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SCHEDULE 14A INFORMATION
CONSENT STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
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<S> <C>
Filed by registrant /X/ / / Confidential,
Filed by a party other than the registrant / / for Use of the
Check the appropriate box: Commission Only
/X/ Preliminary consent statement (as permitted by
/ / Definitive consent statement Rule 14a-6(e)(2))
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule
14a-12
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ALLIANCE GAMING CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
ALLIANCE GAMING CORPORATION
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(Name of Person(s) Filing Consent Statement)
Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rule 14a-6(i)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1)Title of each class of securities to which transaction applies:
_________________________________________________________________________
(2)Aggregate number of securities to which transaction applies:
_________________________________________________________________________
(3)Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
_________________________________________________________________________
(4)Proposed maximum aggregate value of transaction:
_________________________________________________________________________
(5)Total fee paid:
_________________________________________________________________________
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1)Amount previously paid:
_________________________________________________________________________
(2) Form, schedule or registration statement no.:
_________________________________________________________________________
(3) Filing party:
_________________________________________________________________________
(4) Date filed:
_________________________________________________________________________
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CONSENT STATEMENT
OF
ALLIANCE GAMING CORPORATION
This Consent Statement is furnished by the Board of Directors of Alliance
Gaming Corporation, a Nevada corporation ("Alliance", or following the Merger
referred to below, the "Company"), in connection with the solicitation by it of
written consents from the holders of its Common Stock, par value $.10 per share
(the "Common Stock"), to approve without a stockholders' meeting, as permitted
by Nevada law, the issuance in a pending exchange offer (the "Exchange Offer")
of up to $85 million of Alliance's 7 1/2% Convertible Senior Subordinated
Debentures due 2003 (the "New Convertible Debentures") in exchange for its
existing $85 million of 7 1/2% Convertible Subordinated Debt due 2003 (the "Old
Convertible Debentures"), as well as the issuance on conversion of the New
Convertible Debentures of up to 850,000 shares of Alliance's 10% Non-Voting
Junior Convertible Pay-in-Kind Special Stock, Series E, par value $.10 per share
(the "Series E Preferred Stock") and the issuance on conversion of the New
Convertible Debentures and the Series E Preferred Stock of up to 15,287,769
shares of Common Stock, without taking into account shares of Series E Preferred
Stock that may in the future be issued as pay-in-kind dividends and shares of
Common Stock that may be issued on conversion of shares of Series E Preferred
Stock so issued or as a result of antidilution adjustments.
The purpose of the foregoing proposal (the "Proposal") is to permit
consummation of the Exchange Offer. The Exchange Offer is being made to enhance
Alliance's capital structure and to facilitate financing of the pending merger
(the "Merger") of a subsidiary of Alliance into Bally Gaming International, Inc.
("BGII") pursuant to which BGII will be acquired by Alliance. If the Merger
occurs within 60 days after the issuance of the New Convertible Debentures, the
New Convertible Debentures will automatically convert into Common Stock at a
conversion price of $5.56 per share or, if a holder tendering Old Convertible
Debentures in the Exchange Offer so elects at the time such Old Convertible
Debentures are tendered, the New Convertible Debentures received in exchange
therefor will automatically convert into shares of Series E Preferred Stock that
are in turn each convertible into Common Stock at a conversion price of $6.56
per share. If the Merger does not occur within such 60-day period, the New
Convertible Debentures will remain outstanding with a conversion price of $8.33
per share. The conversion price of the Old Convertible Debentures is $10.00 per
share. The New Convertible Debentures will be senior in right of payment to the
Old Convertible Debentures. The terms of the New Convertible Debentures are
otherwise substantially identical to those of the Old Convertible Debentures.
See "The Proposal--Comparison of New Convertible Debentures and Old Convertible
Debentures".
On May [14], 1996, the Board of Directors of Alliance (the "Alliance Board")
fixed May [30], 1996 as the record date for the solicitation made hereby (the
"Record Date"). Stockholders of Alliance are being asked to express their
consent to the Proposal on the accompanying consent card. The effectiveness of
the Proposal is subject to, and conditioned upon, the adoption of the Proposal
by the holders of record, as of the close of business on the Record Date, of a
majority of the shares of Common Stock then outstanding. Certain stockholders
holding a majority of the outstanding shares of Common Stock have indicated
their intention to consent to the Proposal. Because the proposal will become
effective only if executed consents are returned by holders of record on the
Record Date of a majority of the total number of shares of Common Stock then
outstanding, the failure to execute and return a consent will have the same
effect as voting against the Proposal. Alliance expects to obtain the consents
prior to expiration of the Exchange Offer (currently June 6, 1996).
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU CONSENT TO THE PROPOSAL.
If your shares of Common Stock are registered in your own name, please sign,
date and mail the enclosed consent card to Alliance in the post-paid envelope
provided. If your shares of Common Stock are held in the name of a brokerage
firm, bank nominee or other institution, only it can sign a consent card with
respect to your shares of Common Stock and only upon receipt of specific
instructions from you. Accordingly, you should contact the person responsible
for your account and give instructions for a consent card to be signed
representing your shares of Common Stock. Alliance urges you to confirm in
writing your instructions to the person responsible for your account and to
provide a copy of such instructions to Alliance, 4380 Boulder Highway, Las
Vegas, Nevada 89121, so that Alliance will be aware of all instructions given
and can attempt to ensure that such instructions are followed.
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THE PROPOSAL
TERMS OF THE EXCHANGE OFFER
Alliance has offered to exchange up to $85,000,000 aggregate principal
amount of the New Convertible Debentures for a like principal amount of the Old
Convertible Debentures. The terms of the New Convertible Debentures are
substantially identical to the terms of the Old Convertible Debentures, except
that the New Convertible Debentures will have a lower conversion price and will
be senior in right of payment to the Old Convertible Debentures. Holders whose
Old Convertible Debentures are accepted for exchange will also receive on
September 15, 1996 payment in respect of interest (provided such holders' New
Convertible Debentures have not theretofore been converted) and (to the extent
such holder was entitled thereto) liquidated damages on the Old Convertible
Debentures, in each case accrued to the date of issuance of the New Convertible
Debentures. See "-- Comparison of New Convertible Debentures and Old Convertible
Debentures".
The Exchange Offer will be consummated before and is not conditioned on
consummation of the 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, unless earlier redeemed or converted, the New Convertible Debentures
will automatically be converted (the "Automatic Conversion") into Common Stock
at a conversion price of $5.56 per share (equivalent to a conversion rate of
approximately 180 shares per $1,000 principal amount of New Convertible
Debentures), subject to adjustment under certain circumstances. A holder
tendering Old Convertible Debentures in the Exchange Offer may elect, at the
time such Old Convertible Debentures are tendered, to forego receipt of all or
any portion of the Common Stock that such holder would otherwise be entitled to
receive upon the occurrence of the Automatic Conversion with respect to the New
Convertible Debentures issued in exchange for such Old Convertible Debentures
and to receive in lieu thereof ten shares of Series E Preferred Stock, for each
$1,000 principal amount of New Convertible Debentures. Each share of Series E
Preferred Stock will accrue dividends at an annual rate of 10% ($10.00 per
share), payable quarterly in cash or, at Alliance's option through the first
dividend payment date following the fifteenth anniversary of issuance, in
additional shares of Series E Preferred Stock, will be convertible into Common
Stock at an initial conversion price of $6.56 per share (equivalent to a
conversion rate of approximately 15.244 shares of Common Stock per share of
Series E Preferred Stock), subject to adjustment under certain circumstances,
and will have a $100 liquidation preference per share. See "Description of the
10% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E". Although
there can be no assurance, Alliance currently expects that the Merger will be
consummated within 60 days after the issuance of the New Convertible Debentures
and thus that the Automatic Conversion will occur.
The Exchange Offer will expire at 12:00 midnight, New York City time, on
June 6, 1996 (the "Expiration Date"). Alliance has reserved the right, in its
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 (confirmed in writing) 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. Alliance may also delay, amend or terminate the Exchange Offer.
The obligation of Alliance to consummate the Exchange Offer is subject to
customary conditions, as well as the requirements that (i) holders of a majority
of the outstanding shares of Common Stock of Alliance shall have approved the
issuance of the New Convertible Debentures and of the securities issuable
directly or indirectly upon conversion thereof, and (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
Preferred Stock issuable upon conversion thereof.
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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:
CONVERSION PRICE. The conversion price of the Old Convertible Debentures is
currently $10.00 per share of Common Stock. The initial conversion price of the
New Convertible Debentures will be $8.33 per share of Common Stock.
AUTOMATIC 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 the price of $5.56 per share
(equivalent to a conversion rate of approximately 180 shares per $1,000
principal amount of New Convertible Debentures), subject to adjustment under
certain circumstances (the "Special Conversion Price"). 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 ten shares of Series E Preferred Stock for each $1,000 principal amount
of New Convertible Debentures.
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
Preferred Stock) at the Special Conversion Price at the effective time of the
Merger.
SUBORDINATION. The Old Convertible Debentures will be subordinated in right
of payment to the New Convertible Debentures and the Old Convertible Debentures
may be made structurally subordinated to the New Convertible Debentures and the
Senior Notes referred to below if Alliance transfers to an existing subsidiary
all or substantially all of Alliance's assets (including the stock of BGII if
the Merger occurs but excluding the stock of such existing subsidiary) subject
to obtaining needed regulatory approvals and satisfaction of other conditions.
This event may occur whether or not the Merger occurs.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES. On September 21, 1993, Alliance
and the initial purchasers of Old Convertible Debentures entered into a
registration rights agreement (the "Registration Rights Agreement"), pursuant to
which Alliance agreed to file with the Securities and Exchange Commission (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 ceases 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 whose Old Convertible Debentures or Common Stock are
subjected to restrictions on transfer as a result of such Registration Default,
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
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constituting Transfer Restricted Securities (as defined in the Registration
Rights Agreement). Following the cure of a Registration Default, liquidated
damages will cease to accrue with respect to such Registration Default.
A Registration Default occurred on December 27, 1995 and accordingly,
liquidated damages have accrued to holders of transfer-restricted Old
Convertible Debentures as described above. Liquidated damages that accrue prior
to March 15, 1996 have been fully paid by Alliance. The amount of liquidated
damages accrued and unpaid from that date to May 9, 1996 is $.71 per $1,000
principal amount of transfer-restricted Old Convertible Debentures, and
additional liquidated damages are currently accruing at the rate of $0.10 per
$1,000 principal amount per week. Holders whose transfer-restricted Old
Convertible Debentures are accepted for exchange will be paid on September 15,
1996 all liquidated damages to which they are entitled that have accrued from
March 15, 1996 through the date of issuance of the New Convertible Debentures.
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. 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.
DESCRIPTION OF THE 10% NON-VOTING JUNIOR CONVERTIBLE PAY-IN-KIND SPECIAL STOCK,
SERIES E
Alliance's Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions thereof (the "Series E Certificate
of Designations") of the 10% Non-Voting Junior Convertible Pay-in-Kind Special
Stock, Series E (previously defined as the "Series E Preferred Stock") to be
filed with the Secretary of State of Nevada provides that holders of shares of
Series E Preferred Stock are entitled to receive quarterly dividends, as and
when declared by the Alliance Board, in an amount per share equal to $2.50
payable in cash, except that Alliance may at its option pay any such dividend
accruing through and including the Series E Dividend Payment Date (as defined
below) occurring next after the fifteenth anniversary of the effective time of
the Merger in whole or in part in additional shares of Series E Preferred Stock
(or fractions thereof) in an amount equal to such dividend, with each share of
Series E Preferred Stock valued at $100. Dividends are payable on the first day
in each year 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
Alliance Board (each a "Series E Dividend Payment Date"). Dividends are
cumulative and will 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 Series E Preferred Stock,
no dividend or other distribution can be paid to holders of any equity security
ranking junior to or pari passu with the Series E Preferred Stock and no shares
of such junior security can be purchased or redeemed by Alliance. Alliance
currently expects that so long as the Series E Preferred Stock remains
outstanding, it will, subject to the terms thereof, pay dividends accruing
through the first Series E Dividend Payment Date occurring after the fifteenth
anniversary of the effective time of the Merger on the Series E Preferred Stock
in additional shares of such stock.
Shares of Series E Preferred Stock are convertible into shares of Common
Stock at any time, initially at a conversion price of $6.56 per share, subject
to adjustment as provided below (the "Series E Conversion Price"). The right to
convert shares of Series E Preferred Stock called for redemption will expire at
the close of business on the fifth business day prior to the redemption date.
The Series E 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
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purchase shares of Common Stock at less than the current market price (as
defined in the Series E Certificate of Designations), (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,
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 Series E 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 Series E 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 share of Series E Preferred Stock then outstanding would, without
the consent of any holders of such shares, 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 shares 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 Series E Certificate of Designations).
Fractional shares of Series E Preferred Stock may be issued under certain
circumstances (including in payment of dividends payable in shares of Series E
Preferred Stock) and will entitle the holder to receive dividends and
distributions and to exercise voting rights in proportion to the fractional
holding.
Upon liquidation, the holders of shares of Series E Preferred Stock are
entitled (subject to prior preferences and other rights of any senior equity
securities including the 15% Preferred Stock (as defined below) and on a parity
with other securities ranking equally) to be paid out of assets of Alliance in
cash or property valued at its fair market value (as determined in good faith by
the Alliance Board) an amount equal to $100 plus an amount equal to all accrued
and unpaid dividends and distributions thereon.
The Series E Preferred Stock has no voting rights except as required by law
and except in the case where dividends payable on shares of the Series E
Preferred Stock have been in arrears for six consecutive Series E Dividend
Payment Dates, at which time the number of directors constituting the Alliance
Board will be increased by two and the holders of shares of Series E Preferred
Stock, together with the holders of any other class of Special Stock ranking on
a parity with the Series E Preferred Stock as to the payment of dividends who
are entitled to vote in such circumstance, will have the right, voting
separately as a class, to elect two directors to the Alliance Board until all
dividends accumulated on such shares have been paid or set apart for payment in
full.
Alliance may at its option redeem all, or any number less than all, of the
outstanding shares of Series E Preferred Stock at any time at a price per share
equal to $100 per share plus an amount equal to all accrued and unpaid dividends
and distributions thereon to the date of redemption.
REASONS FOR AND EFFECTS OF THE PROPOSAL
VOTING REQUIREMENTS
The rules of the National Association of Securities Dealers, Inc. (the
"NASD") require each NASDAQ NMS issuer such as Alliance to obtain stockholder
approval for the present or potential issuance of common
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stock, or securities convertible into or exercisable for common stock, other
than a public offering for cash, in connection with the acquisition of the stock
or assets of another company, if the common stock has or will have upon issuance
voting power equal to or in excess of 20% of the voting power outstanding before
the issuance of stock or securities convertible into or exercisable for common
stock, or the number of shares of common stock to be issued is or will be equal
to or in excess of 20% of the number of shares of common stock outstanding
before the issuance of the stock or securities. As of the Record Date, there
were shares of Common Stock outstanding. Assuming that the holders of at
least [$14.4] million principal amount of the outstanding Old Convertible
Debentures accept the Exchange Offer and do not elect to receive Series E
Special Stock upon the occurrence of the Automatic Conversion then, upon
consummation of the Merger, Alliance will issue a number of shares of Common
Stock which exceeds 20% of the outstanding Common Stock prior to the issuance.
Therefore, under NASD rules, approval of Alliance stockholders may be required
for the issuance of the New Convertible Debentures and the shares of Common
Stock and Series E Special Stock pursuant to the Exchange Offer.
