<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1996
REGISTRATION NO. 333-2799
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 10549
------------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEVADA 7993 88-0104066
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification
Incorporation or Classification Code Number)
Organization) Number)
</TABLE>
4380 BOULDER HIGHWAY
LAS VEGAS, NEVADA
(702) 435-4200
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
JOHN W. ALDERFER
CHIEF FINANCIAL OFFICER
4380 BOULDER HIGHWAY
LAS VEGAS, NEVADA 89121
(702) 435-4200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
--------------------------
COPIES TO:
LAWRENCE LEDERMAN, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY
1 CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10005
(212) 530-5000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared
effective and all other conditions to the Exchange Offer described in the
enclosed prospectus have been satisfied or waived
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED BE REGISTERED PER UNIT (1) PRICE (1) FEE
<S> <C> <C> <C> <C>
7 1/2% Convertible Senior Subordinated
Debentures due 2003........................ $85,000,000 60% $51,000,000 $17,587.00(6)
15,287,770
Common Stock, par value $.10 per share...... shares (2) -- -- (5)
10% Non-Voting Junior Convertible
Pay-in-Kind Special Stock, Series E, par
value $.10 per share....................... 850,000 shares (3) -- -- (5)
10% Non-Voting Junior Convertible
Pay-in-Kind Special Stock, Series E, par 2,889,822
value $.10 per share....................... shares (4) $100 $288,982,200 $99,649 (6)
</TABLE>
(1) Calculated pursuant to Rule 457(f)(1), based on the average of the bid and
asked price of the Registrant's 7 1/2% Convertible Subordinated Debentures
due 2003, which will be cancelled in the Exchange Offer, on April 23, 1996.
(2) Represents the maximum number of shares of Common Stock that may be issued
upon conversion of the Debentures being registered hereunder.
(3) Represents the maximum number of shares of Special Stock that may be issued
upon conversion of the Debentures being registered hereunder.
(4) Represents the maximum number of shares of Special Stock that may be issued
as dividends on outstanding shares of Special Stock pursuant to the
pay-in-kind feature of the Special Stock.
(5) Pursuant to Rule 457(i), no registration fee is payable with respect to the
Common Stock or Special Stock since the Common Stock or Special Stock will
be issued for no separate consideration. Common Stock or Special Stock will
be issued only upon the conversion of the Debentures, at an initial
conversion rate of approximately 180 shares of Common Stock per $1,000
principal amount or 10 shares of Special Stock per $1,000 principal amount
(as the case may be) assuming that the Automatic Conversion occurs.
(6) Paid with original filing.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ALLIANCE GAMING CORPORATION
CROSS REFERENCE SHEET
FOR
REGISTRATION STATEMENT ON FORM S-4 AND PROSPECTUS
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FORM S-4 - ITEM NUMBER AND CAPTION
- ------------------------------------------------------------------------- LOCATION IN PROSPECTUS
---------------------------------------------------
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................... FACING PAGE OF THE REGISTRATION STATEMENT;
CROSS-REFERENCE SHEET; OUTSIDE FRONT COVER PAGE OF
PROSPECTUS
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ AVAILABLE INFORMATION; INCORPORATION BY REFERENCE;
TABLE OF CONTENTS
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information............................. OUTSIDE FRONT COVER PAGE OF PROSPECTUS; PROSPECTUS
SUMMARY; RISK FACTORS; THE EXCHANGE OFFER; CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS; THE MERGER AND
RELATED FINANCINGS; UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION; NOTES TO UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION;
SELECTED HISTORICAL FINANCIAL INFORMATION OF
ALLIANCE; SELECTED HISTORICAL FINANCIAL INFORMATION
OF BGII; BUSINESS; GAMING REGULATION AND LICENSING
4. Terms of the Transaction........................... PROSPECTUS SUMMARY; THE EXCHANGE OFFER; DESCRIPTION
OF THE NEW CONVERTIBLE DEBENTURES; COMPARISON OF
NEW CONVERTIBLE DEBENTURES AND OLD CONVERTIBLE
DEBENTURES; CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS; THE MERGER AND RELATED FINANCINGS;
DESCRIPTION OF CAPITAL STOCK
</TABLE>
<PAGE>
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FORM S-4 - ITEM NUMBER AND CAPTION
- ------------------------------------------------------------------------- LOCATION IN PROSPECTUS
---------------------------------------------------
5. Pro Forma Financial Information.................... PROSPECTUS SUMMARY; UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION; NOTES TO UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION;
