -- -- --
----------- ------ --------- -------------
Total.................................... $ 19,054 $ 9,647 $ 41,587 $ 70,288
----------- ------ --------- -------------
----------- ------ --------- -------------
</TABLE>
F-60
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
OTHER REVENUES
Other revenues for the year ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- --------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest............................. $ 294 $ 2,932 $ 608 $ 2,943 $ (3,239) $ 3,538
Currency transaction gain (loss)..... 3 52 2 (87) -- (30)
Other................................ 892 594 166 -- (286) 1,366
----------- ----------- ----- --------- ------------- ------
$ 1,189 $ 3,578 $ 776 $ 2,856 $ (3,525) $ 4,874
----------- ----------- ----- --------- ------------- ------
----------- ----------- ----- --------- ------------- ------
</TABLE>
Other revenues for the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
------------- ----------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest............................. $ 362 $ 2,626 $ 962 $ 2,979 $ (3,314) $ 3,615
Currency transaction gain (loss)..... -- 62 (29) (68) (18) (53)
Other................................ 527 789 222 -- (259) 1,279
----- ----------- ------ --------- ------------- ------
$ 889 $ 3,477 $ 1,155 $ 2,911 $ (3,591) $ 4,841
----- ----------- ------ --------- ------------- ------
----- ----------- ------ --------- ------------- ------
</TABLE>
UNUSUAL CHARGES
During the year ended December 31, 1995, Parent and Bally Gaming, Inc.
incurred approximately $3.9 million and $.1 million, respectively, in legal,
accounting, investment banking, public and investor relations and printing costs
in connection with the merger agreement with WMS Industries, Inc., which has
since been terminated, Alliance's tender offer and consent solicitation and the
pending Alliance Merger. All of these costs have been expensed as incurred. Such
costs will continue to be incurred in 1996.
During the fourth quarter of 1995, Vertriebs recorded a non-recurring charge
of $.8 million to writedown to net realizable value a building to be sold. The
provision was based on a strategic decision to sell the building as Wulff's
other distribution offices adequately covered the geographic region that would
have been served by this facility.
During 1995, Wulff increased the amount of value added tax reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million. The Company has accrued the liability as, based on current
developments, the Company's estimate of the ultimate outcome and its experience
in contesting these matters, it is probable that a liability has been incurred
and a range of costs can be reasonably estimated. As the scope of the liability
is better determined, there could be changes in the estimate of the ultimate
liability. Management believes that the preliminary proposed adjustments are
without merit and the ultimate results of the audit will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
F-61
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum lease
payments at December 31, 1995 under operating leases that have initial or
remaining lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. INC.
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1996............................................. $ 608 $ 1,610 $ 918 $ 3,136
1997............................................. 608 1,505 640 2,753
1998............................................. -- 1,157 597 1,754
1999............................................. -- 878 483 1,361
2000............................................. -- 680 441 1,121
Thereafter....................................... -- 767 1,077 1,844
----------- ----------- ------ -------------
$ 1,216 $ 6,597 $ 4,156 $ 11,969
----------- ----------- ------ -------------
----------- ----------- ------ -------------
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 was:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT INC.