Alliance is therefore soliciting written consents to the Proposal in order
to expedite the prompt consummation of the Exchange Offer. Approval of the
Proposal is a condition to Alliance's obligation to consummate the Exchange
Offer. The Exchange Offer is being made to enhance Alliance's capital structure
and to facilitate financing of the pending Merger. Alliance believes that the
conversion of debt into equity resulting from consummation of the Exchange Offer
and the Automatic Conversion described above will facilitate completion of the
Offerings referred to below.
The Exchange Offer is not conditioned on consummation of the Merger.
However, Alliance believes that its ability to obtain financing for, and hence
to consummate, the Merger will depend on, among other factors, the exchange of a
substantial amount of the Old Convertible Debentures. The consummation of the
Merger is contingent on completion of the Offerings and obtaining requisite
regulatory approvals.
THE MERGER AND RELATED FINANCINGS
Pursuant to the Merger Agreement and subject to the terms and conditions set
forth therein, Alliance has agreed to acquire all of the stock of BGII for a
price of approximately $77.2 million in cash (the "Cash Consideration"), $35.7
million in Alliance's 15% Non-Voting Pay-in-Kind Special Stock, Series B, $.10
par value (the "15% Preferred Stock") and $2.9 million in Common Stock valued on
the basis of the closing price of Common Stock on the ten trading days ending
five trading days before the Merger (the "Alliance Average Trading Price"). In
addition, the Company would 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 $53.3 million of
outstanding debt of BGII (including prepayment premium, original issue discount
and accrued and unpaid interest through the effective date of the Merger). At
meetings held on April 2, 1996, the shareholders of Alliance and BGII approved
the Agreement and Plan of Merger, dated October 18, 1995, as amended, among
Alliance, BGII Acquisition Corp. (a wholly-owned subsidiary of Alliance) and
BGII (the "Merger Agreement") and the Merger.
As currently contemplated, the Merger and related transactions will be
financed through (i) a private placement of an aggregate of $5.0 million of
equity of Alliance (the "Private Placement"), (ii) the issuance of an aggregate
of $15.0 million gross proceeds (excluding any over-allotment option in
connection therewith) of 15% Preferred Stock, plus pay-in-kind dividends accrued
from May 3, 1996, through a public offering (the "15% Preferred Stock Offering")
and (iii) the issuance of $140.0 million aggregate principal amount of Senior
Secured Notes due 2003 (the "Senior Notes") through a public offering (the "Note
Offering" and, together with the 15% Preferred Stock Offering, the "Offerings").
The Private Placement and the Offerings are contingent upon and will close
simultaneously with the Merger. The actual amounts and securities issued will
depend upon a number of factors, including market conditions and other factors
beyond the control of Alliance and, therefore, assuming the Merger occurs, could
change significantly. The Merger, the Exchange Offer, the Private Placement, the
15% Preferred Stock Offering and the Note Offering are sometimes referred to
herein collectively as the "Transaction".
The 15% Preferred Stock Offering and the Note Offering are each to be made
by Alliance exclusively pursuant to separate prospectuses. In the Private
Placement, a financial institution has agreed to purchase
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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 per share and the average of
the last sales price of the Common Stock for the five trading days immediately
preceding the Merger. 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 and the Automatic
Conversion, with the remainder to be in the form of non-voting special stock
convertible into Common Stock. Alliance 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.
Funds raised in the Offerings will be used to pay the Cash Consideration and
to refinance approximately $69.9 million outstanding BGII indebtedness, with the
remainder to be used to pay Transaction fees and expenses. Any excess will be
used for working capital purposes.
CERTAIN EFFECTS OF THE PROPOSAL
Stockholders should note certain special considerations relating to the
issuance of the additional shares of Common Stock upon conversion of the New
Convertible Debentures and Series E Preferred Stock and to the information
included in this Consent Statement, including the following:
DILUTION. The New Convertible Debentures and the Series E Preferred Stock
will be convertible into more shares of Common Stock than the Old Convertible
Debentures, and the Series E Preferred Stock has a pay-in-kind feature that may
result in issuance of additional shares of such stock also carrying conversion
rights. This may result in significant dilution to the stockholders of the
Company. If all $85.0 million principal amount of Old Convertible Debentures are
exchanged with all holders electing to receive Common Stock on the Automatic
Conversion and the Automatic Conversion occurs, 15.3 million shares of Common
Stock will be issued; if the Automatic Conversion does not occur, the number of
shares issuable on conversion of the New Convertible Debentures will exceed the
number issuable on conversion of the Old Convertible Debentures by 1.7 million
shares, and the conversion of the Old Convertible Debentures by 1.7 million
shares, and the conversion price will be 17% lower than at present. If all $85.0
million principal amount of Old Convertible Debentures are exchanged and the
Automatic Conversion occurs with all holders electing to receive Series E
Preferred Stock, the number of shares of Common Stock issuable on conversion
would exceed the number issuable on conversion of the Old Convertible Debentures
by approximately 4.5 million shares. If all such exchanging holders elect to
receive Series E Preferred Stock and dividends thereon are paid in kind for 15
years, the resulting Series E Preferred Stock will have an aggregate liquidation
preference of $373,982,200 and be convertible into approximately 57 million
shares of Common Stock. The Company believes it unlikely that dividends would
accrue on the Series E Preferred Stock to this extent. The number of shares of
Common Stock currently outstanding is about 13.0 million.
CHANGE OF CONTROL. Following consummation of the Transaction, Alliance's
two largest shareholders, Alfred Wilms and Kirkland Investment Corporation
("KIC"), who currently own approximately 38.8% and 10.3%, respectively, of the
outstanding shares of Common Stock, will own approximately 19.9% and 5.3%,
respectively, of the outstanding shares of Common Stock assuming exchange of
$50.0 million of Old Convertible Debentures and conversion into Common Stock
only. If all $85 million of Old Convertible Debentures were exchanged for New
Convertible Debentures which were then converted into Common Stock, the
reduction would be greater. 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".
FINANCIAL FORECAST. Alliance was the sole preparer of the forecast (the
"Forecast") included in the Appendix. The Forecast is included only because it
has otherwise been made available to the public by its inclusion in the Exchange
Offer materials; its inclusion herein should not be taken as an indication that
Alliance believes it is relevant to the Proposal. While the Forecast is
presented with numerical specificity, it is based on Alliance's current best
estimates of expected results given the forecasted assumptions described in
"Summary of Significant Assumptions and Accounting Policies for the Forecast"
for the period presented,
7
<PAGE>
including consummation of the Merger and the other elements of the Transaction.
The Forecast, which consists of forward-looking statements, is qualified by and
subject to the assumptions set forth therein and the other information contained
herein. Alliance does not intend to update or otherwise revise the Forecast to
reflect events or circumstances existing or arising after the date of this
Consent Statement 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
Alliance, are inherently subject to significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
to predict and may of which are beyond the control of Alliance. 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 Alliance or any other person that the Forecast will be achieved. Stockholders
are cautioned not to place undue reliance on the Forecast or the other
forward-looking information contained herein.
If the Merger, the Exchange Offer and the Offerings do not occur, the
principal difference in Alliance's financial condition, relative to the Alliance
historical financial information otherwise presented herein, would be that
Alliance's cash and cash equivalents and securities available for sale would
decrease by approximately $7.0 million, which management believes will not have
a material adverse effect on the financial condition of Alliance or impair its
ability to meet its ongoing obligations.
8
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table sets forth certain information as of May , 1996 with
respect to the beneficial ownership of the Common Stock, which constitutes
Alliance's only outstanding class of voting securities, by (i) each person who,
to the knowledge of Alliance, beneficially owned more than 5% of the Common
Stock, (ii) each director of Alliance, (iii) the named executive officers of
Alliance (as defined in the Exchange Act) and (iv) all executive officers and
directors of Alliance 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% 25.7%
Donaldson, Lufkin & Jenrette Securities 1,695,500(5) 11.6% 6.3%(5)
Corporation ................................
277 Park Avenue
New York, New York 10172
Joel Kirschbaum ............................. 1,333,333(6) 10.3% 5.3%
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% 1.3%
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% 28.8%
</TABLE>
- ------------------------
* Less than 1%.
(1)Excludes the effect of (a) the issuance of (i) 2,750,000 shares subject to
warrants to Kirkland Ft. Worth Investment Partners, L.P. ("Kirkland") in
connection with Kirkland's investing $5,000,000 in Alliance, concurrent with
the closing of the issuance of the Old Convertible Debentures in exchange
for Alliance's Non-Voting Junior Convertible Special Stock (the "Kirkland
Investment"), (ii) 1,250,000 shares subject to warrants to Gaming Systems
Advisors, L.P. ("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
9
<PAGE>
Old Convertible Debentures, and (iv) 250,000 shares subject to warrants
issued to Cerberus Partners L.P. and certain affiliates of 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.
(2)Assumes the issuance of approximately 735,000 shares to BGII stockholders in
the Merger, approximately 1,250,000 shares in the Private Placement,
approximately 933,000 shares in partial satisfaction of BGII employee
contract termination costs and performance unit awards and approximately
9,450,000 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.
(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. The Post-Transaction Percent of Class
column assumes no participation in the Exchange Offer although Alliance has
no indication of such holder's intent with respect thereto.
(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 Gaming Systems International, Inc. ("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.
(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.
10
<PAGE>
(13)Includes 162,000 shares subject to options that are currently exercisable or
will become exercisable within 60 days.
(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 Alliance, 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.
SOLICITATION OF CONSENTS
Solicitation of consents may be made by the directors, officers, investor
relations personnel and other employees of Alliance and its affiliates. Consents
will be solicited by mail, advertisement, telephone or telecopier and in person.
No such persons will receive additional compensation for such solicitation.
Banks, brokers, custodians, nominees and fiduciaries will be requested to
forward solicitation material to beneficial owners of the shares of Common
Stock. Alliance will reimburse banks, brokers, custodians, nominees and
fiduciaries for their reasonable expenses for sending solicitation material to
the beneficial owners.
The cost of the solicitation of consents to the Proposal will be borne by
Alliance and its affiliates. Costs related to the solicitation of consents to
the Proposal include expenditures for attorneys, accountants, financial
advisors, consent solicitors, public relations advisors, printing, advertising,
postage, litigation and related expenses and filing fees.
CONSENT PROCEDURE
Section 78.320 of the Nevada General Corporation Law (the "NGCL") states
that, unless otherwise provided in the articles of incorporation or the bylaws,
any action required or permitted to be taken at a meeting of stockholders, may
be taken without a meeting, without prior notice, if a written consent thereto
is
11
<PAGE>
signed by stockholders holding at least a majority of the voting power, except
that if a different proportion of voting power is required for such an action at
a meeting, then that proportion of written consents is required. The written
consent must be filed with the minutes of the proceedings of the stockholders.
As authorized by Nevada law, Alliance's articles of incorporation
specifically permits stockholder action by written consent in lieu of a meeting.
Certain executive officers and directors of Alliance have advised Alliance
that they intend to vote the 6,617,333 shares of Common Stock, representing
approximately 51% of the outstanding shares of Common Stock, as to which they
have voting power, FOR the approval of the Proposal. This would insure adoption
of the Proposal. See "Security Ownership of Certain Beneficial Holders and
Management".
EFFECTIVENESS AND REVOCATION OF CONSENTS
The corporate action proposed herein will be adopted when properly
completed, unrevoked consents are signed by the holders of record on the Record
Date of a majority of the shares of Common Stock then outstanding and such
consents are delivered to Alliance.
An executed consent card may be revoked at any time by marking, dating,
signing and delivering a written revocation before the time that the action
authorized by the executed consent becomes effective. A revocation may be in any
written form validly signed by the record holder as long as it clearly states
that the consent previously given is no longer effective. The delivery of a
subsequently dated consent card which is properly completed will constitute a
revocation of any earlier consent. The revocation may be delivered to Alliance
at the address set forth below under "Special Instructions".
SPECIAL INSTRUCTIONS
If you were a record holder of shares of Common Stock as of the close of
business on the Record Date, you may elect to consent to, withhold consent to or
abstain with respect to the Proposal by marking the "CONSENTS", "DOES NOT
CONSENT" or "ABSTAIN" box, as applicable, underneath the Proposal on the
accompanying consent card and signing, dating and returning it promptly in the
enclosed postage-paid envelope.
If the stockholder has failed to check a box marked "CONSENTS", "DOES NOT
CONSENT" or "ABSTAIN" for the Proposal, such stockholder will be deemed to have
consented to the Proposal.
ALLIANCE RECOMMENDS THAT YOU CONSENT TO THE PROPOSAL.
YOUR CONSENT IS IMPORTANT. PLEASE MARK, SIGN AND DATE THE ENCLOSED CONSENT
CARD AND RETURN IN THE ENCLOSED POSTAGE-PAID ENVELOPE PROMPTLY.
If your shares of Common Stock are held in the name of a brokerage firm,
bank nominee or other institution, only it can execute a consent with respect to
your shares of Common Stock and only upon receipt of specific instructions from
you. Accordingly, you should contact the person responsible for your account and
give instructions for the consent card to be signed representing your shares of
Common Stock. Alliance urges you to confirm in writing your instructions to the
person responsible for your account and provide a copy of those instructions to
Alliance at 4380 Boulder Highway, Las Vegas, Nevada 89121 so that Alliance will
be aware of all instructions given and can attempt to ensure that such
instructions are followed.
CERTAIN FINANCIAL AND RELATED INFORMATION
The Appendix contains historical audited and interim financial statements
for Alliance and BGII as well as pro forma financial statements and a
supplemental analysis of adjusted operating cash flow (both assuming
consummation of the Transaction), the Forecast and Management's Discussion and
Analysis of Financial Condition and Results of Operations for Alliance, BGII
(results of operations only) and pro forma for the Transaction (liquidity and
capital resources only).