FORECAST OF OPERATIONS; SELECTED HISTORICAL
FINANCIAL INFORMATION OF ALLIANCE; SELECTED
HISTORICAL FINANCIAL INFORMATION OF BGII;
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
6. Material Contracts With the Company Being
Acquired.......................................... PROSPECTUS SUMMARY; THE EXCHANGE OFFER; THE MERGER
AND RELATED FINANCINGS; BUSINESS; MANAGEMENT
7. Additional Information Required For Reoffering by
Persons and Parties Deemed to be Underwriters..... Not Applicable
8. Interests of Named Experts and Counsel............. LEGAL MATTERS; EXPERTS
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3 Registrants........ Not Applicable
11. Incorporation of Certain Information by
Reference......................................... Not Applicable
12. Information With Respect to S-2 or S-3
Registrants....................................... INCORPORATION BY REFERENCE; PROSPECTUS SUMMARY; THE
EXCHANGE OFFER; UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION; NOTES TO UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION;
SELECTED HISTORICAL FINANCIAL INFORMATION OF
ALLIANCE; THE COMPANY; THE MERGER AND RELATED
FINANCINGS; BUSINESS; GAMING REGULATION AND
LICENSING
13. Incorporation of Certain Information by
Reference......................................... INCORPORATION BY REFERENCE
14. Information With Respect to Registrants Other Than
S-2 or S-3 Registrants............................ Not Applicable
</TABLE>
<PAGE>
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FORM S-4 - ITEM NUMBER AND CAPTION
- ------------------------------------------------------------------------- LOCATION IN PROSPECTUS
---------------------------------------------------
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information With Respect to S-3 Companies.......... Not Applicable
16. Information With Respect to S-2 or S-3 Companies... Not Applicable
17. Information With Respect to Companies Other Than
S-2 or S-3 Companies.............................. Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
Are to be Solicited............................... Not Applicable
19. Information if Proxies, Consents or Authorizations
Are Not to be Solicited or in an Exchange Offer... SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
AND MANAGEMENT
</TABLE>
<PAGE>
PROSPECTUS
OFFER FOR ALL OUTSTANDING
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
IN EXCHANGE FOR
7 1/2% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2003
OF ALLIANCE GAMING CORPORATION
ALLIANCE GAMING CORPORATION ("ALLIANCE") HEREBY OFFERS, UPON THE TERMS AND
SUBJECT TO THE CONDITIONS SET FORTH IN THIS PROSPECTUS AND IN THE ACCOMPANYING
LETTER OF TRANSMITTAL (THE "LETTER OF TRANSMITTAL", WHICH, TOGETHER WITH THE
PROSPECTUS, CONSTITUTE THE "EXCHANGE OFFER"), TO EXCHANGE UP TO $85,000,000
AGGREGATE PRINCIPAL AMOUNT OF ITS 7 1/2% CONVERTIBLE SENIOR SUBORDINATED
DEBENTURES DUE 2003 (THE "NEW CONVERTIBLE DEBENTURES") FOR A LIKE PRINCIPAL
AMOUNT OF ITS ISSUED AND OUTSTANDING 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
DUE 2003 (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. UPON CONSUMMATION OF THE MERGER (SHOULD IT OCCUR) OF A WHOLLY-OWNED
SUBSIDIARY OF ALLIANCE WITH AND INTO BALLY GAMING INTERNATIONAL, INC. ("BGII"),
PURSUANT TO WHICH BGII WILL BECOME A WHOLLY-OWNED SUBSIDIARY OF ALLIANCE (THE
"MERGER"), WITHIN 60 DAYS AFTER CONSUMMATION OF THE EXCHANGE OFFER, THE NEW
CONVERTIBLE DEBENTURES WILL AUTOMATICALLY BE CONVERTED AS DESCRIBED BELOW. SEE
"DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES" AND "THE MERGER AND RELATED
FINANCINGS".
THE NEW CONVERTIBLE DEBENTURES WILL BEAR INTEREST FROM THE DATE OF ISSUANCE,
PAYABLE ON MARCH 15 AND SEPTEMBER 15 (EACH, AN "INTEREST PAYMENT DATE"),
COMMENCING SEPTEMBER 15, 1996. 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 "DESCRIPTION OF THE
NEW CONVERTIBLE DEBENTURES" AND "COMPARISON OF NEW CONVERTIBLE DEBENTURES AND
OLD CONVERTIBLE DEBENTURES".
AT THE OPTION OF THE HOLDER, THE NEW CONVERTIBLE DEBENTURES WILL BE
CONVERTIBLE INTO COMMON STOCK OF ALLIANCE, PAR VALUE $.10 PER SHARE (THE "COMMON
STOCK"), PRIOR TO MATURITY, UNLESS PREVIOUSLY REDEEMED OR CONVERTED, AT A
CONVERSION PRICE OF $8.33 PER SHARE (EQUIVALENT TO A CONVERSION RATE OF
APPROXIMATELY 120 SHARES PER $1,000 PRINCIPAL AMOUNT OF NEW CONVERTIBLE
DEBENTURES), SUBJECT TO ADJUSTMENT UNDER CERTAIN CIRCUMSTANCES. NEITHER THE OLD
CONVERTIBLE DEBENTURES NOR THE NEW CONVERTIBLE DEBENTURES ARE LISTED OR QUOTED
ON ANY SECURITIES EXCHANGE OR AUTOMATED QUOTATION SYSTEM. ON MAY 7, 1996, THE
LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET
SYSTEM (WHERE IT IS QUOTED UNDER THE SYMBOL "ALLY") WAS $4.00 PER SHARE. SEE
"DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES".