------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1993..................................... $ 680 $ 1,519 $ 405 $ -- $ 2,604
----- ----------- ------ ----- ------
----- ----------- ------ ----- ------
1994..................................... $ 621 $ 1,604 $ 487 $ -- $ 2,712
----- ----------- ------ ----- ------
----- ----------- ------ ----- ------
1995..................................... $ 615 $ 1,731 $ 1,221 $ 2 $ 3,569
----- ----------- ------ ----- ------
----- ----------- ------ ----- ------
</TABLE>
F-62
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------- -------------------- --------------------
1994 1995 1994 1995 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
Revenues................................. $ 61.7 $ 68.3 $ 58.9 $ 69.2 $ 49.3 $ 51.5 $ 66.3 $ 60.3
Gross profit............................. 19.4 24.8 17.6 23.9 16.3 17.7 25.8 19.8
Operating income (loss).................. 4.0 6.7 2.7 4.6 1.2 (1.3) 5.5 (1.6)
Net income (loss)........................ 1.3 2.8 1.6 1.1 (1.4) (3.8) 2.2 (3.5)
Net income (loss) per share of common
stock................................... $ 0.12 $ 0.27 $ 0.15 $ 0.10 $ (0.13) $ (0.35) $ 0.21 $ (0.33)
WULFF
Revenues................................. $ 29.1 $ 36.0 $ 21.4 $ 35.5 $ 26.4 $ 27.0 $ 34.2 $ 32.2
Gross profit............................. 10.0 12.4 5.6 11.9 8.9 9.3 14.5 8.9
Operating income (loss).................. 2.5 3.8 (0.4) 3.0 2.5 0.8 4.6 (2.0)
Net income (loss)........................ 1.1 1.4 (0.1) 1.0 1.3 (0.3) 3.0 (2.4)
GAMING
Revenues................................. $ 30.2 $ 28.0 $ 35.0 $ 33.0 $ 21.4 $ 24.0 $ 31.3 $ 23.4
Gross profit............................. 7.4 8.6 9.2 9.0 5.2 7.0 9.2 5.9
Operating income (loss).................. 1.0 1.0 1.8 0.6 (1.8) (1.6) 0.6 (2.2)
Net income (loss)........................ (0.3) (0.6) 0.4 (0.9) (3.2) (3.0) (1.1) (3.7)
SYSTEMS
Revenues................................. $ 3.0 $ 6.1 $ 4.3 $ 4.2 $ 2.8 $ 2.4 $ 3.3 $ 8.0
Gross profit............................. 2.0 3.9 2.8 3.0 2.2 1.5 2.1 5.0
Operating income......................... 0.5 2.1 1.3 1.0 0.5 (0.5) 0.3 2.6
Net income............................... 0.5 2.1 1.3 1.0 0.5 (0.5) 0.3 2.6
</TABLE>
F-63
<PAGE>
Facsimile copies of the Letter of Transmittal will be accepted. Letters of
Transmittal, certificates for the Old Convertible Debentures and any other
required documents should be sent by each debentureholder or his broker, dealer,
commercial bank, trust company or other nominee to the Exchange Agent at one of
the addresses set forth below:
THE EXCHANGE AGENT:
<TABLE>
<S> <C> <C>
By Regular Mail: By Hand Delivery: By Overnight Delivery:
By Facsimile:
Toll Free Number
</TABLE>
Any questions or requests for assistance or additional copies of this
Prospectus, the Letter of Transmittal and/or the Notice of Guaranteed Delivery
may be directed to the Information Agent at its telephone number and address set
forth below. You may also contact your broker, dealer, commercial bank or trust
company or other nominee for assistance concerning the Exchange Offers.
THE INFORMATION AGENT IS:
(LOGO)
OTHERS CALL TOLL-FREE:
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of the Company's Articles of Incorporation limits the liability
of the Company's directors and officers. It provides that a director or officer
of the Company will not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director or officer,
except for liability (i) for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law or (ii) for the payment of
dividends in violation of Section 78.300 of the Nevada General Corporation Law.
It also provides that any repeal or modification of the foregoing provision of
the stockholders of the Company will be prospective only, and will not adversely
affect any limitation on the personal liability of a director or officer of the
Company existing at the time of such repeal or modification.
Section 78.300 of the Nevada General Corporation Law provides:
1. The directors of a corporation shall not make dividends or other
distributions to stockholders except as provided by such section.
2. In case of any willful or grossly negligent violation of the
provisions of such section, the directors under whose administration
the violation occurred, except those who caused their dissent to be entered
upon the minutes of the meeting of the directors at the time, or who not
then being present caused their dissent to be entered on learning of such
action, are jointly and severally liable, at any time within 3 years after
each violation, to the corporation, and, in the event of its dissolution or
insolvency, to its creditors at the time of the violation, or any of them,
to the lesser of the full amount of the dividend made or of any loss
sustained by the corporation by reason of the dividend or other distribution
to stockholders.