12
<PAGE>
INDEX TO APPENDIX
<TABLE>
<CAPTION>
PAGE
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ALLIANCE GAMING CORPORATION
Independent Auditors' Report........................................................................ F-3
Consolidated Balance Sheets as of June 30, 1994 and 1995............................................ F-4
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-6
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-8
Notes to Consolidated Financial Statements.......................................................... F-9-F-22
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF ALLIANCE GAMING CORPORATION
Condensed Consolidated Balance Sheets as of June 30, 1995 (audited) and March 31, 1996
(unaudited)........................................................................................ F-23
Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 1995
and 1996........................................................................................... F-24
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1995
and 1996........................................................................................... F-25
Notes to Unaudited Condensed Consolidated Financial Statements...................................... F-26-F-30
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF 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>
<TABLE>
<S> <C>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF BALLY GAMING INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets as of December 31, 1995 (audited) and March 31, 1996
(unaudited)........................................................................................ F-65
Consolidated Statements of Operations (unaudited) -- for the Three Months Ended March 31, 1995 and
1996............................................................................................... F-66
Consolidated Statement of Stockholders' Equity (unaudited) -- for the Three Months Ended March 31,
1996............................................................................................... F-67
Condensed Consolidated Statements of Cash Flows (unaudited) -- for the Three Months Ended March 31,
1995 and 1996...................................................................................... F-68
Notes to Condensed Consolidated Financial Statements (unaudited).................................... F-69-F-82
OTHER FINANCIAL AND RELATED INFORMATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION........................................ F-83
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............................... F-87
SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW............................................... F-92
FORECAST OF OPERATIONS.............................................................................. F-94
SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES FOR THE FORECAST......................... F-98
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... F-108
Introduction...................................................................................... F-108
Liquidity and Capital Resources of Alliance....................................................... F-108
Liquidity and Capital Resources of the Company (Pro Forma)........................................ F-111
Alliance Results of Operations.................................................................... F-112
BGII Results of Operations........................................................................ F-117
</TABLE>
F-2
<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-3
<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-4
<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-5
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Gaming:
Routes................................................................... $ 96,282 $ 102,830 $ 106,827
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-6
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(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-7
<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-8
<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-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)
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-10
<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-11
<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-12
<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-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)
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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and securities available for sale............................... $ 37,414 $ 25,562
Receivables, net....................................................................... 3,316 2,060
Inventories............................................................................ 714 661
Prepaid expenses....................................................................... 4,148 3,289
Other.................................................................................. 517 486
---------- -----------
Total current assets................................................................. 46,109 32,058
---------- -----------
Property and equipment, net.............................................................. 50,352 52,065
Receivables, net......................................................................... 5,309 5,600
Excess of costs over net assets of an acquired business, net of accumulated
amortization............................................................................ 3,842 2,074
Intangible assets, net of accumulated amortization....................................... 12,405 11,273
Investment in minority owned subsidiary.................................................. 1,585 --
Other.................................................................................... 6,746 8,218
---------- -----------
Total assets....................................................................... $ 126,348 $ 111,288
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long-term debt................................................... $ 3,995 $ 4,041
Accounts payable....................................................................... 1,758 2,089
Accrued expenses, including due to related parties..................................... 8,610 10,345
---------- -----------
Total current liabilities............................................................ 14,363 16,475
Long-term debt, less current maturities.................................................. 97,402 95,048
---------- -----------
Other liabilities........................................................................ 3,955 4,325
---------- -----------
Total liabilities.................................................................... 115,720 115,848
---------- -----------
Commitments and contingencies
Minority interest........................................................................ 643 1,035
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) (1,067)
Accumulated deficit.................................................................. (23,131) (37,960)
---------- -----------
Total stockholders' equity (deficiency).............................................. 9,985 (5,595)
---------- -----------
Total liabilities and stockholders' equity (deficiency)............................ $ 126,348 $ 111,288
---------- -----------
---------- -----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-23
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Revenues:
Gaming:
Routes................................................................................. $ 79,389 $ 81,111
Casinos and taverns.................................................................... 11,523 32,698
Food and beverage sales.................................................................. 2,842 2,976
Net equipment sales...................................................................... 22 11
--------- ----------
93,776 116,796
--------- ----------
Costs and expenses:
Cost of gaming:
Routes................................................................................. 59,411 62,293
Casinos and taverns.................................................................... 6,743 14,726
Cost of food and beverage................................................................ 2,038 1,992
Cost of equipment sales.................................................................. 10 3
Selling, general and administrative...................................................... 9,279 14,308
Business development expenses............................................................ 5,647 14,233
Corporate expenses....................................................................... 6,258 4,606
Provision for impaired assets............................................................ -- 3,179
Depreciation and amortization............................................................ 6,934 7,328
--------- ----------
96,320 122,668
--------- ----------
Operating loss........................................................................... (2,544) (5,872)
Other income (expense):
Interest income.......................................................................... 2,235 1,206
Interest expense......................................................................... (5,844) (6,341)
Minority share of income................................................................. (252) (708)
Royalty Fee.............................................................................. (27) (2,931)
Other, net............................................................................... 33 398
--------- ----------
Loss before income taxes................................................................... (6,399) (14,248)
Income tax expense......................................................................... (394) (581)
--------- ----------
Net loss................................................................................... $ (6,793) $ (14,829)
--------- ----------
--------- ----------
Loss per share of common stock............................................................. $ (.61) $ (1.21)
--------- ----------
--------- ----------
Weighted average common shares outstanding................................................. 11,192 12,245
--------- ----------
--------- ----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-24
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................ $ (6,793) $ (14,829)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization......................................................... 6,934 7,328
Loss on sale of property and equipment................................................ 825 277
Write off of other assets............................................................. 1,620 396
Provision for losses on receivables................................................... 380 46
Amortization of debt discounts........................................................ 237 177
Equity in losses of affiliate......................................................... 386 --
Provision for impaired assets......................................................... -- 3,179
Deferred income tax provision......................................................... -- 388
Net change in operating assets and liabilities:
Decrease (increase) in:
Inventories........................................................................... (14) 23
Prepaid expenses...................................................................... 1,627 864
Refundable income taxes............................................................... -- 361
Other assets.......................................................................... (47) 201
Increase (decrease) in:
Accounts and slot contracts payable................................................... (271) 331
Accrued expenses...................................................................... (4,163) 735
Minority interests.................................................................... 251 392
Other liabilities..................................................................... (805) (402)
---------- ----------
Net cash provided by (used in) operating activities................................. 167 (533)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment..................................................... (7,816) (6,624)
Proceeds from sale of property and equipment............................................ 328 2,213
Additions to receivables................................................................ (10,251) (9,303)
Cash collections on receivables......................................................... 11,063 9,774
Net cash provided by acquisition of business............................................ 2,481 --
Investment in subsidiary................................................................ (1,585) --
Proceeds from sale (purchase) of securities available for sale.......................... (577) 12,950
Additions to intangible assets.......................................................... (282) (487)
Additions to other long-term assets..................................................... (3,152) (3,268)
---------- ----------
Net cash (used in) provided by investing activities................................... (9,791) 5,255
---------- ----------
Cash flows from financing activities:
Reduction of long-term debt............................................................. (1,975) (3,167)
Proceeds from long-term debt............................................................ -- 682
Issuance of stock....................................................................... 466 --
---------- ----------
Net cash (used in) financing activities............................................... (1,509) (2,485)
---------- ----------
Cash and cash equivalents:
Increase (decrease) for period.......................................................... (11,133) 2,237
Balance, beginning of period............................................................ 37,085 13,734
---------- ----------
Balance, end of period................................................................ $ 25,952 $ 15,971
---------- ----------
---------- ----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-25
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
1. ADJUSTMENTS FOR FAIR PRESENTATION
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments, including 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. CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE FOR SALE
For balance sheet presentation the following account balances have been
combined:
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1995 1996
--------- -----------
(In thousands)
<S> <C> <C>
Cash and cash equivalents............................................... $ 13,734 $ 15,971
Securities available for sale........................................... 23,680 9,591
--------- -----------
Total................................................................... $ 37,414 $ 25,562
--------- -----------
--------- -----------
</TABLE>
As of March 31, 1996 unrealized losses for securities available for sale was
$1,067,000 net of a tax effect of $550,000 and is included as a component of
stockholders' equity.
4. 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 MARCH 31
1995 1996
--------- -----------
(In thousands)
<S> <C> <C>
Notes receivable--location operators.................................... $ 7,760 $ 6,160
Other receivables....................................................... 865 1,500
--------- -----------
8,625 7,660
Less current amounts.................................................... (3,316) (2,060)
--------- -----------
Long-term receivables, excluding current amounts........................ $ 5,309 $ 5,600
--------- -----------
--------- -----------
</TABLE>
F-26
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
4. RECEIVABLES (CONTINUED)
Receivables are presented net of an allowance for doubtful accounts of
approximately $1,659,000 and $1,363,000 as of June 30, 1995 and March 31, 1996,
respectively. The allowance is allocated between current and long-term
receivables on a pro rata basis related to notes receivable from location
operators.
5. DEBT
Long-term debt at June 30, 1995 and March 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1995 1996
---------- -----------
(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 7.5%), net of discount of $747,619 and $570,551.............. 3,309 2,535
Hospitality Franchise Systems due 2001, 7.5%..................................... 9,065 8,173
National Gaming Mississippi due 2002, 10.0%...................................... 631 1,188
Other debt....................................................................... 3,392 2,193
---------- -----------
101,397 99,089
Less current maturities.......................................................... 3,995 4,041
---------- -----------
Long-term debt, less current maturities.......................................... $ 97,402 $ 95,048
---------- -----------
---------- -----------
</TABLE>
Accrued interest of approximately $1,991,000 (June 30) and $372,000 (March
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.
6. 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 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.
Due to losses and the lack of available carrybacks, the Company recognized
no federal income tax expense or benefit for the nine-month periods ended March
31, 1996 and 1995 other than the tax effects of changes in the unrealized gains
(losses) on securities available for sale. At March 31, 1996, the Company had
estimated net operating loss carryforwards for federal income tax purposes of
approximately $48,000,000 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.
7. IMPAIRED ASSETS
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 Camptown Greyhound
Racing, Inc. ("Camptown") and The Racing Association of Kansas-Southeast
F-27
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
7. IMPAIRED ASSETS (CONTINUED)
("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 Kansas legislature considered gaming
bills during the 1996 session although none passed. There can be no assurance
that gaming of any type will ever be legalized in Kansas. Management has
evaluated this investment and determined it to be impaired because it does not
appear to be recoverable. The Company fully reserved the net book value of
approximately $1,585,000 through a charge to operations which has been recorded
in the quarter ended March 31, 1996.
Native American Investments, Inc. ("NAI"), a wholly-owned subsidiary has a
contract to develop Class II and III gaming opportunities with an Indian tribe
in California. Class II gaming 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 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 NIGC. 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 the ultimate outcome of these litigation
activities or successful completion of any part of the Company's 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. The
Company believes that this ruling will have a materially adverse effect upon its
Native American casino development activities in California. Accordingly,
Management has evaluated this investment and determined it to be impaired
because it now appears to be unrecoverable. Management has fully reserved the
net book value of approximately $1,594,000 through a charge to operations which
has been recorded in the quarter ended March 31, 1996. Management will continue
to monitor the status of Class II and III gaming in California.
8. RAINBOW CASINO VICKSBURG PARTNERSHIP
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 45% limited partnership interest, through a
wholly-owned subsidiary, the Company funded a $3,250,000 advance to Rainbow
Casino Corporation ("RCC") on the same terms as RCC's financing from Hospitality
Franchise Systems, Inc. ("HFS").
On March 29, 1995 the Company consummated certain transactions whereby the
Company acquired from RCC the controlling general partnership interest in
Rainbow Casino Vicksburg Partnership ("RCVP") and increased its partnership
interest and since that date the operations of RCVP have been consolidated. In
F-28
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
8. RAINBOW CASINO VICKSBURG PARTNERSHIP (CONTINUED)
exchange for commitments by the Company 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 for the completion of
certain elements of the project which survived the opening of a casino (for
which RCC was to have been responsible for, but failed to satisfy), the
following occurred: (i) a subsidiary of the Company became the general partner
and RCC became the limited partner and (ii) the respective partnership interests
were adjusted. RCC is entitled to receive 10% of the net available cash flows
from gaming revenues, as defined (which amount shall increase to 20% of the
incremental cash flow generated 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 achieved earnings from the project of at least
$10,500,000 before deducting depreciation, amortization, royalty and income
taxes, then the Company would be obligated to pay to certain principals of the
original partnership, as additional consideration for the purchase of the
general partnership interest, an amount aggregating $1,000,000 in cash or shares
of Common Stock (at the Company's option) 180 days after the occurrence. The
casino has achieved the required earnings as adjusted, and the Company is
obligated to make the required payment or issue the Common Stock by September
30, 1996.
9. 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.
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.
On April 2, 1996, shareholders of both companies approved the pending
Merger. The Company has filed registration statements with the Securities and
Exchange Commission covering offerings of $140,000,000 senior secured notes and
$15,000,000 Series B Special Stock, the proceeds of which will be used to fund
the cash portion of the consideration of the merger agreement, to refinance
existing BGII debt, and for working capital purposes.
On April 17, 1996, both companies agreed to a Mutual Waiver of Agreement and
Plan of Merger extending the termination date of the Merger until June 18, 1996.
In addition the Company will pay interest at the rate of 5.5% on the cash
portion of the merger consideration to BGII shareholders from May 3, 1996
through the effective date of the transaction. Similarly, the dividend on the
PIK preferred stock portion of the merger consideration will begin accruing on
May 3, 1996. In addition, in order to facilitate completion of
F-29
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
9. PROPOSED BGII MERGER TRANSACTION (CONTINUED)
the offerings, the Company has filed a registration statement in respect of an
offer to exchange for its outstanding convertible subordinated debentures new
convertible subordinated debentures which would be senior to the outstanding
debentures. The new debentures would automatically convert on consummation of
the Merger into shares of the Company's common stock at a conversion price of
$5.56 per share (or, at the option of the holder, into a new series of junior
convertible pay-in-kind preferred stock). The transaction is subject to
obtaining customary regulatory approvals, the successful completion of the
offerings, and certain other conditions. The merger is expected to occur no
later than June 18, 1996.
10. 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 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.
11. 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-30
<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-31
<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-32
<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-33
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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 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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 5,526 $ 2,009
Accounts and notes receivable, net of allowance for doubtful accounts of $16,281 and
$17,054............................................................................ 87,176 82,872
Inventories, net:
Raw materials and work-in process................................................. 16,066 17,342
Finished goods.................................................................... 35,525 34,619
------------ -----------
51,591 51,961
Other current assets................................................................ 3,983 4,450
------------ -----------
Total current assets.......................................................... 148,276 141,292
Long-term notes receivable, net of allowance for doubtful accounts of $7,869 and
$7,887............................................................................... 9,981 9,696
Property, plant and equipment, net.................................................... 23,244 23,615
Intangible assets, less accumulated amortization of $13,720 and $14,045............... 10,814 10,417
Other assets.......................................................................... 2,001 1,916
------------ -----------
$ 194,316 $ 186,936
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 18,556 $ 14,707
Accrued liabilities and other payables.............................................. 17,406 16,258
Current maturities of long-term debt................................................ 14,957 24,678
------------ -----------
Total current liabilities......................................................... 50,919 55,643
------------ -----------
10 3/8 Senior Secured Notes due 1998, net of unamortized discount of $344 and $312.... 39,656 39,688
Other long-term debt, less current maturities......................................... 15,331 5,605
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock..................................................................... -- --
Common stock........................................................................ 108 108
Additional paid-in capital.......................................................... 68,345 68,345
Retained earnings................................................................... 1,842 1,329
Cumulative translation adjustments.................................................. 18,662 16,708
Unearned compensation............................................................... (547) (490)
------------ -----------
Total stockholders' equity........................................................ 88,410 86,000
------------ -----------
$ 194,316 $ 186,936
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-65
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1995 1996
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Sales.................................................................................... $ 67,658 $ 57,435
Other.................................................................................... 631 1,109
----------- -----------
68,289 58,544
----------- -----------
Costs and expenses:
Cost of sales............................................................................ 43,500 37,757
Selling, general and administrative...................................................... 16,998 16,526
Provision for doubtful receivables....................................................... 1,154 991
Unusual charges.......................................................................... -- 996
----------- -----------
61,652 56,270
----------- -----------
Operating income........................................................................... 6,637 2,274
Interest expense........................................................................... 1,733 1,665
----------- -----------
Income before income taxes................................................................. 4,904 609
Provision for income taxes................................................................. 2,042 1,122
----------- -----------
Net income (loss).......................................................................... $ 2,862 $ (513)
----------- -----------
----------- -----------
Net income (loss) per common share......................................................... $0.27 $(0.05 )
----------- -----------
----------- -----------
Weighted average number of common shares and common stock equivalents outstanding.......... 10,751 10,805
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-66
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<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, 1995........ $ 108 $ 68,345 $ 1,842 $ 18,662 $ (547) $ 88,410
Net loss.......................... -- -- (513) -- -- (513)
Foreign currency translation
adjustments...................... -- -- -- (1,954) -- (1,954)
Amortization of unearned
compensation..................... -- -- -- -- 57 57
----------- ----------- ----------- ------------ ------ ------------
Balance at March 31, 1996........... $ 108 $ 68,345 $ 1,329 $ 16,708 $ (490) $ 86,000
----------- ----------- ----------- ------------ ------ ------------
----------- ----------- ----------- ------------ ------ ------------
</TABLE>
<TABLE>
<CAPTION>
COMMON
STOCK
SHARE AMOUNTS ISSUED
- -------------------------------------------------------------------------------------------------------- -----------
<S> <C>
Balance at December 31, 1995
and March 31, 1996..................................................................................... 10,800
-----------
-----------
</TABLE>
See accompanying notes.