(CONTINUED ON NEXT PAGE)
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 27 FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY HOLDERS WHO ARE DETERMINING
WHETHER TO EXCHANGE OLD CONVERTIBLE DEBENTURES FOR NEW CONVERTIBLE DEBENTURES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NEITHER THE NEVADA GAMING COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD,
THE NEW JERSEY CASINO CONTROL COMMISSION NOR THE REGULATORY AUTHORITY OF ANY
OTHER STATE HAS PASSED UPON OR CONFIRMED THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE INVESTMENT MERITS OF THE SECURITIES OFFERED HEREBY.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE
6, 1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD CONVERTIBLE
DEBENTURES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
The date of this Prospectus is May 9, 1996.
<PAGE>
(CONTINUED FROM PRECEDING PAGE)
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 THE 10% NON-VOTING JUNIOR
CONVERTIBLE PAY-IN-KIND SPECIAL STOCK, SERIES E, OF ALLIANCE, PAR VALUE $.10 PER
SHARE (THE "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 NEW CONVERTIBLE DEBENTURES" AND "DESCRIPTION OF
CAPITAL STOCK". THE MERGER REMAINS SUBJECT TO CERTAIN CONDITIONS, INCLUDING
REGULATORY APPROVALS AND THE OBTAINING OF FINANCING. 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 NEW CONVERTIBLE DEBENTURES WILL BE REDEEMABLE IN WHOLE OR IN PART, AT
THE OPTION OF ALLIANCE, FOR CASH AT ANY TIME PRIOR TO SEPTEMBER 15, 1996 IF THE
PRICE OF THE COMMON STOCK EXCEEDS 250% OF THE CONVERSION PRICE (AS DEFINED IN
THE INDENTURE PURSUANT TO WHICH THE NEW CONVERTIBLE DEBENTURES WILL BE ISSUED
(THE "NEW CONVERTIBLE INDENTURE")) FOR 20 OUT OF ANY 30 CONSECUTIVE TRADING DAYS
AND AT ANY TIME ON OR AFTER SEPTEMBER 15, 1996, IN EACH CASE AT THE REDEMPTION
PRICES SET FORTH HEREIN, PLUS ACCRUED INTEREST TO THE DATE OF REDEMPTION. THE
NEW CONVERTIBLE DEBENTURES ARE REDEEMABLE AT THE OPTION OF THE HOLDER UNDER
CERTAIN CIRCUMSTANCES, INCLUDING A CHANGE OF CONTROL (AS DEFINED IN THE NEW
CONVERTIBLE INDENTURE), AT 101% OF THE PRINCIPAL AMOUNT THEREOF, PLUS ACCRUED
INTEREST TO THE DATE OF REDEMPTION. THE MERGER WILL NOT BE A CHANGE OF CONTROL
FOR PURPOSES OF THIS REDEMPTION FEATURE. THE NEW CONVERTIBLE DEBENTURES ARE
UNSECURED OBLIGATIONS OF ALLIANCE AND ARE SUBORDINATED IN RIGHT OF PAYMENT TO
ALL EXISTING AND FUTURE SENIOR INDEBTEDNESS (AS DEFINED IN THE NEW CONVERTIBLE
INDENTURE) OF ALLIANCE, AND EFFECTIVELY SUBORDINATED TO ALL INDEBTEDNESS (AS
DEFINED IN THE NEW CONVERTIBLE INDENTURE) OF ALLIANCE'S SUBSIDIARIES, BUT WILL
BE SENIOR IN RIGHT OF PAYMENT TO THE OLD CONVERTIBLE DEBENTURES, AND ALSO MAY BE
MADE STRUCTURALLY SENIOR TO THE OLD CONVERTIBLE DEBENTURES. AT MARCH 31, 1996,
THERE WAS NO OUTSTANDING SENIOR INDEBTEDNESS OF ALLIANCE AND $14.1 MILLION OF
OUTSTANDING INDEBTEDNESS OF ALLIANCE'S SUBSIDIARIES ($140.0 MILLION AND $33.5
MILLION, RESPECTIVELY, ON A PRO FORMA BASIS AT MARCH 31, 1996 ASSUMING THE
MERGER HAD OCCURRED ON THAT DATE). NEITHER THE INDENTURE GOVERNING THE OLD
CONVERTIBLE DEBENTURES NOR THE NEW CONVERTIBLE INDENTURE, IMPOSES ANY LIMITATION
ON ALLIANCE'S ABILITY TO INCUR ADDITIONAL SENIOR INDEBTEDNESS OR INDEBTEDNESS OF
SUBSIDIARIES.