However, Section 78.751 of the Nevada General Corporation Law permits the
Registrant to indemnify its directors and officers as follows:
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except any action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit
or proceeding if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, has no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and that, with respect to any criminal action or proceeding, he
had reasonable cause to believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually
and reasonably incurred by him in connection with the defense or settlement
of the action or suit if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter
as to which such a person has been
II-1
<PAGE>
adjudged by a court of competent jurisdiction, after exhaustion of all
appeals therefrom, to be liable to the corporation or for amounts paid in
settlement to the corporation, unless and only to the extent that the court
in which the action or suit was brought or other court of competent
jurisdiction determines, upon application, that in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in subsections 1 and 2, or in
defense of any claim, issue or matter herein, he must be indemnified by the
corporation against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
4. Any indemnification under subsections 1 and 2, unless offered by a
court or advanced pursuant to subsection 5, must be made by the
corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper
in the circumstances. The determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit
or proceeding;
(c) If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by
independent legal counsel in a written opinion; or
(d) If a quorum of directors who were not parties to the act,
suit or proceeding so orders, by independent legal counsel in
a written opinion.
5. The articles of incorporation, the bylaws or an agreement made by the
corporation may provide that the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of the director or officer to repay the amount
if it is ultimately determined by a court of competent jurisdiction that he
is not entitled to be indemnified by the corporation. The provisions of this
subsection do not affect any rights to advancement of expenses to which
corporate personnel other than directors or officers may be entitled under
any contract or otherwise by law.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <C> <S>
Exhibit 2.1 -- Amended and Restated Agreement and Plan of Merger among Alliance, BGII
Acquisition Corp. and BGII, dated as of October 18, 1995 (included as Annex I
to the Joint Proxy Statement/Prospectus).
2.2 -- Mutual Waiver to Agreement and Plan of Merger dated as of April 17, 1996.(24)
2.3 -- 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)
2.4 -- 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)
2.5 -- Asset Purchase Agreement between Plantation Investments, Inc. and Richards-
Schnack Development Corp. dated April 2, 1990.(1)
2.6 -- First Amendment to Agreement of Purchase and Sale between Plantation
Investments, Inc. and Richards-Schnack Development Corp.(1)
2.7 -- Bill of Sale between Plantation Investments, Inc. and Richards-Schnack
Development Corp.(1)
2.8 -- Consolidation Agreement, dated March 29, 1995 among Alliance, United Gaming
Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow
Development Corporation and Leigh Seippel and John A. Barrett, Jr.(23)
3.1 -- Restated Articles of Incorporation of the Registrant, as amended.(16)
3.2 -- Revised By-Laws of the Registrant.(20)
4.1 -- Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Special Stock and Qualifications,
Limitations and Restrictions thereof of 15% Non-Voting Junior Special Stock,
Series B, $.10 par value, of Alliance Gaming Corporation
4.2 -- Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Special Stock and Qualifications,
Limitations and Restrictions thereof of 15% Non-Voting Junior Special Stock,
Series E, par value $.10 per share, of Alliance Gaming Corporation.(24)
4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his
loan commitment with Video Services, Inc.(6)
4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and
NationsBank of Texas, N.A., as Trustee in respect of Alliance'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)
4.7 -- Indenture, dated as of , 1996, by and among Alliance Gaming
Corporation and the Bank of New York in respect of Alliance's 7 1/2%
Convertible Subordinated Debentures due 2002.(24)
5 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey
8 -- Opinion of Milbank, Tweed, Hadley & McCloy
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <C> <S>
10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc.,
Video Services, Inc. and Alfred H. Wilms.(6)
10.2 -- Lease, dated August 3, 1988, as amended April 6, 1989, from Walter Schwartz
to Alliance for Alliance's Corporate headquarters building at 4380 Boulder
Highway, Las Vegas, Nevada.(2)
10.3 -- Employment Agreement between United Gaming, Inc. and Ira S. Levine.(13)
10.4 -- Amendment to Employment Agreement between United Gaming, Inc. and Ira S.