F-67
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1995 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................................ $ 2,862 $ (513)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization.......................................................... 1,440 1,898
Provision for doubtful receivables..................................................... 1,154 991
Provision for inventory valuation...................................................... 158 538
Changes in operating assets and liabilities............................................ (10,795) (4,299)
Other, net............................................................................... (424) (372)
----------- -----------
Cash used in operating activities...................................................... (5,605) (1,757)
Cash flows from investing activities:
Purchases of property, plant and equipment............................................... (2,232) (2,733)
Proceeds from disposals of property, plant and equipment................................. 410 554
Other.................................................................................... (286) (39)
----------- -----------
Cash used in investing activities...................................................... (2,108) (2,218)
Cash flows from financing activities:
Net change in lines of credit............................................................ 2,602 817
Repayments of long-term debt............................................................. (914) (227)
----------- -----------
Cash provided by financing activities.................................................. 1,688 590
Effect of exchange rate changes on cash.................................................... 780 (132)
----------- -----------
Decrease in cash and cash equivalents...................................................... (5,245) (3,517)
Cash and cash equivalents, beginning of period............................................. 9,204 5,526
----------- -----------
Cash and cash equivalents, end of period................................................... $ 3,959 $ 2,009
----------- -----------
----------- -----------
Supplemental cash flows information:
Operating activities include cash payments for interest and income taxes as follows:
Interest paid............................................................................ $ 2,721 $ 2,598
Income taxes paid........................................................................ 1,333 1,264
</TABLE>
See accompanying notes.
F-68
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 its wholly-owned subsidiary Bally Wulff Automaten GmbH,
"Automaten") and distributes (through its wholly-owned subsidiary Bally Wulff
Vertriebs GmbH. ("Vertriebs")) wall-mounted, coin-operated, armless gaming
machines 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 slot monitoring
systems for slot and video gaming machines. In three transactions dated November
1991, July 1992, and September 1993, BEC divested all of its interests in the
Company.
The accompanying condensed consolidated financial statements reflect all
adjustments which management believes necessary to present fairly the financial
position, results of operations and cash flows of the Company. All such
adjustments are of a normal recurring nature. Interim results may not
necessarily be indicative of results which may be expected for any other interim
period or for the year as a whole. The accompanying condensed consolidated
financial statements should be read in conjunction with the financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
The condensed consolidated balance sheet at December 31, 1995 was derived
from audited financial statements, but does not include all disclosures required
under generally accepted accounting principles.
Certain reclassifications have been made to prior years' financial
statements to conform with the 1996 presentation.
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 ("Merger"). The Merger
Agreement and certain mutual waivers entered into by the parties provide 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
("Converted 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) ("Cash Consideration"), plus
interest accruing at a rate of 5.5% per annum from May 3, 1996 to the effective
time of the merger, (ii) a fraction of a share of common stock, $.10 par value,
of Alliance ("Alliance 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, plus dividends accruing at a rate of 15% per
annum from May 3, 1996. The obligations of Alliance and the Company to
consummate the Merger are subject to various conditions, including obtaining
requisite 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.
The Company and Alliance have extended the unilateral termination date of the
Merger Agreement until June 18, 1996.
F-69
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt and lines of credit consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
10 3/8% Senior Secured Notes due 1998, net of unamortized discount
of $344 and $312................................................... $ 39,656 $ 39,688
-------- --------------
-------- --------------
Other long-term debt:
Wulff revolving lines of credit................................... $ 15,905 $ 16,289
Bally Gaming, Inc. revolving line of credit....................... 9,400 9,332
Notes payable 5% to 12%........................................... 4,983 4,662
Less current maturities........................................... (14,957) (24,678)
-------- --------------
$ 15,331 $ 5,605
-------- --------------
-------- --------------
</TABLE>
INCOME TAXES
The Company's effective tax rate in the 1995 and 1996 periods differs from
the U.S. statutory rate of 35% principally due to a higher effective tax rate on
income earned in Germany and the lack of current tax benefits available for
losses in the U.S.
RESEARCH AND DEVELOPMENT
Wulff, Gaming and Systems expense product research and development costs as
incurred. Research and development costs were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Wulff................................................................................ $ 853 $ 868
Gaming............................................................................... 971 877
Systems.............................................................................. 473 502
--------- ---------
$ 2,297 $ 2,247
--------- ---------
--------- ---------
</TABLE>
UNUSUAL CHARGES
During the quarter ended March 31, 1996, the Company incurred approximately
$1.0 million in legal, accounting, investment banking, public and investor
relations and printing costs in connection with the pending Merger. All of these
costs have been expensed as incurred.
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 10,751,299 and 10,805,262 for the three months
ended March 31, 1995 and 1996, respectively.
COMMITMENTS AND CONTINGENCIES
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
$16.7 million at March 31, 1996. It is possible that one or more of Gaming's
customers whose obligation has been guaranteed by Gaming and/or the Company may
be unable to make payments as such become due. In this case Gaming and/or the
Company may become responsible for repayment of at least a portion of such
amounts over the term of the receivables. At March 31, 1996, amounts due from
one customer under three contracts totaling $3.7 million were past due and these
amounts and subsequent installments have not been paid. In general, under the
terms of these contracts, Gaming and/or the Company may be responsible for
monthly payments of the outstanding obligations. The
F-70
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $6.6 million on all receivables with recourse is included in the
Company's allowance for doubtful accounts at March 31, 1996.
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 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.
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 March 31, 1996, the Company has $4.6 million in accounts and notes receivable
from an operator of two casinos for two different Indian tribes including $1.9
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 March 31, 1996. Management believes the receivable is properly
valued at March 31, 1996. As events change during 1996, management will
reevaluate its estimate of the realizability of the receivable.
On or about June 19, 1995, three purported class actions were filed in the
Chancery Court of Delaware by Company 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 Industries Inc. ("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 the Company had in place a shareholders'
right plan, commonly known 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) ("Alliance Merger"), 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
F-71
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 the 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 judgment. On April 2,
1996, the Company opposed WMS's motion for summary judgment and cross-moved for
summary judgment. Pursuant to the Merger Agreement, Alliance has agreed to
indemnify the directors and officers of the Company under 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 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
F-72
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 the License Agreement. The Company believes that no breach of
such License Agreement is caused by the Alliance Merger and the 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. 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, 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. The
Company, its subsidiaries and its current employees were not subject to such
investigation.
Prior to the conclusion of the federal criminal 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. The New Jersey report makes
no specific recommendations for action by the CCC. The gaming authorities in
Ontario, Canada, who have investigated the matters, 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. 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
F-73
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
disclosed as a result of the trial of the eighteen defendants (all of whom have
now pled, 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 operation 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 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
these 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.
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial statements are presented to
provide information regarding Bally Gaming, Inc., as guarantor of the Senior
Secured Notes, and Automaten and Vertriebs, 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 for Gaming and Wulff includes an
allocation of parent company revenues and expenses whereas the following
condensed consolidating financial statements do not reflect these allocations to
the subsidiaries. The condensed consolidating financial statements should be
read in conjunction with the notes to the condensed consolidated financial
statements provided herein, as well as the notes to the Company's consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year and ended December 31, 1995.
F-74
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1995
(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>
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 receivable, 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, 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
----------- --------- --------- ---------- ------------- -------------
----------- --------- --------- ---------- ------------- -------------
</TABLE>
(Continued)
F-75
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS--(CONTINUED)
DECEMBER 31, 1995
(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>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 557 $ 6,386 $ 19,342 $ 31 $ (7,760) $ 18,556
Accrued liabilities and other
payables............................. 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>
F-76
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<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................... $ 502 $ 2,626 $ (1,119) $ -- $ -- $ 2,009
Accounts and notes receivable, net of
allowance for doubtful accounts of $30,
$7,319 and $9,705 for Automaten, Vertriebs
and Gaming................................. 2,890 48,566 35,951 5,331 (9,866) 82,872
Inventories, net:
Raw materials and work-in-process......... 5,295 -- 12,047 -- -- 17,342
Finished goods............................ 3,426 13,231 19,684 -- (1,722) 34,619
----------- --------- --------- ---------- ------------- -------------
8,721 13,231 31,731 -- (1,722) 51,961
Other current assets........................ 1,028 1,655 731 837 199 4,450
----------- --------- --------- ---------- ------------- -------------
Total current assets.................... 13,141 66,078 67,294 6,168 (11,389) 141,292
Long-term notes receivable, net of allowance
for doubtful accounts of $66 and $7,821 for
Vertriebs and Gaming......................... -- 2,052 7,644 -- -- 9,696
Long-term receivables from affiliate.......... 24,325 -- -- 25,170 (49,495) --
Property, plant and equipment; net............ 1,149 12,703 11,866 -- (2,103) 23,615
Intangible assets, less accumulated
amortization of $11,597, $100 and $2,348 for
Vertriebs, Gaming and Parent................. -- 5,947 150 4,320 -- 10,417
Investment in subsidiaries.................... -- -- -- 90,766 (90,766) --
Other assets.................................. 313 524 113 449 517 1,916
----------- --------- --------- ---------- ------------- -------------
$ 38,928 $ 87,304 $ 87,067 $ 126,873 $ (153,236) $ 186,936
----------- --------- --------- ---------- ------------- -------------
----------- --------- --------- ---------- ------------- -------------
</TABLE>
(Continued)
F-77
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<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>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 831 $ 5,637 $ 16,365 $ 31 $ (8,157) $ 14,707
Accrued liabilities and other payables....... 4,315 3,891 6,045 1,907 100 16,258
Current maturities of long-term debt......... -- 14,765 9,460 453 -- 24,678
----------- --------- --------- ---------- ------------- ------------
Total current liabilities.............. 5,146 24,293 31,870 2,391 (8,057) $ 55,643
Long-term payables to affiliate................ -- 27,484 25,170 -- (52,654) --
10 3/8% Senior Secured Notes due 1998, net of
unamortized discount of $312.................. -- -- -- 39,688 -- 39,688
Other long-term debt, less current
maturities.................................. -- 4,578 15 1,012 -- 5,605
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)...... 3,546 87 (4,571) 9,931 (7,664) 1,329
Cumulative translation adjustments........... 8,407 9,265 (13) (206) (745) 16,708
Unearned compensation........................ -- -- -- (490) -- (490)
----------- --------- --------- ---------- ------------- ------------
Total stockholders' equity................... 33,782 30,949 30,012 83,782 (92,525) 86,000
----------- --------- --------- ---------- ------------- ------------
$ 38,928 $ 87,304 $ 87,067 $ 126,873 $ (153,236) $ 186,936
----------- --------- --------- ---------- ------------- ------------
----------- --------- --------- ---------- ------------- ------------
</TABLE>
F-78
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<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>
Revenues:
Sales................................ $ 18,742 $ 31,186 $ 33,991 $ -- $ (16,261) $ 67,658
Other................................ 282 732 127 335 (845) 631
----------- --------- --------- --------- ------------- -------------
19,024 31,918 34,118 335 (17,106) 68,289
----------- --------- --------- --------- ------------- -------------
Costs and expenses:
Cost of sales........................ 10,859 26,475 21,690 -- (15,524) 43,500
Selling, general and
administrative...................... 2,292 5,782 7,387 1,533 4 16,998
Provision for doubtful receivables... 9 130 1,015 -- -- 1,154
----------- --------- --------- --------- ------------- -------------
13,160 32,387 30,092 1,533 (15,520) 61,652
----------- --------- --------- --------- ------------- -------------
Operating income (loss)................ 5,864 (469) 4,026 (1,198) (1,586) 6,637
Interest expense....................... -- 329 1,038 1,161 (795) 1,733
----------- --------- --------- --------- ------------- -------------
Income (loss) before income taxes...... 5,864 (798) 2,988 (2,359) (791) 4,904
Provision (benefit) for income taxes... 2,677 (363) 1,048 (995) (325) 2,042
----------- --------- --------- --------- ------------- -------------
Net income (loss)...................... $ 3,187 $ (435) $ 1,940 $ (1,364) $ (466) $ 2,862
----------- --------- --------- --------- ------------- -------------
----------- --------- --------- --------- ------------- -------------
</TABLE>
F-79
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<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>
Revenues:
Sales................................ $ 12,947 $ 28,025 $ 28,311 $ -- $ (11,848) $ 57,435
Other................................ 143 751 335 671 (791) 1,109
----------- --------- --------- --------- ------------- -------------
13,090 28,776 28,646 671 (12,639) 58,544
----------- --------- --------- --------- ------------- -------------
Costs and expenses:
Cost of sales........................ 8,540 22,289 18,440 -- (11,512) 37,757
Selling, general and
administrative...................... 2,009 6,032 7,503 959 23 16,526
Provision for doubtful receivables... 12 360 619 -- -- 991
Unusual charges...................... -- -- 50 946 -- 996
----------- --------- --------- --------- ------------- -------------
10,561 28,681 26,612 1,905 (11,489) 56,270
----------- --------- --------- --------- ------------- -------------
Operating income (loss)................ 2,529 95 2,034 (1,234) (1,150) 2,274
Interest expense....................... -- 330 972 1,113 (750) 1,665
----------- --------- --------- --------- ------------- -------------
Income (loss) before income taxes...... 2,529 (235) 1,062 (2,347) (400) 609
Provision (benefit) for income taxes... 1,138 (36) 360 (309) (31) 1,122
----------- --------- --------- --------- ------------- -------------
Net income (loss)...................... $ 1,391 $ (199) $ 702 $ (2,038) $ (369) $ (513)
----------- --------- --------- --------- ------------- -------------
----------- --------- --------- --------- ------------- -------------
</TABLE>
F-80
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<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>
Cash flows from operating activities:
Net income (loss).............................. $ 3,187 $ (435) $ 1,940 $ (1,364) $ (466) $ 2,862
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Depreciation and amortization................ 516 652 514 248 (490) 1,440
Provision for doubtful receivables........... 9 130 1,015 -- -- 1,154
Provision for inventory valuation............ -- -- 158 -- -- 158
Changes in operating assets and
liabilities................................. (3,927) (845) (6,574) (1,116) 1,667 (10,795)
Other, net..................................... -- -- -- -- (424) (424)
----------- ----------- --------- --------- ------ -------------
Cash provided by (used in) operating
activities................................ (215) (498) (2,947) (2,232) 287 (5,605)
Cash flows from investing activities:
Purchases of property, plant and equipment..... (386) (1,296) (550) -- -- (2,232)
Proceeds from disposals of property, plant and
equipment..................................... 11 399 -- -- -- 410
Other.......................................... -- -- -- -- (286) (286)
----------- ----------- --------- --------- ------ -------------
Cash used in investing activities.......... (375) (897) (550) -- (286) (2,108)
Cash flows from financing activities:
Net changes in lines of credit -- (388) 2,592 -- -- 2,204
Repayments of long-term debt................... -- (1) (396) (118) (1) (516)
Change in payables to/receivables from
affiliates.................................... -- (2,285) (65) 2,350 -- --
----------- ----------- --------- --------- ------ -------------
Cash provided by (used in) financing
activities................................ -- (2,674) 2,131 2,232 (1) 1,688
Effect of exchange rate changes on cash.......... 132 648 -- -- -- 780
----------- ----------- --------- --------- ------ -------------
Decrease in cash and cash equivalents............ (458) (3,421) (1,366) -- -- (5,245)
Cash and cash equivalents, beginning of period... 1,362 7,487 355 -- -- 9,204
----------- ----------- --------- --------- ------ -------------
Cash and cash equivalents, end of period......... $ 904 $ 4,066 $ 1,011 $ -- $ -- $ 3,959
----------- ----------- --------- --------- ------ -------------
----------- ----------- --------- --------- ------ -------------
</TABLE>
F-81
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<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>
Cash flows from operating activities:
Net income (loss)............................... $ 1,391 $ (199) $ 702 $ (2,038) $ (369) $ (513)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Depreciation an amortization.................. 233 905 426 355 (21) 1,898
Provision for doubtful receivables:........... 12 360 619 -- -- 991
Provision for inventory valuation:............ -- -- 538 -- -- 538
Changes in operating assets and
liabilities:................................. (581) (2,393) (1,072) (1,045) 792 (4,299)
Other, net:..................................... -- 7 (20) -- (359) (372)
----------- --------- --------- --------- ----- -------------
Cash provided by (used in) operating
activities:................................ 1,055 (1,320) 1,193 (2,728) 43 (1,757)
Cash flows from investing activities:
Purchase of property, plant and equipment....... (82) (2,428) (223) -- -- (2,733)
Proceeds from disposals of property, plant and
equipment...................................... -- 554 -- -- -- 554
Other........................................... -- 3 1 -- (43) (39)
----------- --------- --------- --------- ----- -------------
Cash used in investing activities........... (82) (1,871) (222) -- (43) (2,218)
Cash flows from financing activities:
Net change in lines of credit................... -- 885 (68) -- -- 817
Repayments of long-term debt.................... -- -- (104) (123) -- (227)
Change in payables to/receivables from
affiliates..................................... (1,787) 1,787 (2,851) 2,851 -- --
----------- --------- --------- --------- ----- -------------
Cash provided by (used in) financing
activities................................. (1,787) 2,672 (3,023) 2,728 -- 590
Effect of exchange rate changes on cash........... (37) (95) -- -- -- (132)
----------- --------- --------- --------- ----- -------------
Decrease in cash and cash equivalents............. (851) (614) (2,052) -- -- (3,517)
Cash and cash equivalents, beginning of period.... 1,353 3,240 933 -- -- 5,526
----------- --------- --------- --------- ----- -------------
Cash and cash equivalents, end of period.......... $ 502 $ 2,626 $ (1,119) $ -- $ -- $ 2,009
----------- --------- --------- --------- ----- -------------
----------- --------- --------- --------- ----- -------------
</TABLE>
F-82
<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 the
nine months ended March 31, 1996, and further assuming 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 March 31,
1996. 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 that all the
resulting New Convertible Debentures are 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.