THE CONSUMMATION OF THE EXCHANGE OFFER IS NOT CONDITIONED UPON ANY MINIMUM
PRINCIPAL AMOUNT OF OLD CONVERTIBLE DEBENTURES BEING TENDERED OR UPON
CONSUMMATION OF THE MERGER. THE OBLIGATION OF ALLIANCE TO CONSUMMATE THE
EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS, INCLUDING, AMONG OTHERS, THE
REQUIREMENTS THAT (I) THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF
COMMON STOCK SHALL HAVE APPROVED THE ISSUANCE OF THE NEW CONVERTIBLE DEBENTURES
AND OF THE SECURITIES ISSUABLE UPON CONVERSION THEREOF (THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK HAVE INDICATED THEIR
INTENTION TO APPROVE SUCH ISSUANCE), 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 SECURITIES ISSUABLE UPON CONVERSION
THEREOF. SEE "THE EXCHANGE OFFER -- CONDITIONS TO THE EXCHANGE OFFER". 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.
ALLIANCE WILL NOT RECEIVE ANY PROCEEDS FROM THE EXCHANGE OFFER. ALLIANCE
WILL PAY ALL EXPENSES INCIDENT TO THE EXCHANGE OFFER. TENDERS OF OLD CONVERTIBLE
DEBENTURES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. IN THE
EVENT ALLIANCE TERMINATES THE EXCHANGE OFFER AND DOES NOT ACCEPT FOR EXCHANGE
ANY OLD CONVERTIBLE DEBENTURES, ALLIANCE WILL PROMPTLY RETURN THE OLD
CONVERTIBLE DEBENTURES TO THE HOLDERS THEREOF. SEE "THE EXCHANGE OFFER -- TERMS
OF THE EXCHANGE OFFER".
2
<PAGE>
IMPORTANT
Any holder of Old Convertible Debentures desiring to tender all or any
portion of his Old Convertible Debentures should either (1) complete and sign
the Letter of Transmittal (or a facsimile thereof) in accordance with the
instructions in the Letter of Transmittal and mail or deliver it, together with
the certificates representing tendered Old Convertible Debentures and any other
required documents, to The Bank of New York (the "Exchange Agent") or tender
such Old Convertible Debentures pursuant to the procedure for book-entry
transfer set forth in "The Exchange Offer -- Procedures for Tendering" or (2)
request his broker, dealer, commercial bank, trust company or nominee to effect
the transaction for him. Holders whose Old Convertible Debentures are registered
in the name of a broker, dealer, commercial bank, trust company or other nominee
must contact such person if they desire to tender their Old Convertible
Debentures. Holders who wish to tender Old Convertible Debentures and whose Old
Convertible Debentures are not immediately available or who cannot comply with
the procedures for book entry transfer on a timely basis may tender such Old
Convertible Debentures by following the procedures for guaranteed delivery set
forth in "The Exchange Offer -- Procedures for Tendering".
------------------------
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION AS TO WHETHER ANY
HOLDER OF OLD CONVERTIBLE DEBENTURES SHOULD TENDER OLD CONVERTIBLE DEBENTURES
PURSUANT TO THE EXCHANGE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH
RECOMMENDATIONS, INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY ALLIANCE OR THE DEALER MANAGERS. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF ALLIANCE OR BGII
SINCE THE DATE HEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES COVERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SUCH SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER ALLIANCE NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY
HOLDER OF OLD CONVERTIBLE DEBENTURES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING OLD CONVERTIBLE DEBENTURES PURSUANT TO THE EXCHANGE OFFER OR WHETHER A
HOLDER OF NEW CONVERTIBLE DEBENTURES SHOULD ELECT TO RECEIVE COMMON STOCK OR
SERIES E PREFERRED STOCK IF THE AUTOMATIC CONVERSION OCCURS. EACH HOLDER OF OLD
CONVERTIBLE DEBENTURES MUST MAKE HIS OR HER OWN DECISION WITH RESPECT TO THE
FOREGOING.
3
<PAGE>
AVAILABLE INFORMATION
Alliance has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act, with respect to the registration of the
New Convertible Debentures and will file with the Commission a Schedule 13E-4
(together with all amendments, exhibits, schedules and supplements thereto, the
"Schedule 13E-4") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), with respect to the Exchange Offer. This Prospectus does not
contain all the information set forth in the Registration Statement, to which
reference is hereby made for further information about Alliance and the Exchange
Offer.
Alliance is subject to the informational requirements of the Exchange Act
and in accordance therewith files periodic reports, proxy and information
statements and other information with the Commission. The Registration Statement
and all reports, proxy and information statements and other information filed by
Alliance with the Commission may be inspected at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
The Common Stock is quoted on The Nasdaq Stock Market, Inc. ("NASDAQ"), and
all reports, proxy and information statements, and other information filed with
the Commission also may be inspected at the offices of NASDAQ, 1735 K Street,
N.W., Washington, D.C. 20006.