Levine.(21)
10.5 -- Employment Agreement between United Gaming, Inc. and John W. Alderfer.(13)
10.6 -- 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. and
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)
10.11 -- 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)
10.12 -- 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)
10.13 -- 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)
10.14 -- 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 -- Amendment to Stockholders Agreement dated as of October 20, 1994.(16)
10.16 -- Selling Stockholder Letter Agreement dated as of March 20, 1995.(22)
10.17 -- 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)
10.18 -- Confidential Separation and Consulting Agreement with Carole A. Carter
(including mutual release) dated July 15, 1993.(9)
10.19 -- Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993.(9)
10.20 -- Amendment to Executive Severance Agreement with Shannon L. Bybee dated July
15, 1993.(20)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <C> <S>
10.21 -- Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett,
Jr. and Leigh Seippel to United Gaming, Inc.(12)
10.22 -- 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)
10.23 -- 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)
10.24 -- 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)
10.25 -- Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc.,
Capital Gaming International, Inc. and I.G.Davis, Jr.(15)
10.26 -- Loan and Security Agreement, dated as of August 2, 1993, between United
Gaming, Inc., Alfred H. Wilms and Video Services, Inc.(16)
10.27 -- Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc.
and Alfred H. Wilms.(16)
10.28 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United
Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.(16)
10.29 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United
Gaming, Inc. and Oppenheimer & Co. Inc.(16)
10.30 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United
Gaming, Inc. and L.H. Friend, Weinress & Frankson, Inc.(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 -- Consulting Agreement, dated as of November 8, 1993, between David A.
Scheinman and United Gaming, Inc.(16)
10.33 -- 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)
10.34 -- Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc.,
The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel.(18)
10.35 -- 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)
10.36 -- 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)
10.37 -- 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)
10.38 -- Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as
of July 8, 1994.(19)
10.39 -- Second Amended and Restated Agreement of Limited Partnership, dated March 29,
1995, between United Gaming Rainbow and RCC.(23)
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <C> <S>
10.40 -- Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc.
to The Rainbow Casino Corporation.(19)
10.41 -- Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc.
to The Rainbow Casino Corporation.(19)
10.42 -- Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and
Leigh Seippel to United Gaming, Inc.(19)
10.43 -- 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)
10.44 -- Employment Agreement between United Gaming, Inc. and Johnann McIlwain.(20)
10.45 -- Settlement Agreement, dated December 4, 1994, by and among Alliance, United
Gaming of Iowa, Inc., GDREC and Joseph and Paula Zwack.(16)
10.46 -- Employment Agreement, dated August 15, 1994, between Alliance and Steve
Greathouse.(22)
10.47 -- Warrant Agreement, dated August 15, 1994, between Alliance and Steven
Greathouse.(22)
10.48 -- Agreement, dated September 1, 1994, between Alliance and Craig Fields.(22)
10.49 -- Warrant Agreement, dated September 1, 1994, between Alliance and Craig
Fields.(22)
10.50 -- Agreement, dated March 20, 1995, between Alliance and Joel Kirschbaum.(22)
10.51 -- 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)
10.52 -- Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming
Rainbow.(23)
10.53 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming
Rainbow.(23)
10.54 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming
Mississippi, Inc.(23)
10.55 -- Release, dated March 29, 1995, by United Gaming Rainbow and Alliance and
their affiliates of RCC, Rainbow Development Corporation, John A. Barrett,
Jr. and Leigh Seippel and their affiliates (other than RCVP).(23)
10.56 -- 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 Alliance and their affiliates.(23)
12. -- Ratio of Earnings to Combined Fixed Charges
21.1 -- Consent of Schreck, Jones, Bernhard, Woloson & Godfrey (included in Exhibit
5).
21.2 -- Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibit 8).
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
24 -- Power of Attorney.
25 -- A statement of eligiblity and qualification of The Bank of New York
designated to act as trustee on Form T-1.(24)
99.1 -- Form of Letter of Transmittal(24)
</TABLE>
II-6
<PAGE>
<TABLE>
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99.2 -- Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9.(24)
99.3 -- Form of Letter from Alliance Gaming Corporation to Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees.(24)
99.4 -- Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees to their Clients.(24)
99.5 -- Form of Notice of Guaranteed Delivery.(24)
</TABLE>
- ------------------------
(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 Form 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 Registrant'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)To be filed by amendment.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-7
<PAGE>
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in response to Item 15, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-8
<PAGE>
The registrant and each person whose signature appears below hereby
authorizes John W. Alderfer, David D. Johnson, and Steve Greathouse (the
"Agents") to file one or more amendments (including post-effective amendments)
to the Registration Statement, which amendments may make such changes in the
registration statement as such Agent deems appropriate and the registrant and
each such person hereby appoints each such Agent as attorney-in-fact to execute
in the name and on behalf of the registrant and each such person, individually
and in each capacity stated below, any such amendments to the Registration
Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Alliance Gaming
Corporation has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on April 24, 1996.