If the Merger and the Offerings do not occur, the principal difference in
Alliance's financial condition, relative to the historical Alliance financial
information otherwise presented herein, would be that Alliance's cash, cash
equivalents and securities available for sale would decrease by approximately
$7.0 million, which management believes will not have a material adverse effect
on the financial condition of Alliance or impair its ability to meet its ongoing
obligations.
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 financial statements of Alliance for the nine-month period
ended March 31, 1996. 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 and March 31, 1996. 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 nine-month period ended
March 31, 1996 are calculated by subtracting the unaudited six-month period
ended June 30, 1995 results from the audited year ended December 31, 1995
results and adding the unaudited three-month period ended March 31, 1996 results
thereto.
The Supplemental Unaudited Pro Forma Information presents pro forma cash
flow and fixed charges information and includes related pro forma adjustments,
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
"Reasons for and Effects of the Prosposal--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.
F-83
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1996 (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 $ 25,562 $ 2,009 $ 27,571 $ 152,900(a) $ 19,817
Available for Sale............................ (52,190)(b)
(77,220)(c)
(7,559)(c)
(10,410)(c)
1,535(d)
(14,810)(e)
Receivables, Net............................... 2,060 82,872 84,932 84,932
Inventories.................................... 661 51,961 52,622 52,622
Other.......................................... 3,775 4,450 8,225 8,225
---------- ---------- ---------- -----------
Total Current Assets......................... 32,058 141,292 173,350 165,596
Property and Equipment, Net...................... 52,065 23,615 75,680 75,680
Other Assets:
Long Term Receivables, Net..................... 5,600 9,696 15,296 15,296
Excess of Costs over Net Assets of an Acquired 2,074 5,290 7,364 46,523(c) 53,887
Business, Net.................................
Intangible Assets, Net......................... 11,273 5,127 16,400 4,998(c) 18,920
(2,478)(f)
Other, Net..................................... 8,218 1,916 10,134 6,500(a) 16,185
(449)(b)
---------- ---------- ---------- -----------
Total Other Assets........................... 27,165 22,029 49,194 104,288
---------- ---------- ---------- -----------
Total Assets................................. $ 111,288 $ 186,936 $ 298,224 $ 345,564
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable............................... $ 2,089 $ 14,707 $ 16,796 $ 16,796
Accrued Liabilities............................ 10,345 16,258 26,603 (3,789)(e) 21,964
(850)(b)
Current Maturities of Long Term Debt........... 4,041 24,678 28,719 (9,213)(b) 19,506
---------- ---------- ---------- -----------
Total Current Liabilities.................... 16,475 55,643 72,118 58,266
---------- ---------- ---------- -----------
Long Term Debt, Less Current Maturities.......... 95,048 45,293 140,341 140,000(a) 188,926
(41,415)(b)
(50,000)(f)
Other Liabilities................................ 4,325 4,325 4,325
---------- ---------- ---------- -----------
Total Liabilities............................ 115,848 100,936 216,784 251,517
Minority Interest................................ 1,035 1,035 1,035
Preferred Stock.................................. 15,000(a) 50,662
35,662(c)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common Stock, Par.............................. 1,298 108 1,406 125(a) 2,490
74(c)
93(c)
(108)(c)
900(f)
Paid-in Capital................................ 32,134 68,345 100,479 4,275(a) 108,012
(68,345)(c)
2,866(c)
3,637(c)
49,100(f)
16,000(f)
Retained Earnings (Accumulated Deficit)........ (37,960) 1,329 (36,631) (712)(b) (68,098)
(449)(b)
(1,329)(c)
522(d)
(11,021)(e)
(18,478)(f)
Cumulative Translation Adjustments............. 16,708 16,708 (16,708)(c)
Other Stockholders' Equity..................... (1,067) (490) (1,557) 490(c) (54)
1,013(d)
---------- ---------- ---------- -----------
Total Stockholders' Equity (Deficiency)...... (5,595) 86,000 80,405 42,350
---------- ---------- ---------- -----------
Total Liabilities and Stockholders' Equity
(Deficiency)................................ $ 111,288 $ 186,936 $ 298,224 $ 345,564
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
F-84
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1995(1)(3)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
-----------------------------------
AS BGII
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 67,651
(3,174)(h)
Unusual Charges and Other................................. 1,500
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
---------- -------- ----------
---------- -------- ----------
15% Preferred Stock Dividend................................
Net Loss Applicable to Common Shares........................
Income (Loss) Per Common Share(5)........................... $ (0.95) $ 0.45
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(6)
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....................... 106,804 (5,000)(i) 100,135
(1,669)(j)
Unusual Charges and Other................................. 1,500 (250)(j) 1,250
Depreciation and Amortization............................. 18,895 1,166(k) 22,642
2,404(l)
(298)(m)
800(n)
(325)(o)
-------- --------
Total Operating Costs................................... 381,316 378,144
-------- --------
Operating Income (Loss)..................................... 19,505 22,677
OTHER INCOME (EXPENSES):
Interest Income........................................... 2,798 2,798
Interest Expense.......................................... (16,211 ) (7,018)(n) (23,229 )
Casino Royalty............................................ (3,431 ) (3,431 )
Minority Interest......................................... (397 ) (397 )
Other, Net................................................ 418 418
-------- --------
Income (Loss) Before Taxes.................................. 2,682 (1,164 )
Domestic Tax Expense........................................ (555 ) (555 )
Foreign Tax Benefit (Expense)............................... (5,779 ) 3,779(p) (2,000 )
-------- --------
Net Income (Loss)........................................... $(3,652 ) $(3,719 )
-------- --------
--------
15% Preferred Stock Dividend................................ $(8,039 )
--------
Net Loss Applicable to Common Shares........................ $(11,758)
--------
--------
Income (Loss) Per Common Share(5)........................... $ (0.50 )
--------
--------
SUPPLEMENTAL INFORMATION:(6)
PRO FORMA CASH FLOW INFORMATION:
$ 7,225
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.............. $(1,164 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges and Preferred $(9,203 )
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
F-85
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED MARCH 31, 1996(1)(4)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
-----------------------------------
AS BGII
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gaming................................ $113,809 $ $113,809 $
Food and Beverage Sales............... 2,976 2,976
Net Equipment Sales................... 11 11 166,328
Other................................. 3,993
---------- -------- ----------
Total Revenues...................... 116,796 116,796 170,321
---------- -------- ----------
OPERATING COSTS:
Gaming................................ 77,019 77,019
Food and Beverage..................... 1,992 1,992
Equipment Sales....................... 3 3 107,831
Selling, General and Administrative... 33,147 252(q) 33,399 48,842
Unusual Charges and Other............. 3,179 3,179 7,312
Depreciation and Amortization......... 7,328 7,328 6,977
---------- -------- ----------
Total Operating Costs............... 122,668 122,920 170,962
---------- -------- ----------
Operating Income (Loss)................. (5,872) (6,124) (641)
OTHER INCOME (EXPENSES):
Interest Income....................... 1,206 1,206
Interest Expense...................... (6,341) (6,341) (4,949)
Casino Royalty........................ (2,931) (2,931)
Minority Interest..................... (708) (708)
Other, Net............................ 398 398
---------- -------- ----------
Income (Loss) Before Taxes.............. (14,248) (14,500) (5,590)
Domestic Tax Expense.................... (581) (581) (216)
Foreign Tax (Expense) Benefit........... (2,032)
---------- -------- ----------
Net Loss................................ $(14,829) $(15,081) $ (7,838)
---------- -------- ----------
---------- -------- ----------
15% Preferred Stock Dividend............
Net Loss Applicable to Common Shares....
Loss Per Common Share(5)................ $ (1.21) $ (0.73)
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(6)
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................................ $113,809 $ $113,809
Food and Beverage Sales............... 2,976 2,976
Net Equipment Sales................... 166,339 166,339
Other................................. 3,993 3,993
-------- --------
Total Revenues...................... 287,117 287,117
-------- --------
OPERATING COSTS:
Gaming................................ 77,019 77,019
Food and Beverage..................... 1,992 1,992
Equipment Sales....................... 107,834 107,834
Selling, General and Administrative... 82,241 (3,750)(r) 66,256
(12,235)(s)
Unusual Charges and Other............. 10,491 (2,725)(s) 7,766
Depreciation and Amortization......... 14,305 874(t) 17,114
1,803(u)
(224)(v)
600(w)
(244)(x)
-------- --------
Total Operating Costs............... 293,882 277,981
-------- --------
Operating Income (Loss)................. (6,765 ) 9,136
OTHER INCOME (EXPENSES):
Interest Income....................... 1,206 1,206
Interest Expense...................... (11,290 ) (5,632)(w) (16,922 )
Casino Royalty........................ (2,931 ) (2,931 )
Minority Interest..................... (708 ) (708 )
Other, Net............................ 398 398
-------- --------
Income (Loss) Before Taxes.............. (20,090 ) (9,821 )
Domestic Tax Expense.................... (797 ) (797 )
Foreign Tax (Expense) Benefit........... (2,032 ) 1,321(y) (711 )
-------- --------
Net Loss................................ $(22,919) $(11,329)
-------- --------
--------
15% Preferred Stock Dividend............ $(5,916 )
--------
Net Loss Applicable to Common Shares.... $(17,245)
--------
--------
Loss Per Common Share(5)................ $ (0.70 )
--------
--------
SUPPLEMENTAL INFORMATION:(6)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities.. $20,564
--------
--------
Cash Flows from Investing Activities.. $(1,088 )
--------
--------
Cash Flows from Financing Activities.. $(3,059 )
--------
--------
Pro Forma Deficit of Earnings to Fixed C $(9,821 )
--------
--------
Pro Forma Deficit of Earnings to Fixed C $(15,737)
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
F-86
<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. The Unaudited Pro Forma Condensed Combined Balance Sheet is
presented assuming the combination occurred on March 31, 1996. 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 of the Merger ($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 of the Merger), (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 15%
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). The price per share of Common Stock used for purposes of the
Unaudited Pro Forma Condensed Combined Financial Information is $4.00, based on
the closing price of the Common Stock as reported on NASDAQ on May 7, 1996. The
assumed price per share of the $5.0 million Private Placement is computed as the
lower of $4.56 (the average trading price of the Common Stock for the five
trading day period immediately preceding the Private Placement agreement) and
the average of the last sales price of the Common Stock for the five trading
days immediately preceding the Merger (for these purposes, the closing price on
May 7, 1996). See "Reasons for and Effects of the Proposal--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 Unaudited 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 MARCH 31, 1996
(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. For every 1.0% increase in the effective dividend
rate on the 15% Preferred Stock, which is assumed to be issued at
liquidation value, the correlative change in the 15% Preferred Stock
dividend would be $0.2 million, or a $0.01 decrease in earnings per common
share.
(b) To adjust for the repayment of $52.2 million of certain 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 $0.7 million and
accrued and unpaid interest of $0.9 million. Additionally, certain deferred
financing costs related to the BGII debt totaling $0.4 million will be
written off. Based on the passage of time from March 31, 1996 to June 18,
F-87
<PAGE>
1996, it is anticipated that at the effective time of the Merger the total
repayment of debt including accrued and unpaid interest, original issue
discount and other costs associated with the prepayment, will be $53.3
million.
(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............................................................ 77,220
Value of Common Stock to be exchanged for BGII shares......................... 2,940
Value of 15% Preferred Stock to be exchanged for BGII shares.................. 35,662
Contract termination costs for certain BGII personnel (see below)............. 6,291
--------------
Total consideration........................................................... 132,523
Estimated value of BGII's underlying net assets............................... (86,000)
--------------
Excess of costs over the net assets of BGII acquired.......................... $ 46,523
--------------
--------------
</TABLE>
The compensation to be paid to BGII personnel consists of cash payable
to Messrs. Gillman and Jenkins totaling $5.9 million and Common Stock valued
at $0.4 million (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 $3.3 million of Common Stock (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 effected in the Unaudited Pro Forma Condensed
Combined Financial Information 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
Unaudited Pro Forma Condensed Combined Financial Information.
(d) To add back the $1.0 million valuation adjustment, net of the tax
effect of $0.5 million, for the Alliance-owned BGII common stock,
representing the difference between the purchase cost of $10.4 million and
the market value at March 31, 1996 of $8.9 million.
(e) To record the payment of certain Merger and related expenses assumed
to be incurred prior to and concurrent with the date of the Unaudited Pro
Forma Condensed Combined Balance Sheet totaling $14.8 million, of which $3.8
million has been accrued for at March 31, 1996.