INCORPORATION BY REFERENCE
The following documents filed with the Commission by Alliance pursuant to
the Exchange Act are incorporated by reference in this Prospectus:
(1) Alliance's Annual Report on Form 10-K for the fiscal year ended June 30,
1995, as amended and restated by Form 10-K/A Amendment No. 3 dated March
6, 1996; and
(2) Alliance's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1995, December 31, 1995 and March 31, 1996, respectively.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO DOCUMENTS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE,
WITHOUT CHARGE, TO ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, ON WRITTEN
OR ORAL REQUEST, TO ALLIANCE GAMING CORPORATION, 4380 BOULDER HIGHWAY, LAS
VEGAS, NEVADA 89121 (TELEPHONE NUMBER (702) 435-4200), ATTENTION: JOHN W.
ALDERFER, SENIOR VICE PRESIDENT -- FINANCE AND ADMINISTRATION, CHIEF FINANCIAL
OFFICER AND TREASURER. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD BE MADE NOT LATER THAN FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION
DATE.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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AVAILABLE INFORMATION...................................................................................... 4
INCORPORATION BY REFERENCE................................................................................. 4
PROSPECTUS SUMMARY......................................................................................... 8
Overview................................................................................................. 8
The Company.............................................................................................. 8
Description of the New Convertible Debentures............................................................ 11
Description of the Series E Preferred Stock.............................................................. 14
Description of the Exchange Offer........................................................................ 15
Risk Factors............................................................................................. 17
Certain Advantages and Disadvantages of the Exchange Offer............................................... 17
The Merger and Related Financings........................................................................ 18
Sources and Uses of Funds................................................................................ 19
Pro Forma Business Structure of the Company.............................................................. 20
Summary Financial Information............................................................................ 21
RISK FACTORS............................................................................................... 30
Subordination............................................................................................ 30
High Leverage and Fixed Charges; Holding Company Structure; Working Capital.............................. 30
Risks of Equity Ownership................................................................................ 31
Restrictions on Certain Activities....................................................................... 32
Operating History -- Recent Losses....................................................................... 32
Implementation of the Merger............................................................................. 33
Financial Forecast....................................................................................... 33
Change of Control........................................................................................ 34
Competition.............................................................................................. 34
Product Development...................................................................................... 35
Customer Financing....................................................................................... 36
Sales to Non-traditional Gaming Markets.................................................................. 36
Foreign Operations....................................................................................... 36
Key Personnel............................................................................................ 36
Strict Regulation by Gaming Authorities.................................................................. 36
Ownership Limitations on Securities of the Company....................................................... 37
Ongoing BGII Regulatory Investigations................................................................... 38
Certain Litigation; Bally Trade Name..................................................................... 38
Gaming Taxes and Value Added Taxes....................................................................... 38
Absence of Public Market; Volatility of Market Prices.................................................... 39
Dilution; Outstanding Options and Convertible Securities................................................. 39
Transfer Restrictions on Non-Tendering Holders........................................................... 40
Effect of Exchange Offer on Liquidity.................................................................... 40
Election to Receive Series E Preferred Stock upon Automatic Conversion................................... 41
Limitations on Net Operating Losses; Discharge of Debt Income............................................ 41
Hart-Scott-Rodino Filing................................................................................. 41
THE EXCHANGE OFFER......................................................................................... 42
General.................................................................................................. 42
Terms of the Exchange Offer.............................................................................. 42
Conditions to the Exchange Offer......................................................................... 42
Expiration; Extension; Termination; Amendment............................................................ 44
Procedures for Tendering................................................................................. 45
Election to Receive Series E Preferred Stock upon Automatic Conversion................................... 47
Withdrawal of Tenders.................................................................................... 48
Acceptance of Old Convertible Debentures; Delivery of New Convertible Debentures......................... 48
Exchange Agent and Information Agent..................................................................... 49
Dealer Managers.......................................................................................... 49
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DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES.............................................................. 50
General.................................................................................................. 50
Conversion at Election of Holder......................................................................... 50
Automatic Conversion Upon Consummation of Merger......................................................... 51
Interest on New Convertible Debentures................................................................... 52
Subordination............................................................................................ 52
Redemption at Alliance's Option.......................................................................... 53
Redemption at Holder's Option............................................................................ 53
Certain Covenants........................................................................................ 55
Events of Default........................................................................................ 55
Merger and Consolidation................................................................................. 56
Assumption of Obligations................................................................................ 56
Modification and Waiver.................................................................................. 57
Satisfaction and Discharge of the New Convertible Indenture.............................................. 57
Control by Debentureholders.............................................................................. 57
Mandatory Disposition Pursuant to Gaming Laws............................................................ 58
COMPARISON OF NEW CONVERTIBLE DEBENTURES AND OLD CONVERTIBLE DEBENTURES.................................... 58