ALLIANCE GAMING CORPORATION
By: /S/ JOHN W. ALDERFER
-----------------------------------
John W. Alderfer
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
/s/ STEVE GREATHOUSE Chairman of the Board of April 24, 1996
------------------------------------------- Directors, President and
Steve Greathouse Chief Executive Officer
(Principal Executive Officer)
/s/ JOHN W. ALDERFER Senior Vice President April 24, 1996
------------------------------------------- Treasurer and Chief
John W. Alderfer Financial Officer (Principal
Financial and Accounting
Officer)
/s/ ANTHONY DICESARE Director and Executive April 24, 1996
------------------------------------------- Vice President
Anthony DiCesare
/s/ DR. CRAIG FIELDS Director (Vice Chairman April 24, 1996
------------------------------------------- of the Board)
Dr. Craig Fields
/s/ JOEL KIRSCHBAUM Director April 24, 1996
-------------------------------------------
Joel Kirschbaum
/s/ ALFRED H. WILMS Director April 24, 1996
-------------------------------------------
Alfred H. Wilms
/s/ DAVID ROBBINS Director April 24, 1996
-------------------------------------------
David Robbins
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- --------------------------------------------------------------------------------------------- -----
<C> <C> <S> <C>
<CAPTION>
.*11 -- Form of Common Stock Underwriting Agreement.
<C> <C> <S> <C>
*1.2 -- Form of Preferred Stock Underwriting Agreement.
*1.3 -- Form of Senior Secured Note Underwriting Agreement.
*2.1 -- Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of
October 18, 1995, as amended and restated.
2.2 -- 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 (incorporated
herein by reference to Alliance's Form 8-K dated October 29, 1993).
2.3 -- 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 (incorporated
herein by reference to Alliance's Form 8-K dated November 5, 1993).
2.4 -- Consolidation Agreement, dated March 29, 1995 among Alliance, United Gaming Rainbow, Inc.,
RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development Corporation and Leigh
Seippel and John A. Barrett, Jr. (incorporated herein by reference to Alliance's Form 8-K
dated March 29, 1995).
2.5 -- Offer to Purchase Common Shares of Bally Gaming International, Inc., dated July 28, 1995
(incorporated herein by reference to Alliance's Schedule 14D-1 and Schedule 13D dated July
28, 1995).
3.1 -- Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by
reference to Alliance's Form S-2, Registration Number 33-72990, and subsequent amendments
thereto).
3.2 -- Revised By-Laws of the Registrant (incorporated herein by reference to Alliance's Form 10-K
for the year ended June 30, 1994).
*4.1 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of
15% Non-Voting Junior Special Stock, Series B.
*4.2 -- Form of Certificate evidencing 15% Non-Voting Junior Special Stock, Series B.
4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan commitment
with Video Services, Inc. (incorporated herein by reference to Alliance's Form 8-K dated
March 31, 1992).
4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and NationsBank of
Texas, N.A., as Trustee in respect of Alliance's 7 1/2% Convertible Subordinated Debentures
due 2003 (incorporated herein by reference to Alliance's Form S-2, Registration Number
33-72990, and subsequent amendments thereto).
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. (incorporated herein by reference to Alliance's Form S-2,
Registration Number 33-72990, and subsequent amendments thereto).
*4.7 -- Form of Senior Secured Indenture (including form of Note and Guarantee).
*4.8 -- Form of Collateral Documents.
*5 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey as to legality of the securities being
registered.
*8 -- Opinion of Milbank, Tweed, Hadley & McCloy.
10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video Services,
Inc. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated March
31, 1992).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- --------------------------------------------------------------------------------------------- -----
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10.2 -- Lease, dated August 3, 1988, as amended April 6, 1989, from Walter Schwartz to Alliance for
Alliance's corporate headquarters building at 4380 Boulder Highway, Las Vegas, Nevada
(incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1989).