(f) Represents the assumed conversion of all $50.0 million of the New
Convertible Debentures assumed to be issued in the Exchange Offer into
shares of Common Stock. The Exchange Offer is not subject to any minimum or
maximum condition, and up to $85.0 million of New Convertible Debentures
could be issued therein. Each $1,000 principal amount of Old Convertible
Debentures is convertible into 100 shares of Common Stock. Each $1,000
principal amount of the New Convertible Debentures will be converted in the
event of the Automatic Conversion into approximately 180 shares of Common
Stock. The additional 80 shares of Common Stock per $1,000 of principal are
treated as a "sweetener" to the original terms of the Old Convertible
Debentures and recorded at the fair value of the stock consideration being
offered as a non-cash charge for inducement for early conversion.
F-88
<PAGE>
In accordance with the rules and regulations of the Commission, the net
charge for inducement for early conversion resulting from the Exchange Offer
was not considered in the Unaudited Pro Forma Condensed Combined Statements
of Operations and has been reflected in the Unaudited Pro Forma Condensed
Combined Balance Sheet as a charge against retained earnings. The assumed
$50.0 million of New Convertible Debentures to be issued in the Exchange
Offer and converted into Common Stock pursuant to the Automatic Conversion
would result in a non-cash charge of $18.5 million, representing the value
of the Common Stock inducement of $16.0 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 $3.7
million. For tax purposes the Automatic Conversion results in an
extinguishment of debt gain. However, this tax gain would be entirely offset
against the Company's net operating loss carry-forwards, based on current
Common Stock prices.
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 of 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 $16.8 million increase in interest expense from
the issuance of the $140.0 million of debt which Alliance currently intends
to issue as part of the financing of the Merger, and to amortize the related
debt issuance costs over 7 years, offset by the elimination of the $6.0
million 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 of $3.8 million
caused by the Exchange Offer and the Automatic Conversion into Common Stock
of an assumed $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
$0.8 million on a pre-tax basis.
(o) Represents the reduction of the amortization of the deferred
financing costs related to the assumed $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.
F-89
<PAGE>
4. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR
THE NINE-MONTH PERIOD ENDED MARCH 31, 1996
(q) Alliance development expenses, which relate to mergers, acquisitions
and joint ventures, were reduced to $3.0 million annually. For the
nine-month period ended March 31, 1996, Alliance was below this $3.0 million
annualized amount by $0.3 million. The elimination of direct costs related
to the Merger is shown separately in note (s) below.
(r) 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.
(s) To eliminate costs associated with the Merger incurred by Alliance
and BGII of $12.2 million and $2.7 million, respectively, consisting of
legal, accounting and investment banking fees and related costs.
(t) To record the amortization of the goodwill resulting from the
Merger. The goodwill is being amortized over 40 years.
(u) 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.
(v) To eliminate the amortization of goodwill on the historical
financial statements of BGII.
(w) To adjust for the $12.6 million increase in interest expense from
the issuance of the $140.0 million of debt, at face value, which Alliance
currently intends to issue as part of the financing of the Merger, and to
amortize the related debt issuance costs over 7 years, net of the
elimination of the $4.2 million interest on the BGII debt being refinanced.
Also represents the reduction of interest expense of $2.8 million caused by
the Exchange Offer and the Automatic Conversion into Common Stock of an
assumed $50.0 million of principal of the New Convertible Debentures.
(x) Represents the reduction of the amortization of the deferred
financing costs related to the assumed $50.0 million of New Convertible
Debentures exchanged and converted into Common Stock.
(y) 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. 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>
TWELVE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED MARCH 31,
1995 1996
----------------- -------------------
<S> <C> <C>
Historical weighted average shares outstanding................................... 11.3(a) 12.2
Shares to be sold in the Private Placement....................................... 1.3 1.3
Shares to be issued to BGII stockholders......................................... 0.7 0.7
Common Stock to be issued to terminate contracts for certain BGII personnel...... 0.9 0.9
Common Stock to be issued in the Automatic Conversion............................ 9.5 9.5
--- ---
Pro forma weighted average shares outstanding................................ 23.7 24.6
--- ---
--- ---
</TABLE>
- ------------------------
(a) Excludes 1.3 million shares of non-voting special stock held by KIC, which
was converted into Common Stock in December 1995.
F-90
<PAGE>
Effect of the Merger on the shareholders of Alliance, assuming a stock price
of $4.00, exchange of $50.0 million of Old Convertible Debentures and conversion
of New Convertible Debentures solely into Common Stock, is as follows (shares in
millions):
<TABLE>
<S> <C> <C> <C> <C>
Shares of Common Stock outstanding at
March 31, 1996.......................... 13.0
Shares of BGII common stock outstanding
at March 31, 1996....................... 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
stockholders............................ 0.7
Common Stock to be issued to terminate
contracts for certain BGII personnel.... 0.9
Common Stock to be sold in Private
Placement............................... 1.3
Common Stock to be issued in the
Automatic Conversion.................... 9.5
---
Pro forma total outstanding shares... 25.4
---
---
</TABLE>
If all $85.0 million outstanding Old Convertible Debentures were exchanged
and the resulting New Convertible Debentures converted into Common Stock, the
pro forma total of outstanding shares would increase by 6.3 million.
6. 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 15% 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.
F-91
<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 Company believes that this information is a useful adjunct to net
income, cash flows and other 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 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 nine-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 non-recurring or unusual charges will not occur in the future.
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.................. $ 20,431
-------
-------
NINE MONTH PERIOD ENDED MARCH 31, 1996
Operating Income (Loss)......................... $ (5,872) $ (6,124) $ (641)
Depreciation and Amortization................... 7,328 7,328 6,977
Minority Interest............................... (708) (708) --
Casino Royalty.................................. (2,931) (2,931) --
----------- ------------- -------------
$ (2,183) (2,435) 6,336
----------- ------------- -------------
-----------
Reclassification of Certain Direct Merger
Costs........................................ 12,235 2,725
ADJUSTMENTS:
Rainbow Operations............................ (160) --
Other Unusual or Nonrecurring Charges......... 3,179 4,566
------------- -------------
Adjusted Operating Cash Flow.................... $ 12,819 $ 13,627 $ 3,750 $ 30,196
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.................. $ 15,716
-------
-------
</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 $1.2 million, and the pro forma
deficit of earnings to fixed charges after the 15% Preferred Stock dividend was
$9.2 million. The Company's pro forma deficit of earnings to fixed charges, both
before and after the 15% Preferred Stock dividend, for the nine-month period
ended March 31, 1996 was $9.8 million, and $15.7 million, respectively.
F-92
<PAGE>
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 totaled $1.7 million and $12.2
million for the year ended June 30, 1995 and the nine months ended March 31,
1996. BGII's direct costs incurred relating to the Merger totaled $0.3 million
and $2.7 million for the year ended June 30, 1995 and the nine months ended
March 31, 1996, 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 nine months ended March 31, 1996 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 June 30, 1995 and the nine months ended March 31, 1996 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 referred to under "Forecast of Operations".
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. Results for the nine months ended March 31, 1996 were
adjusted for charges consisting of a reserve for V.A.T. 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 $1.0 million.
In June 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 and $1.8 million for the fiscal year ended June
30, 1995 and the nine months ended March 31, 1996, respectively.
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. Also, for the nine months ended March
31, 1996 Alliance recorded a provision for impaired assets of two business
development projects, totaling $3.2 million.
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.
F-93
<PAGE>
FORECAST OF OPERATIONS
The following Forecast of Operations (the "Forecast") sets forth, to the
best of management's knowledge and belief and giving consideration to actual
results for Alliance and BGII for the three months ended March 31, 1996,
management's expectations of the results of operations for the Company (assuming
consummation of the Merger and giving effect to the other elements of the
Transaction) for the twelve-month period ending December 31, 1996. The Forecast
is based on Alliance's current best estimates of expected results for the period
presented given the forecasted assumptions described in "Summary of Significant
Assumptions and Accounting Policies for the Forecast". The Forecast, which
consists of forward-looking statements, is qualified by, and subject to, the
assumptions set forth below and the other information contained herein, and
should be read in conjunction with "Summary of Significant Assumptions and
Accounting Policies for the Forecast" as well as "Unaudited Pro Forma Condensed
Combined Financial Information", "Supplemental Analysis of Pro Forma Adjusted
Operating Cash Flows", "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.
Alliance does not intend to update or otherwise revise the Forecast to
reflect events or circumstances existing or arising after the date of this
Consent Statement 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
Alliance 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 Alliance. However, the
forecast does represent management's good faith estimate of the most likely 1996
results of operations including operating income, net income (loss), net income
(loss) applicable to Common Shares, income (loss) per share, EBITDA and Adjusted
Operating Cash Flow. The assumptions disclosed herein are those that Alliance
believes are significant to the Forecast and reflect 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. Not all
assumptions used in the preparation of the Forecast have been set forth herein.
In addition, the business and operations of the Company are subject to
substantial risks which increase the uncertainty inherent in the Forecast, such
as the Company's high leverage and fixed charges, its operating history and
recent losses, possible difficulties in implementing the Merger, potential
changes of control, competition, risks of product development, the need to
provide customer financing, risks of sales to non-traditional gaming markets,
risks of foreign operations, dependance on continued services of key personnel,
strict regulation by gaming authorities, ongoing BGII regulatory investigations,
certain litigation regarding Bally Trade name, uncertainties concerning gaming
taxes and value added taxes and limitations on use of net operating losses. Many
of these factors 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. The inclusion of the Forecast herein should not be
regarded as a representation by Alliance or any other person that the Forecast
will be achieved. Holders are cautioned not to place undue reliance on the
Forecast. If the Merger and the Offerings do not occur, the principal difference
in Alliance's financial condition, relative to the historical Alliance financial
information otherwise presented herein, would be that Alliance's cash, cash
equivalents and securities available for sale would decrease by approximately
$7.0 million, which management believes will not have a material adverse effect
on the financial condition of Alliance or impair its ability to meet its ongoing
obligations.
F-94
<PAGE>
Alliance 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 certain non-operating
items, income taxes, extraordinary items and significant changes in financial
position.
The Forecast reflects, among other things, the results of operations, EBITDA
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 operating requirements relating to capital
maintenance and expansion. 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 flow earned at certain subsidiaries
being unavailable for distribution to the Company, including to service
indebtedness of the Company.
F-95
<PAGE>
ALLIANCE GAMING CORPORATION
FORECAST OF OPERATIONS
<TABLE>
<CAPTION>
COMPARATIVE ANALYSIS OF
OPERATIONS (1)
-----------------------------------------------------
TWELVE MONTHS THREE MONTHS FORECAST OF OPERATIONS
ENDED DECEMBER 31, ENDED MARCH 31, FOR THE TWELVE
-------------------------- ------------------------- MONTHS ENDING
1994 1995 1995 1996 DECEMBER 31, 1996
------------ ------------ ------------ ----------- ------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS
INFORMATION:
Revenues
Gaming........................ $ 129,690 $ 147,590 $ 36,365 $ 39,707 $ 163,389
Food and Beverage Sales....... 7,096 4,045 1,118 856 4,189
Net Equipment Sales........... 231,371 244,488 67,664 57,440 254,467
Other......................... 4,874 4,841 631 1,109 3,912
------------ ------------ ------------ ----------- ------------
Total Revenues.............. 373,031 400,964 105,778 99,112 425,957
------------ ------------ ------------ ----------- ------------
Operating Costs
Gaming........................ 90,125 98,377 22,972 26,771 103,331
Food and Beverage............. 4,755 2,884 701 566 3,150
Equipment Sales............... 152,582 157,800 42,889 36,740 158,804
Selling, General and
Administrative............... 91,508(2) 94,859(2) 24,635(2) 22,318(2) 113,283(2)
Unusual Charges and Other..... 300 5,216 400 3,479 4,479
Depreciation and
Amortization................. 22,483 22,584 4,740 5,311 23,192
------------ ------------ ------------ ----------- ------------
Total Operating Costs..... 361,753 381,720 96,337 95,185 406,239
------------ ------------ ------------ ----------- ------------
Operating Income................ 11,278 19,244 9,441 3,927 19,718
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
Net Income (Loss)............... $ (12,181) $ (7,153) $ 2,906 $ (3,076) $ (27,939)
15% Preferred Stock Dividends... (8,039) (8,039) (1,900) (1,900) (8,039)
------------ ------------ ------------ ----------- ------------
Net Income (Loss) Applicable to
Common Shares.................. $ (20,220) $ (15,192) $ 1,006 $ (4,976) $ (35,978)
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
Income (Loss) per Common
Share.......................... $ (0.89) $ (0.64) $ 0.04 $ (0.20) $ (1.42)(3)
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
Pro Forma (or Forecasted) Common
Shares Outstanding............. 22,600 23,800 23,700 25,400 25,400
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
SUPPLEMENTAL INFORMATION:
Operating Income................ $ 11,278 $ 19,244 $ 9,441 $ 3,927 $ 19,718
Depreciation and Amortization... 22,483 22,584 4,740 5,311 23,192
Casino Royalty.................. (1,670) (3,674) (983) (1,024) (4,368)
Minority Interest............... (675) (504) (83) (432) (920)
------------ ------------ ------------ ----------- ------------
Subtotal...................... 31,416 37,650 13,115 7,782 37,622
Adjustments:
Rainbow Operations............ -- 1,912(4) 1,189(4) -- --
Unusual Charges and Other..... 2,856(5) 7,783(5) 600(5) 3,487(5) 4,479(6)
Direct Merger Costs........... -- -- -- -- 12,815(7)
------------ ------------ ------------ ----------- ------------
Adjusted Operating Cash Flow.... $ 34,272 $ 47,345 $ 14,904 $ 11,269 $ 54,916
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
OTHER DATA:
Net Interest Expense.......... $ 19,561 $ 20,743 $ 4,964 $ 5,191 $ 20,491
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
</TABLE>
- ------------------------------
(1) See Note (2) -- Presentation of Supplemental Comparative Information of the
"Summary of Significant Assumptions and Accounting Policies for the
Forecast".
See accompanying Summary of Significant Assumptions and Accounting Policies for
the Forecast
F-96
<PAGE>
(2) Selling, general and administrative costs are net of the following: direct
Merger costs; the business development costs over (under) the $3.0 million
budgeted annual amount totaling $4.7 million, $1.0 million, $1.4 million and
$(52,000) for the twelve months ended December 31, 1994 and 1995 and the
three months ended March 31, 1995 and 1996, respectively; and synergy cost
savings totaling $5.0 million for the twelve months ended December 31, 1994,
1995 and ending 1996 and $1.3 million for the three months ended March 31,
1995 and 1996. See Note (6) below for one-time $1.0 million costs to
implement synergy cost savings in 1996. See Note (7) below for the 1996
presentation which includes direct Merger costs.
(3) The Loss per Common Share in the forecasted twelve-month period ending
December 31, 1996 is computed based on 25,400,000 common shares outstanding,
and includes depreciation and amortization of $23.2 million (or $0.91 per
share), direct Merger costs of $12.8 million (or $0.50 per share), loss on
assumed conversion of New Convertible Debentures of $18.5 million (or $0.73
per share) and 15% Preferred Stock Dividends of $8.0 million (or $0.32 per
share).
(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 GAAP.
(6) For the twelve months ending December 31, 1996, reflects items determined by
management to be non-recurring charges, consisting of a provision for
impaired assets of two development projects totaling $3.2 million included
in Alliance's Selling, General and Administrative costs; 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); and certain charges of $0.3
million relating to a regulatory investigation and legal proceedings in
Louisiana.
(7) Direct Merger costs for the twelve months ending December 31, 1996 of $12.8
million 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 earlier periods.