Conversion Price......................................................................................... 58
Automatic Conversion upon Consummation of Merger......................................................... 58
Subordination............................................................................................ 59
Registration Rights; Liquidated Damages.................................................................. 59
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................................................. 61
Consideration Allocable to Interest...................................................................... 61
The Transaction.......................................................................................... 62
Market Discount.......................................................................................... 62
New Convertible Debentures............................................................................... 63
Common Stock and Series E Preferred Stock................................................................ 63
Proposed Legislation..................................................................................... 64
Backup Withholding....................................................................................... 64
Holders of Old Convertible Debentures Who Do Not Participate in the Exchange Offer....................... 65
THE MERGER AND RELATED FINANCINGS.......................................................................... 66
SOURCES AND USES OF FUNDS.................................................................................. 68
MARKET PRICE DATA AND DIVIDEND POLICY...................................................................... 69
DILUTION................................................................................................... 70
CAPITALIZATION............................................................................................. 71
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............................................... 73
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION...................................... 77
SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW...................................................... 82
FORECAST OF OPERATIONS..................................................................................... 84
SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES FOR THE FORECAST................................ 87
SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE...................................................... 97
SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII.......................................................... 99
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 101
Introduction............................................................................................. 101
Liquidity and Capital Resources of Alliance.............................................................. 101
Liquidity and Capital Resources of the Company (Pro Forma)............................................... 104
Alliance Results of Operations........................................................................... 105
BGII Results of Operations............................................................................... 110
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BUSINESS................................................................................................... 118
Overview................................................................................................. 118
Business Strategy........................................................................................ 118
Business Units........................................................................................... 119
Gaming Machine Manufacturing and Systems................................................................. 120
German Operations........................................................................................ 126
Gaming Machine Management Operations..................................................................... 129
Casino Operations........................................................................................ 132
Business Development Activity............................................................................ 133
Patents, Copyrights and Trade Secrets.................................................................... 133
Employees and Labor Relations............................................................................ 134
Litigation Relating to the Merger........................................................................ 134
Other Litigation......................................................................................... 136
Environmental Matters.................................................................................... 137
GAMING REGULATION AND LICENSING............................................................................ 137
Nevada................................................................................................... 138
Louisiana................................................................................................ 142
Mississippi.............................................................................................. 143
New Jersey............................................................................................... 145
Additional Domestic Jurisdictions........................................................................ 145
Germany.................................................................................................. 146
MANAGEMENT................................................................................................. 148
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT............................................ 151
Stockholders Agreement................................................................................... 153
Outstanding Options and Convertible Securities........................................................... 153
DESCRIPTION OF CAPITAL STOCK............................................................................... 155
Common Stock............................................................................................. 155
Special Stock............................................................................................ 155
Provisions Applicable to Certain Holders................................................................. 158
INTEREST IN OLD CONVERTIBLE DEBENTURES..................................................................... 158
CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE OLD CONVERTIBLE DEBENTURES.... 158
LEGAL MATTERS.............................................................................................. 159
EXPERTS.................................................................................................... 159
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. AS USED
HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, (I) THE TERM "ALLIANCE" MEANS
ALLIANCE GAMING CORPORATION AND ITS SUBSIDIARIES TAKEN AS A WHOLE PRIOR TO THE
MERGER, (II) THE TERM THE "COMPANY" MEANS ALLIANCE GAMING CORPORATION AND ITS
SUBSIDIARIES, INCLUDING BGII, TAKEN AS A WHOLE, UPON CONSUMMATION OF THE MERGER,
AND INFORMATION WITH RESPECT TO THE COMPANY IN THIS PROSPECTUS IS PRESENTED
AFTER GIVING EFFECT TO THE MERGER, THE EXCHANGE OFFER, THE OFFERINGS (AS DEFINED
BELOW) AND THE PRIVATE PLACEMENT (AS DEFINED BELOW), (III) THE TERM "BGII" MEANS
BALLY GAMING INTERNATIONAL, INC. AND ITS SUBSIDIARIES, TAKEN AS A WHOLE, PRIOR
TO THE MERGER AND (IV) THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE OVER-ALLOTMENT OPTION IN THE 15% PREFERRED STOCK OFFERING (AS DEFINED
BELOW). HOLDERS OF OLD CONVERTIBLE DEBENTURES ARE URGED TO READ THIS PROSPECTUS
IN ITS ENTIRETY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING INFORMATION THAT
INVOLVES RISKS AND UNCERTAINTIES AND THAT IS SUBJECT TO THE ASSUMPTIONS SET
FORTH IN CONNECTION THEREWITH AND THE INFORMATION CONTAINED HEREIN.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THIS PROSPECTUS, INCLUDING THE PRO
FORMA FINANCIAL INFORMATION, THE SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING
CASH FLOW AND THE FORECAST OF OPERATIONS INCLUDED HEREIN, ASSUMES THE EXCHANGE
OF $50.0 MILLION PRINCIPAL AMOUNT OF OLD CONVERTIBLE DEBENTURES IN THE EXCHANGE
OFFER AND CONSUMMATION OF THE MERGER AND CONVERSION INTO COMMON STOCK OF ALL NEW
CONVERTIBLE DEBENTURES. SEE "THE MERGER AND RELATED FINANCINGS".