10.3 -- Employment Agreement between United Gaming, Inc. and John W. Alderfer (incorporated herein by
reference to Alliance's Form 10-Q for the quarter ended March 31, 1993).
10.4 -- Amendment to Employment Agreement between United Gaming, Inc. and John W. Alderfer
(incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994).
10.5 -- Letter Agreement dated June 25, 1993 among United Gaming, Inc. and 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 Preferred Stock), Exhibit D (Form of Warrant Agreement), and Exhibit E
(Form of press release) thereto (incorporated herein by reference to Alliance's Form 8-K
dated June 25, 1993).
10.6 -- 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 (incorporated herein by reference to
Alliance's Form 8-K dated June 25, 1993).
10.7 -- United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (incorporated herein by
reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number
33-75308).
10.8 -- Gaming and Technology, Inc. 1984 Employee Stock Option Plan (incorporated herein by reference
to Alliance's Form S-8 Registration Number 2-98777).
10.9 -- 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 (incorporated herein by reference to Alliance's Form 8-K dated
September 21, 1993).
10.10 -- 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 (incorporated herein by reference to Alliance's Form 8-K dated
September 21, 1993).
10.11 -- 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 (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993).
10.12 -- 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 (incorporated herein by reference to Alliance's Form 8-K
dated September 21, 1993).
10.13 -- Amendment to Stockholders Agreement dated as of October 20, 1994 (incorporated herein by
reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number
33-75308).
10.14 -- Selling Stockholder Letter Agreement dated as of March 20, 1995 (incorporated herein by
reference to Alliance's Form S-3 Registration Number 33-58233).
10.15 -- 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
(incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- --------------------------------------------------------------------------------------------- -----
<C> <C> <S> <C>
10.16 -- Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993 (incorporated herein
by reference to Alliance's Form 10-Q dated September 30, 1993).
10.17 -- Amendment to Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993
(incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994).
10.18 -- Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett, Jr. and Leigh
Seippel to United Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K dated
October 29, 1993).
10.19 -- 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
(incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993).
10.20 -- 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)
(incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993).
10.21 -- 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
(incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993).
10.22 -- Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc., Capital Gaming
International, Inc. and I.G.Davis, Jr. (incorporated herein by reference to Alliance's Form
8-K dated December 10, 1993).
10.23 -- Loan and Security Agreement, dated as of August 2, 1993, between United Gaming, Inc., Alfred
H. Wilms and Video Services, Inc. (incorporated herein by reference to Alliance's Form S-2,
Registration Number 33-72990 and subsequent amendments thereto).
10.24 -- Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc. and Alfred H.
Wilms (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990
and subsequent amendments thereto).
10.25 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference to
Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.26 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and Oppenheimer & Co. Inc. (incorporated herein by reference to Alliance's Form S-2,
Registration Number 33-72990 and subsequent amendments thereto).
10.27 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and L.H. Friend, Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's
Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.28 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference to
Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.29 -- Consulting Agreement, dated as of November 8, 1993, between David A. Scheinman and United
Gaming, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number
33-72990 and subsequent amendments thereto).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- --------------------------------------------------------------------------------------------- -----
<C> <C> <S> <C>
10.30 -- 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 (incorporated herein by
reference to Alliance's Form 8-K dated March 7, 1994).
10.31 -- Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc., The Rainbow
Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (incorporated herein by reference
to Alliance's Form 8-K dated March 15, 1994).
10.32 -- 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
(incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.33 -- 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
(incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.34 -- 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
(incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.35 -- Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8, 1994
(incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.36 -- Second Amended and Restated Agreement of Limited Partnership, dated March 29, 1995, between
United Gaming Rainbow and RCC (incorporated herein by reference to Alliance's Form 8-K dated
March 29, 1995).
10.37 -- Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow
Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11,
1994).
10.38 -- Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow
Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11,
1994).
10.39 -- Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and Leigh Seippel to
United Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K dated August 11,
1994).
10.40 -- 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
(incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.41 -- Employment Agreement between United Gaming, Inc. and Johnann McIlwain (incorporated herein by
reference to Alliance's Form 10-K for the year ended June 30, 1994).