F-97
<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 Operations 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 Alliance's best estimate as of the
date of this Consent Statement 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, 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.
The Forecast assumes that, among other things: (i) the proceeds of the
Offerings and the Private Placement are used as contemplated in "Reasons for and
Effects of the Proposal -- The Merger and Related Financings"; (ii) there will
be no change in GAAP 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.
Alliance 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 Consent Statement.
NOTE 2. -- PRESENTATION OF SUPPLEMENTAL COMPARATIVE INFORMATION
For the purpose of assisting investors in evaluating the forecasted
information, Alliance has presented a Comparative Analysis for the twelve-month
periods ended December 31, 1994 and 1995 and the three-month periods ended March
31, 1995 and 1996 which have been derived using accounting principles and
assumptions consistent with those used in deriving the Pro Forma Unaudited
Condensed Combined Statements of Operations included elsewhere in this Consent
Statement. Each period in the Comparative Analysis includes adjustments for the
planned reduction of the Company's ongoing development costs to $3.0 million per
year, certain estimated annual synergy cost savings (net of one-time
implementation costs) and items management believes to be one-time charges, and
assumes that the Rainbow Casino was consolidated since its opening in July 1994.
The Comparative Analysis has been prepared by management to provide potential
participants in the Exchange Offer with additional information to analyze the
Forecast and should not be construed as a 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.
F-98
<PAGE>
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).
Alliance has agreements with local bars, taverns, restaurants and
convenience stores for either space leases or revenue-sharing arrangements.
Under the revenue-sharing arrangements, Alliance shares the revenues from the
machines with the location operator, and with space leases Alliance pays a fixed
rental to the owner of the establishment and then Alliance receives all of the
revenues derived from the gaming devices. At December 31, 1995, the weighted
average remaining term of Alliance'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)
<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, as well as due to an increase in average
net win per machine based primarily on the assumed implementation of Gambler's
Bonus discussed below. The Forecast assumes that of the contracts expiring
during the forecast period Alliance intends to retain 80%, which is consistent
with historical renewal rates. For the year ended June 30, 1995, Alliance did
not renew 17% of expiring agreements, including those Alliance had determined to
allow to lapse.
Additionally, in December 1995, Alliance implemented the Gambler's Bonus
cardless slot player's club and player tracking system. Alliance 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 based on an
anticipated increase in the play at these machines. Consistent with contracts
signed to date, the Forecast assumes that the contracts with the additional
locations will allow Alliance to receive a percentage of the increased gaming
win generated 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.
F-99
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
The Forecast assumes that costs and expenses (which include selling, general
and administrative costs) related to Nevada gaming machine management operations
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 changed by referendum. Forecasted results of the
Louisiana gaming machine management 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. Alliance's operations also depend on the financial viability
of the racetrack, which is beyond the control of Alliance.
Pursuant to the terms of a subordinated loan of up to $6.5 million made in
March 1992 by Mr. Wilms to VSI, a majority-controlled subsidiary of Alliance
(the "VSI Loan"), 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 and expenses (which include selling, general
and administrative costs) related to Louisiana gaming machine management
operations will be approximately the same during the forecast period as a
percentage of revenues as during 1995.
F-100
<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. The Forecast also 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.
The Forecast also assumes that costs and expenses (which includes selling,
general and administrative costs) related to Plantation Station operations are
approximately the same during the forecast period as a percentage of revenues as
in 1995.
F-101
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
RAINBOW CASINO
RAINBOW CASINO OPERATIONS (A)
<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>
TOTAL VICKSBURG MARKET
Average Number of Slot Machines........................................ 2,849 2,847 2,880
Average 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
Average Number of Slot Machines........................................ 573 589 589
Average 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 the
Company's location at Vicksburg Landing and the adjoining amenities will 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. The Forecast assumes that
there are no new entrants into the market and no relocation of existing
facilities within the market. 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 Forecast assumes that costs and expenses (which include selling, general
and administrative but do not include the casino royalty related to the Rainbow
Casino operations) are relatively stable as a percentage of revenues as compared
to the 1995 levels.
NET EQUIPMENT SALES
Forecasted equipment sales revenues includes the operating results from
Gaming, Systems and Wulff. There are numerous factors which affect any forecast
of gaming equipment sales, including gaming regulatory factors and casino or
arcade machine demand and patron preferences. The impact of such factors on the
Company will be material.
GAMING
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
F-102
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
markets. Equipment sales is a function of the number of unit sales and the net
sales price per unit. Gaming results include Bally Gaming International GmbH
("GmbH") and BGI Australia Pty Limited along with certain reclassifications from
historical presentation.
GAMING OPERATIONS
<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 15,000
International.............................................................. 4,499 5,498 5,500
---------- ---------- ------------
Total.................................................................. 21,625 18,084 20,500
Net Revenues............................................................... $ 118,659 $ 111,849 $ 122,483
Cost and Expenses.......................................................... $ 111,355 $ 104,544 $ 111,733
</TABLE>
Although worldwide electronic gaming machine sales (for these purposes,
primarily slot and video machines) decreased in 1995 by approximately 18%
primarily because of a reduced number of new casino openings and delays in
previously expected riverboat activity, 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, (3) the
expansion of certain other markets and (4) the expected increase in demand for
replacement machines as a result of an increasing portion of the installed base
reaching its natural replacement cycle. 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 two 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 by approximately 18% 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.
F-103
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
SYSTEMS
Systems' revenues reflect the sales of computer hardware and computer
software, as well as maintenance and upgrades of such hardware and software, 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' game monitoring units ("GMUs").
SYSTEMS OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Revenues....................................................... $ 13,386 $ 20,681 $ 20,565
Cost and Expenses.................................................. $ 9,793 $ 14,893 $ 14,262
</TABLE>
The Forecast 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 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 1996 than during the first half of 1995, but
to increase, and to exceed the 1995 level of demand, in the second
F-104
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
half of 1996 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 in the
second half of 1996 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 that other than as presented, 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 non-recurring
revenue items as well as non-recurring expense items. 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 the Company's 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
--------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gaming Machine Management................................................... $ 6,166 $ 7,773 $ 5,132
Casinos..................................................................... 644 3,803 1,580
Gaming...................................................................... 1,522 879 750
Systems..................................................................... 626 294 276
Wulff....................................................................... 7,389 7,067 5,682
Other....................................................................... 1,169 444 65
--------- --------- ------------
Total................................................................... $ 17,516 $ 20,260 $ 13,485
--------- --------- ------------
--------- --------- ------------
</TABLE>
F-105
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
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.
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>
FORECASTED
TWELVE
TWELVE MONTHS ENDED THREE MONTHS ENDED MONTHS
DECEMBER 31, MARCH 31, ENDING
-------------------- -------------------- DECEMBER 31,
1994 1995 1995 1996 1996
--------- --------- --------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EBITDA by Business Unit:
Gaming......................................... $ 7,304 $ 7,305 $ 2,659(a) $ 1,046(a) $ 10,750
Systems........................................ 3,593 5,788 1,997(a) 1,620(a) 6,303
Wulff.......................................... 15,575 15,172 5,106(a) 3,406(a) 16,836
Gaming Machine Management...................... 17,159 18,260 4,758 4,469 19,957
Casinos........................................ 2,927 10,546 731 3,889 14,958
Alliance Corporate Administrative Expense...... (10,609) (8,912) (1,654) (4,723) (8,979)
Alliance Development Expense................... (7,694) (15,072) (2,139) (3,497) (13,815)
BGII Corporate Administrative Expense.......... (4,520) (3,732) (1,285) (604) (4,800)
Discontinued Operations/Other.................. (1,378) (933) (58) (64) --
Casino Royalty................................. -- (2,718) (27) (1,024) (4,368)
Minority Interest.............................. (675) (504) (83) (432) (920)
BGII Unusual Charges and Other................. (300) (7,216) (400) (1,296) (2,300)
--------- --------- --------- --------- ------------
Combined EBITDA.................................. 21,382 17,984 9,605 2,790 33,622
Adjustments:
Direct Merger Costs............................ -- 13,106(b) -- 3,794(b) 12,815(b)
Alliance Development Expense Adjustment........ 4,694(c) 966(c) 1,389(c) (52 (c) --
Rainbow Operations............................. 340(d) 2,506(d) 2,060(d) -- --
Unusual or Nonrecurring Charges................ 2,856(e) 7,783(f) 600(g) 3,487(h) 4,479(i)
Synergy Cost Savings........................... 5,000(j) 5,000(j) 1,250(j) 1,250(j) 4,000(j)
--------- --------- --------- --------- ------------
Adjusted Operating Cash Flow..................... $ 34,272 $ 47,345 $ 14,904 $ 11,269 $ 54,916
--------- --------- --------- --------- ------------
--------- --------- --------- --------- ------------
</TABLE>
- --------------------------
(a) Differences in interim results for the three-month periods for Gaming and
Systems were affected by the timing and number of new casino openings, and
management believes that the interim results for Wulff in the 1996 quarter
were affected 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
(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 and Other. No such costs were incurred by either
company in the three months ended March 31, 1995. For the three months ended
March 31, 1996, $2.8 million of direct Merger costs are included in Alliance
Development Expense and $1.0 million in BGII Unusual Charges and Other. For
the forecasted twelve months ending December 31, 1996, $10.8 million of
direct Merger costs are included in Alliance Development Expense and $2.0
million in BGII Unusual Charges and Other.
(c) Reflects Alliance Development Expense, which relates to mergers,
acquisitions and joint ventures, adjusted to $3.0 million annually. The
adjustment to $3.0 million reflects the anticipated elimination of expenses
that were being incurred pending Alliance's accomplishment of its strategic
plan to acquire a major gaming manufacturing company. To accomplish this
reduction, Alliance reduced payroll costs and fees paid to consultants and
legal costs
F-106
<PAGE>
NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT (CONTINUED)
related to non-BGII transactions it had been pursuing. The adjustment to
eliminate direct costs related to the Merger is shown in Note (b) above. For
the three months ended March 31, 1996, Alliance Development Expense was
below the $3.0 million annual rate by $52,000.
(d) 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 and three months ended March 31, 1995, to reflect the 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, $1.0 million and $1.0 million, for the twelve
months ended December 31, 1994 and 1995 and the three months ended March 31,
1995, respectively).
(e) Includes legal costs included as BGII Corporate Administrative Expense
related to a former executive totaling $0.5 million and $0.3 million
recorded as BGII Unusual Charges and Other 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.
(f) 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 relating to a regulatory investigation and legal
proceedings in Louisiana included in BGII Unusual Charges and Other, and
$0.2 million included in BGII Corporate Administrative Expense for legal
costs related to the "Bally" trade name litigation. BGII Unusual Charges and
Other also includes $2.0 million in costs related to the merger agreement
between BGII and 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
V.A.T.
(g) Includes certain charges of $0.4 million included in BGII Unusual Charges
and Other 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.
(h) Includes a provision for impaired assets of two development projects
totaling $3.2 million included in Alliance Corporate Administrative Expense.
Also includes certain charges of $0.3 million included in BGII Unusual
Charges and Other relating to a regulatory investigation and legal
proceedings in Louisiana.
(i) Includes a provision for impaired assets of two development projects
totaling $3.2 million in Alliance Corporate Administrative Expense, $1.0
million of one-time charges to implement the expected annual synergy cost
savings, and certain charges of $0.3 million included in BGII Unusual
Charges and Other relating to a regulatory investigation and legal
proceedings in Louisiana.
(j) To adjust for estimated synergy cost savings indentified 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. For the forecasted twelve months ending December 31,
1996, the synergy cost savings is presented net of the $1.0 million of
one-time charges to implement the cost savings (which is added back in (i)
above).
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............................................................................................. 773
------
$ 4,657
------
------
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources of the Company (Pro Forma)".
F-107
<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 Consent Statement.
LIQUIDITY AND CAPITAL RESOURCES OF ALLIANCE
At March 31, 1996, Alliance had working capital of approximately
$15,583,000, a decrease of approximately $16,163,000 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 March 31, 1996, Alliance had $25,562,000 in
cash, cash equivalents and securities available for sale (including $8,875,000
representing the market value of the 1,000,000 shares of BGII common stock owned
by Alliance), of which approximately $9,000,000 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 nine months ended March 31, 1996, Alliance incurred development
costs associated with pursuing Alliance's business strategy relating to mergers
and acquisition of approximately $14,233,000 consisting of $12,235,000 of direct
costs incurred related to the Merger and the previous tender offer and consent
solicitation by Alliance and $1,998,000 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.
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 March 31, 1996, amounts outstanding
under the HFS facility and the
F-108
<PAGE>
related financings aggregated $9.4 million. As adjusted, RCC is entitled to
receive 10% of the net available cash flows (which amount shall increase 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
(with the issuance being its expected course of action) by September 30, 1996.
Also, Alliance's 5.2% royalty on gross revenues was terminated on the date it
became general partner.
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. The Kansas legislature considered gaming
bills during the 1996 session although none passed. There can be no assurance
that gaming of any type will ever be legalized in Kansas. Management has
evaluated this investment and determined it to be impaired because it does not
appear to be recoverable. Alliance fully reserved the net book value of
approximately $1,585,000 through a charge to operations which has been recorded
in the quarter ended March 31, 1996.
Native American Investments, Inc. ("NAI"), a wholly-owned subsidiary has a
contract to develop Class II and III gaming opportunities with an Indian tribe
in California. Class II gaming 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 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 NIGC. 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 the ultimate outcome of these litigation
activities or successful completion of any part of the Alliance 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. Alliance
believes that this ruling will have a materially adverse effect upon its Native
American casino development activities in California. Accordingly, management
has evaluated this investment and determined it to be impaired because it now
appears to be unrecoverable. Management has fully reserved the net book value of
approximately $1,594,000 through a charge to operations which has been recorded
in the quarter ended March 31, 1996. Management will continue to monitor the
status of Class II and III gaming in California.
F-109
<PAGE>
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 March 31, 1996, there was an
outstanding balance of $3.7 million on this loan.
Cash provided by operations for the nine months ended March 31, 1996
decreased by approximately $700,000 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 $8,586,000, primarily related to the
Merger, partially offset by an increase in cash provided by the casino
operations of approximately $7,795,000 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 Alliance's proposed equity
investment in Capital Gaming, and the payment by Capital Gaming of $4,000,000
(offset by transaction expenses) to Alliance in connection therewith, and
$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 nine months ended March 31,
1996 increased $15,046,000 over that in 1995 due primarily to the proceeds from
the sale of approximately $12,950,000 of securities. Proceeds from the sale of
property and equipment increased $1,805,000 compared to 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 nine months ended March 31, 1996
increased $976,000 from the same period in 1995 due primarily to Alliance's
principal reductions on its existing long-term debt by $1,192,000 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 the Old Convertible
Debentures. Concurrent with the closing of the issuance of the Old 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
F-110
<PAGE>
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 Non-Voting Junior Convertible Special Stock into an equivalent number
of shares of Common Stock.
EBITDA 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 14.5% in the first nine 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 23.3% in fiscal 1995 and 31.4% in the first nine months of
fiscal 1996. The increase in the first nine 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 $1.1 million for the year ended June 30, 1995 and
would have been inadequate to cover fixed charges by approximately $9.7 million
for the nine-month period ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (PRO FORMA)
On October 18, 1995 Alliance entered into the Merger Agreement with BGII.