OVERVIEW
The Exchange Offer is being made to enhance Alliance's capital structure and
to facilitate financing of the pending Merger. 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. See "-- Description of the New Convertible Debentures".
THE COMPANY
BACKGROUND
Alliance is a diversified gaming company that currently operates through its
subsidiaries approximately 6,000 electronic gaming machines (primarily video
poker machines and slot machines) and also owns and operates a small casino in
each of Vicksburg, Mississippi and Sparks/Reno, Nevada. Alliance is the largest
gaming machine management operator in Nevada and is the exclusive operator of
video poker devices at the only racetrack and ten associated off-track betting
parlors ("OTBs") in the greater New Orleans area.
As part of its long-term growth strategy, Alliance entered into an Agreement
and Plan of Merger in October 1995, as amended in January 1996 (the "Merger
Agreement"), with BGII pursuant to which BGII will become a wholly-owned
subsidiary of Alliance. BGII, through subsidiaries in the United States and
Germany, is a leading designer, manufacturer and distributor of electronic
gaming machines. BGII also designs, assembles and sells computerized monitoring
systems for slot and video gaming machines which provide casino operators with
on-line real time player tracking, security and maintenance capabilities.
BGII is currently the second largest manufacturer of casino-style electronic
gaming machines in North America and since 1993 has made significant inroads in
recapturing a portion of its once dominant market share of the late 1970s. Unit
sales of electronic gaming machines by BGII's domestic subsidiary have
approximately doubled from the level of unit sales in 1993. Although BGII sells
electronic gaming machines
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to most of the major participants in the United States casino industry, the
Company hopes to continue to increase its penetration in such casinos by
capitalizing on Alliance's and BGII's managements' relationships within the
gaming industry together with the performance capabilities of its current
products.
Alliance believes that the Merger represents an opportunity to acquire an
established electronic gaming machine manufacturer with a well-recognized
presence in the gaming industry and a significant base of assets and experience.
Management estimates that the installed base of casino-style electronic gaming
machines (for these purposes, primarily slot and video machines) is
approximately 650,000 units, of which approximately 50% are located in North
America, and that annual sales in North America have grown from approximately
30,000 units in 1991 to approximately 89,000 units in 1995, reflecting a period
of accelerated growth in the number and size of casinos in North America.
Historically, growth in the gaming machine market has been fueled principally by
sales to new casinos and to a lesser degree by replacement of machines (which
have an average replacement cycle of three to seven years) and the application
of new technology. In the future, management believes that annual sales growth
resulting from replacement requirements and the application of new technology
should outpace growth in demand generated by new casino openings, which growth
rate is expected to decline. Management believes that the Merger provides
Alliance with an avenue for entering a business historically characterized by
effective barriers to entry in that the BGII assets being acquired are difficult
to replicate and would require significant time and investment to develop
successfully.
For the twelve-month period ended December 31, 1995, on a pro forma basis
after giving effect to the Merger and the related transactions described herein,
the Company would have had revenues and Adjusted Operating Cash Flow (as
defined; see the introduction to "Summary Financial Information") of
approximately $401.0 million and $47.3 million, respectively, and for the three
months ended March 31, 1996 would have been $99.1 million and $11.3 million,
respectively.
BUSINESS STRATEGY
The Company's strategic objective is to build a pre-eminent gaming
entertainment company to capitalize on what management believes to be gaming's
continuing growth within the entertainment industry. In addition to continuing
the development of the Company's existing business units, the Company's
strategic focus if the Merger occurs will be on BGII's domestic subsidiary, key
elements of which include:
- to capitalize on BGII's strong product line and current sales momentum as
represented by unit sales of electronic gaming machines by BGII's domestic
subsidiary which have approximately doubled from the level of unit sales
in 1993;
- to develop and market premier gaming entertainment products employing
available information technology currently in common use in other segments
of the entertainment industry, but not yet prevalent in the gaming
industry;
- to reduce costs through enhanced operating efficiencies while improving
the quality of products and services; and
- to capitalize on relationships and enter into alliances with technology
and entertainment companies, with a particular focus on the application of
technology in the gaming entertainment business.