10.42 -- Settlement Agreement, dated December 4, 1994, by and among Alliance, United Gaming of Iowa,
Inc., GDREC and Joseph and Paula Zwack (incorporated herein by reference to Alliance's Form
S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.43 -- Employment Agreement, dated August 15, 1994, between Alliance and Steve Greathouse
(incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- --------------------------------------------------------------------------------------------- -----
<C> <C> <S> <C>
10.44 -- Warrant Agreement, dated August 15, 1994, between Alliance and Steven Greathouse
(incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233).
10.45 -- Agreement, dated September 1, 1994, between Alliance and Craig Fields (incorporated herein by
reference to Alliance's Form S-3, Registration Number 33-58233).
10.46 -- Warrant Agreement, dated September 1, 1994, between Alliance and Craig Fields (incorporated
herein by reference to Alliance's Form S-3, Registration Number 33-58233).
10.47 -- Agreement, dated March 20, 1995, between Alliance and Joel Kirschbaum (incorporated herein by
reference to Alliance's Form S-3, Registration Number 33-58233).
10.48 -- Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel, John
A. Barrett, Jr. and Butler, Snow, O'Mara, Stevens & Cannada (incorporated herein by reference
to Alliance's Form 8-K dated March 29, 1995).
10.49 -- Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow
(incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.50 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow
(incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.51 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi,
Inc. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.52 -- Release, dated March 29, 1995, by United Gaming Rainbow and Alliance and their affiliates of
RCC, Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their
affiliates (other than RCVP) (incorporated herein by reference to Alliance's Form 8-K dated
March 29, 1995).
10.53 -- 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
Alliance and their affiliates (incorporated herein by reference to Alliance's Form 8-K dated
March 29, 1995).
10.54 -- Trademark License Agreement, dated November 11, 1991 between Bally Manufacturing Corporation
and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(i)(d)
included in BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
10.55 -- Amended and Restated Trademark License Agreement, dated July 8, 1992, by and between Bally
Gaming International, Inc. and Bally Manufacturing Corporation (incorporated herein by
reference to exhibit 10(i)(d) included in BGII's Registration Statement on Form S-1 No.
33-48347 filed on July 9, 1992).
10.56 -- Agreement, dated January 8, 1993 by and between Bally Gaming International, Inc. and Bally
Manufacturing Corporation (incorporated herein by reference to exhibit 10(i)(p) included in
BGII's Annual Report on Form 10-K for the period ended December 31, 1992).
10.57 -- Second Amendement to Trademark License Agreement and Settlement Agreement, dated March 31,
1995, by and between Bally Entertainment Corporation and Bally Gaming International, Inc.
(incorporated herein by reference to Exhibit I, included in BGII's Current Report on Form 8-K
dated April 3, 1995).
10.58 -- 1991 Incentive Plan of Bally Gaming International, Inc. (incorporated herein by reference to
exhibit 10(iii)(a) included in BGII's Registration Statement No. 33-42227 on Form S-1,
effective November 8, 1991).
</TABLE>
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EXHIBIT NO. DESCRIPTION PAGE
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10.59 -- Amendment No. 1 to the 1991 Incentive Plan of Bally Gaming International, Inc. effective
February 6, 1992 (incorporated herein by reference to exhibit 10(iii)(b) included in BGII's
Registration Statement No. 33-42227 on Form S-1 effective November 1, 1991).
10.60 -- Amendment No. 2 to 1991 Incentive Plan of Bally Gaming International Inc. (incorporated
herein by reference to exhibit 99(e) included in BGII's Registration Statement No. 33-71154
on Form S-3 filed on November 1, 1993).
10.61 -- 1991 Non-Employee Directors' Option Plan of Bally Gaming International, Inc. (incorporated
herein by reference to exhibit 10(iii)(f) included in BGII's Annual Report on Form 10-K for
the fiscal y ear ended December 31, 1991).
10.62 -- Amendment No. 1 to the 1991 Non-Employee Directors' Option Plan of Bally Gaming
International, Inc. (incorporated herein by reference to exhibit 10(iii)(g) included in
BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
10.63 -- Bally Gaming International, Inc. 1992 Restricted Stock Performance Plan (incorporated herein
by reference to exhibit 99(d) included in BGII's Registration Statement on Form S-3 filed on
November 1, 1993).