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 of the Merger), $35.7 million in 15%
Preferred Stock (including dividends accruing at a rate of 15% per annum from
May 3, 1996 to the effective time of the Merger) and $2.9 million in Common
Stock. Alliance will also retire approximately $53.3 million of long-term debt
of BGII (including prepayment premium, original issue discount and unpaid
interest accrued through the effective time of the Merger) 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
"Reasons for and Effects of the Proposal -- The Merger and Related Financings".
Alliance currently anticipates obtaining one or more working capital
revolving facilities at Gaming, Systems and Wulff providing up to an aggregate
of $50.0 million of borrowings (of which approximately $28.0 million of Wulff's
existing lines of credit are anticipated to remain in place) which would be
secured by inventory and accounts receivable. Alliance 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 Alliance.
Following the Transaction, Alliance 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,
Alliance expects that it will have to refinance all or a portion of the Old
Convertible Debentures and the Senior 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 15% Preferred Stock dividends by approximately $9.1
million and approximately $15.7 million for the 12-month period ended June 30,
1995 and the nine-month period ended March 31, 1996, respectively. Alliance
believes that the Company's 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 Notes will significantly restrict the Company's
ability to incur indebtedness.
F-111
<PAGE>
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 $16.7 million at March 31,
1996. 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.
If the Merger and the Offerings do not occur, the principal difference in
Alliance's financial condition, relative to the Alliance historical financial
information otherwise presented herein, would be that Alliance's cash and cash
equivalents and securities available for sale would decrease by approximately
$7.0 million, which management believes will not have a material adverse effect
on the financial condition of Alliance or impair its ability to meet its ongoing
obligations.
ALLIANCE RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1995
REVENUES
Total revenues for the nine months ended March 31, 1996 were $116,796,000,
an increase of $23,020,000 (24.5%) over those for the same period in fiscal year
1995. Revenues from all gaming route operations increased $1,722,000 (2.2%) to
approximately $81,111,000 in the first nine months of fiscal 1996. Revenues from
the Louisiana route operations increased $467,000 (an increase of 3.9%)
primarily as a result of an expansion of operations from the opening of a new
OTB parlor in October 1995. Revenues from Nevada route operations increased
approximately $1,255,000 (1.9%) over those for the same period last year. The
increase in the Nevada gaming route revenues was attributable to a $0.66
increase in the average net win per gaming device per day for the nine months
ended March 31, 1996 compared to the same period in fiscal year 1995 (accounting
for an increase of approximately $942,000) and an increase in the weighted
average number of gaming devices on location for the nine months ended March 31,
1996 as compared to the same period in fiscal year 1995 (accounting for an
increase of approximately $313,000). Revenues from casino and tavern operations,
including food and beverage sales, increased approximately $21,309,000 (148.3%)
during the current nine months as compared to those for the prior year as
revenues recognized from the Rainbow Casino, which were consolidated beginning
March 29, 1995, exceeded the revenues lost with the 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 route revenues for the nine months ended
March 31, 1996 increased $2,882,000 (4.8%) over the same period in fiscal year
1995. Costs of revenues from route operations in Louisiana increased $187,000
(an increase of 2.4% from last year) as a result of an expansion of operations
from the opening of a new OTB parlor in October 1995. Costs of gaming revenues
for Nevada gaming route revenues increased $2,695,000 (5.2%) as compared to the
prior year as revenues increased and increased slightly as a percent of Nevada
gaming route revenues primarily due to increased costs associated with
additional and renewed space lease contracts. Cost of route revenues includes
rents under both space lease and revenue sharing arrangements, gaming taxes and
direct labor, including related taxes and benefits. The
F-112
<PAGE>
cost of casino and tavern revenues including costs of food and beverage revenues
increased $7,937,000 (90.4%) compared to the same period of fiscal year 1995
results 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 nine months ended March 31, 1996 Alliance incurred
developmental costs associated with pursuing Alliance's business development
strategy relating to mergers and acquisitions of approximately $14,233,000,
consisting of $12,235,000 of direct costs incurred related to the Merger and the
previous tender offer and consent solicitation by Alliance and $1,998,000 of
salaries and administrative costs of the mergers and acquisitions unit, which
represented an increase of $8,586,000 (152.0%). 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 nine months ended March
31, 1996 increased approximately $5,029,000 (54.2%) over the same period in
1994. Expenses for casinos and taverns for the nine months ended March 31, 1996
increased $5,577,000 (209.5%) over the prior year primarily due to the Rainbow
Casino expenses 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. Such expenses
related to gaming machine management operations for the nine months ended March
31, 1996 decreased $548,000 (8.3%) over the same period in fiscal year 1995
reflecting steps taken to control costs, including reduced staffing levels.
Corporate general and administrative expenses decreased $1,652,000 (26.4%). 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 $386,000 representing Alliance's equity in the net loss of the Rainbow Casino
in its first nine 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 $497,000 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
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<PAGE>
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.
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 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
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<PAGE>
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.
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.
F-115
<PAGE>
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 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
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<PAGE>
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.
F-117
<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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED
REVENUES:
Sales.............................................. 97.5% 97.9% 98.1% 99.1% 98.1%
Other.............................................. 2.5 2.1 1.9 0.9 1.9
---------- ---------- ---------- ---------- ----------
Total Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales...................................... 72.1% 66.5% 65.4% 63.7% 64.5%
Selling, General and Administrative................ 34.0 25.4 26.2 24.9 28.2
Provision for Doubtful Receivables................. 4.9 2.4 2.7 1.7 1.7
Unusual Charges.................................... -- -- 2.3 -- 1.7
---------- ---------- ---------- ---------- ----------
Total Costs and Expenses......................... 111.0 94.3 96.6 90.3 96.1
---------- ---------- ---------- ---------- ----------
Operating Income (Loss).............................. (11.0) 5.7 3.4 9.7 3.9
Interest Expense..................................... 2.6 2.9 2.8 2.5 2.9
---------- ---------- ---------- ---------- ----------
Income (Loss) before Income Taxes and Extraordinary
Gain................................................ (13.6) 2.8 0.6 7.2 1.0
Provision for Income Taxes........................... 2.5 1.2 2.0 3.0 1.9
---------- ---------- ---------- ---------- ----------
Income (Loss) before Extraordinary Gain.............. (16.1) 1.6 (1.4) 4.2 (0.9)
Extraordinary Gain on Early Extinguishment of Debt... 2.2 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net Income (Loss).................................... (13.9)% 1.6% (1.4)% 4.2% (0.9)%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
WULFF
REVENUES:
Sales.............................................. 96.6% 96.3% 97.1% 98.5% 97.5%
Other.............................................. 3.4 3.7 2.9 1.5 2.5
---------- ---------- ---------- ---------- ----------
Total Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales...................................... 65.4% 64.9% 67.4% 65.4% 66.3%
Selling, General and Administrative................ 25.5 25.1 24.1 23.8 26.8
Provision for Doubtful Receivables................. 0.5 1.7 1.3 0.4 1.2
Unusual Charges.................................... -- -- 2.9 -- 1.6
---------- ---------- ---------- ---------- ----------
Total Costs and Expenses......................... 91.4 91.7 95.7 89.6 95.9
---------- ---------- ---------- ---------- ----------
Operating Income..................................... 8.6 8.3 4.3 10.4 4.1
Interest Expense..................................... 1.3 1.3 1.0 1.0 0.8
---------- ---------- ---------- ---------- ----------
Income before Income Taxes........................... 7.3 7.0 3.3 9.4 3.3
Provision for Income Taxes........................... 3.7 2.3 3.5 5.5 3.4
---------- ---------- ---------- ---------- ----------
Net Income (Loss).................................... 3.6% 4.7% (0.2)% 3.9% (0.1)%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
ADDITIONAL INFORMATION (APPROXIMATE UNITS):
New Wall Machines Sold by Wulff.................... 12,552 13,100 12,000 2,900 2,400
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
GAMING
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales.............................................. 98.3% 99.3% 98.9% 99.5% 98.6%
Other.............................................. 1.7 0.7 1.1 0.5 1.4
---------- ---------- ---------- ---------- ----------
Total Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales...................................... 100.0% 73.7% 71.9% 69.6% 71.3%
Selling, General and Administrative................ 48.4 21.9 24.6 24.7 26.4
Provision for Doubtful Receivables................. 16.9 3.0 3.6 2.4 2.6
Unusual Charges.................................... -- -- 1.9 -- 2.1
---------- ---------- ---------- ---------- ----------
Total Costs and Expenses......................... 165.3 98.6 102.0 96.7 102.4
---------- ---------- ---------- ---------- ----------
Operating Income (Loss).............................. (65.3) 1.4 (2.0) 3.3 (2.4)
Interest Expense..................................... 7.1 4.6 5.2 5.0 6.0
---------- ---------- ---------- ---------- ----------
Loss before Income Taxes and Extraordinary Gain...... (72.4) (3.2) (7.2) (1.7) (8.4)
Provision for Income Taxes........................... -- 0.2 0.3 0.2 0.2
---------- ---------- ---------- ---------- ----------
Loss before Extraordinary Gain....................... (72.4) (3.4) (7.5) (1.9) (8.6)
---------- ---------- ---------- ---------- ----------
Extraordinary Gain on Early Extinguishment of Debt,
Net of Income Taxes................................. 7.7 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net Loss............................................. (64.7)% (3.4)% (7.5)% (1.9)% (8.6)%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
ADDITIONAL INFORMATION (UNITS):
New Slot Machines Sold............................. 7,749 17,655 11,948 3,668 2,921
New Video Gaming Machines Sold..................... 2,205 3,807 6,080 1,194 1,120
Other.............................................. 202 163 56 -- --
---------- ---------- ---------- ---------- ----------
Total............................................ 10,156 21,625 18,084 4,862 4,041
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SYSTEMS
REVENUES:
Sales.............................................. 100.0% 100.0% 100.0% 100.0% 99.9%
Other.............................................. -- -- -- -- 0.1
---------- ---------- ---------- ---------- ----------
Total Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales...................................... 28.2% 32.0% 35.3% 36.3% 31.8%
Selling, General and Administrative................ 42.8 46.5 34.3 25.5 37.0
Provision for Doubtful Receivables................. (4.4) 2.1 5.3 5.5 --
---------- ---------- ---------- ---------- ----------
Total Costs and Expenses......................... 66.6 80.6 74.9 67.3 68.8
---------- ---------- ---------- ---------- ----------
Operating Income..................................... 33.4 19.4 25.1 32.7 31.2
Interest Expense..................................... -- 0.2 -- 0.1 0.1
---------- ---------- ---------- ---------- ----------
Income before Income Taxes........................... 33.4 19.2 25.1 32.6 31.1
Provision for Income Taxes........................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net Income........................................... 33.4% 19.2% 25.1% 32.6% 31.1%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
ADDITIONAL INFORMATION:
New Installations Implemented...................... 6 11 9 3 6
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
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<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
WULFF
Wulff's revenues for the three months ended March 31, 1996 were $31.4
million compared to $35.9 million in the comparable 1995 quarter, a decrease of
13%. Revenues from new wall machines decreased approximately 17% due to an
approximate 14% decrease in units sold in the first quarter 1996 and an
approximate 3% decrease in the average selling price of new wall machines.
Revenues from the distribution of recreational and amusement machines, used wall
machines and new wall machines manufactured by third parties decreased
approximately 11% during the first quarter of 1996 compared to the 1995 period.
The currency translation impact of the fluctuation of the German mark versus the
U.S. dollar increased revenues by $0.2 million during the 1996 period.
Operating income for the three months ended March 31, 1996 was $1.3 million
compared to $3.7 million for the three months ended March 31, 1995. The $2.4
million decrease was principally due to the aforementioned decrease in revenues,
a $0.2 million increase in the provision for doubtful receivables, unusual
charges of $0.5 million in 1996 representing an allocation of Merger costs,
partially offset by slightly lower selling, general and administrative expenses.
Gross margin as a percentage of revenues remained unchanged during the first
quarter of 1996 and 1995.
GAMING
Gaming reported revenues of $23.6 million in the first quarter of 1996
compared to $28.0 million in the comparable 1995 period, a 16% decrease. Gaming
reported unit sales of approximately 4,000 new gaming machines in the three
months ended March 31, 1996, compared to approximately 4,900 in the comparable
1995 quarter. This decrease was primarily a result of the continuing trend of
lower demand due to a reduced number of new casino openings. First quarter 1996
included sales of approximately 1,900 units to the Nevada and Atlantic City
markets, 1,600 units to international markets and 500 units to riverboat, other
domestic casinos and casinos on Native American lands. The average sale price
for new gaming machines was unchanged during the first quarters of 1996 and
1995. In total, revenues from the sale of new gaming machines were $19.9 million
in the 1996 quarter versus $23.8 million in the 1995 period. Revenues from other
sources decreased approximately $0.5 million to $3.7 million in the 1996 period
due principally to decreased accessory and used equipment sales offset in part
by a 43% increase in part sales.
Gaming reported an operating loss for the 1996 period of $0.6 million
compared to operating income of $0.9 million in the first quarter of 1995. The
$1.5 million decline in Gaming's operating results was primarily due to the
aforementioned decline in Gaming's revenues, a 1% decline in gross profit
margins as a percentage of total revenues and $0.5 million in unusual charges,
offset, in part, by a decrease in selling, general, and administrative expenses.
Gross profit margins as a percentage of revenues decreased due to the impact of
decreased demand for new machines and a $0.4 million increase in the provision
for inventory valuation, partially offset by the changing mix in products to
higher margin products. Unusual charges of $0.5 million in 1996 represent an
allocation of Merger costs. Selling, general, and administrative expenses
decreased approximately $0.7 million principally due to lower legal expenses.
SYSTEMS
Systems' revenues for the three months ended March 31, 1995 and 1996 were
$6.1 million and $5.0 million respectively. While this represents an 18%
decrease from the prior year quarter, the 1995 quarter was a record quarter due
to significant sales in the Louisiana market.
Operating income for the three months ended March 31, 1996 was $1.6 million
compared to operating income of $2.0 million for the three months ended March
31, 1995. The $0.4 million decrease in operating results was primarily a result
of lower revenues and increased selling, general and administrative expenses
offset, in part, by higher gross margin as a percentage of total revenues and a
lower provision for doubtful receivables. Gross margins as a percentage of total
revenues increased due primarily to product mix. Selling, general, and
administrative expenses increased approximately $0.3 million due to increased
staffing levels. The provision for doubtful receivables decreased approximately
$0.3 million due principally to better collection experience during the 1996
quarter.
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<PAGE>
CONSOLIDATED
Revenues for the first quarter of 1996 were $58.5 million compared to $68.3
million in the first quarter of 1995, a decrease of $9.8 million (14%)
principally due to the aforementioned decreases in revenues at Wulff, Gaming and
Systems.
BGII had operating income of $2.3 million in the 1996 quarter compared to
$6.6 million in the comparable 1995 quarter, a decrease of $4.3 million. The
decline in operating results was attributable to the aforementioned decreases in
Wulff's, Gaming's and Systems' operating results, and reflects $1.0 million of
Merger transaction expenses in the first quarter of 1996.
Interest expense was $1.7 million in both periods.
BGII's effective tax rate in both periods differs from the United States
statutory rate of 35% principally due to a higher tax rate on income earned in
Germany and the lack of current tax benefits available for operating losses in
the United States.
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 affected 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. 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%.
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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 V7000 Game Maker-Registered Trademark- ("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.
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 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.
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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.
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
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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 Video Lottery Terminal devices in Louisiana. This $0.4 million
increase (13%) resulted from increased sales volume in the 1994 period.
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 expense 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 June 30, 1995 or the nine-month period ended March 31, 1996,
or BGII's operations during the three years ended December 31, 1995 or the
three-month period ended March 31, 1996.
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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