10.64 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Richard Gillman and
Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(g)
included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.65 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Hans Kloss and Bally
Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(h) included
in BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.66 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Neil Jenkins and
Bally Gaming International, Inc.(incorporated herein by reference to exhibit 10(iii)(i)
included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.67 -- Bally Gaming International, Inc. 1994 Stock Option Plan for Non-Employee Directors, as
amended (incorporated herein by reference to exhibit 10(iii)(k) included in BGII's Annual
Report on Form 10-K for the period ended December 31, 1994).
10.68 -- Employment Agreement, effective January 1, 1993, between Bally Gaming International, Inc. and
Richard Gillman (incorporated herein by reference to exhibit 10(iii)(j) included in BGII's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
10.69 -- Amendment, dated June 8, 1994, to the Employment Agreement, effective as of January 1, 1993,
between Richard Gillman and Bally Gaming International, Inc. (incorporated herein by
reference to exhibit 10(iii)(m) included in BGII's Annual Report on Form 10-K for the period
ended December 31, 1994).
10.70 -- Employment Agreements, as amended, between Hans Kloss and each of Bally Wulff Automaten GmbH
and Bally Wulff Vertriebs GmbH (incorporated herein by reference to exhibit 10(iii)(b)
included in BGII's Registration Statement No. 33-42227 on Form S-1, effective November 8,
1991).
10.71 -- Third Amendments, dated June 2, 1993, to Employment Agreements between Hans Kloss and each of
Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH (incorporated herein by reference
to exhibit 99(c) included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on
November 1, 1993).
10.72 -- Employment Agreement, effective as of May 15, 1993, between Bally Gaming International, Inc.,
Bally Gaming, Inc. and Hans Kloss (incorporated herein by reference to exhibit 99(b) included
in BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1, 1993).
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10.73 -- Amendment, dated June 8, 1994, to the Employment Agreement effective as of May 15, 1993,
between Hans Kloss and Bally Gaming International, Inc. (incorporated herein by reference to
exhibit 10(iii)(q) included in BGII's Annual Report on Form 10-K for the period ended
December 31, 1994).
10.74 -- Employment Agreement, dated June 30, 1994, between Neil Jenkins and Bally Gaming
International, Inc. (incorporated herein by reference to exhibit 10(iii)(r) included in
BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.75 -- Employment Agreement, dated as of March 24, 1995, between Scott D. Schweinfurth and Bally
Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(z) included
in BGII's Annual Report on Form 10-K/A for the period ended December 31, 1994).
12 -- Statement re computation of ratios.
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
*23.3 -- Consent of Schreck, Jones, Bernhard, Woloson and Godfrey (included in its opinion filed as
Exhibit 5).
*23.4 -- Consent of Milbank, Tweed, Hadley & McCloy (included in its opinion filed as Exhibit 8).
24 -- Power of Attorney (included on signature page).
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*To be filed by amendment.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Alliance Gaming Corp.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the registration statement. As noted
under the captions "Forecast of Operating Income and Adjusted Operating Cash
Flow" and "Experts", KPMG Peat Marwick LLP has not examined the Forecast
presented under "Forecast of Operating Income and Adjusted Operating Cash Flow"
and, accordingly we do not express an opinion or any other form of assurance
with respect thereto.
KPMG PEAT MARWICK LLP
Las Vegas, Nevada
April 24, 1996
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EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report, dated February 13, 1996, on our audits of the consolidated financial
statements of Bally Gaming International, Inc. We also consent to the reference
to our firm under the caption "Experts." As noted under the captions "Forecast
of Operating Income and Adjusted Operating Cash Flow" and "Experts," Coopers &
Lybrand L.L.P. neither examined nor compiled nor had any other involvement with
the preparation of the accompanying prospective financial information included
in this registration statement and, accordingly, we do not express an opinion or
any other form of assurance with respect thereto, nor do we assume any
responsibility for such prospective financial information.
COOPERS & LYBRAND L.L.P.
Las Vegas, Nevada
April 23, 1996