The Company believes it has assembled a strong and experienced management
team to implement its strategy and capitalize on the opportunities in the gaming
industry. Steve Greathouse, Chairman of the Board of Directors, President and
Chief Executive Officer of Alliance, has over 20 years of experience in the
gaming industry and has strong relationships with many casino operators. Prior
to joining Alliance in 1994, Mr. Greathouse was President of the Harrah's Casino
Hotels Division of The Promus Companies Incorporated. Craig Fields, Vice
Chairman of the Board of Directors of Alliance, who is expected to assume a
senior management position if the Merger is consummated, has over 20 years of
experience with advanced information technology from his work with several
leading companies and government agencies including Perot Systems Corp. and the
United States Department of Defense. Dr. Fields has been active in developing
the Company's strategic focus on the application of technology to gaming
entertainment products. In addition, Hans Kloss, currently the President and
Chief Operating Officer of BGII and long-time managing director of BGII's German
operations, will, if the Merger occurs, join the senior management team. Since
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becoming President of BGII in 1993, Mr. Kloss has been instrumental in
implementing changes in BGII's United States-based operations which have
contributed to improvements in the results of such operations. See "Management".
BUSINESS UNITS
Following the Merger, the Company will operate through four business units:
(i) casino-style electronic gaming machine manufacturing and systems, (ii)
German operations (consisting of the manufacture and distribution of
wall-mounted gaming machines and the distribution of other recreational and
amusement machines), (iii) gaming machine management operations and (iv) casino
operations. The business units described in clauses (i) and (ii) are currently
operated by BGII and will not become part of the Company unless the Merger
occurs, and the business units described in clauses (iii) and (iv) are currently
operated by Alliance.
GAMING MACHINE MANUFACTURING AND SYSTEMS. BGII's United States subsidiary,
Bally Gaming, Inc., currently has two components: a domestic-based electronic
gaming machine manufacturing unit ("Gaming") and a data systems and software and
hardware support service unit ("Systems").
Gaming designs, manufactures and distributes a variety of slot machines and
video gaming machines. Gaming is the second largest electronic gaming machine
manufacturer in North America, and has significantly increased its penetration
in the gaming machine market with the successful introduction of its
ProSeries-TM- and Game Maker-Registered Trademark- lines in 1993 and 1994,
respectively. In the United States, Gaming historically has marketed electronic
gaming machines, primarily to casinos in Atlantic City and Nevada, and more
recently has marketed such machines in other jurisdictions. Gaming also
distributes electronic gaming machines outside the United States, principally in
Europe through Bally Gaming International GmbH ("GmbH") and, to a lesser extent,
in Canada, the Far East, Latin America and the Caribbean.
Systems designs, assembles and sells, primarily to casino operators in the
United States, computerized player tracking, cash monitoring, accounting and
security data systems for electronic gaming machines. Since the introduction of
its SDS 6000 system in the first quarter of 1993 and subsequent upgrades,
Systems has rapidly expanded its presence in casino properties. By the end of
1993, Systems had 40,000 of its game monitoring units ("GMUs") installed in 33
casino properties. This has since increased to 59,000 GMUs installed in 56
casino properties as of April 1, 1996. For the twelve-month period ended
December 31, 1995, EBITDA (as defined; see footnote (1) to "Summary Financial
Information -- Summary Historical Financial Information -- Alliance Gaming
Corporation") for the gaming machine manufacturing and systems unit was
approximately $11.7 million.
GERMAN OPERATIONS. BGII's German subsidiaries, which operate under the name
Bally Wulff (collectively, "Wulff"), design, manufacture and distribute
coin-operated, wall-mounted, electronic gaming machines known as wall machines.
Management estimates that Wulff has approximately 25% of the installed base of
the wall machine market which exists almost exclusively in Germany and that
Wulff and the two other major competitors have a greater than 90% market share.
Wulff markets its own wall machines as well as wall machines and other
recreational and amusement machines manufactured by third parties, including
pool tables, air-hockey and pinball machines, jukeboxes and arcade games, to
operators of arcades, taverns, hotels and restaurants primarily in Germany. For
the twelve-month period ended December 31, 1995, EBITDA for the German
operations unit was approximately $15.2 million.
GAMING MACHINE MANAGEMENT OPERATIONS. Alliance's Nevada gaming machine
management operations, which are the largest in Nevada, involve the selection,
ownership, installation, operation and maintenance of video poker devices,
reel-type slot machines and other electronic gaming machines in local
establishments such as taverns, restaurants, supermarkets, drug stores and
convenience stores operated by third parties. Alliance enters into contracts
with these parties whereby Alliance either receives a portion of the revenue
generated by the machines or pays rent and receives all of the revenues
generated by the machines. In Nevada, Alliance operated approximately 5,357
units installed in 528 locations as of April 1, 1996. As of March 31, 1996, the
weighted average remaining term of Alliance's revenue-sharing arrangements was
approximately 3.6 years. Alliance's customer and machine base has remained
relatively stable
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over the last five years. These operations target local residents who generally
frequent establishments close to their homes. In December 1995, Alliance
launched Gambler's Bonus, a proprietary product which brings large casino gaming
amenities to local establishments, such as multi-location progressive jackpots,
bigger jackpot payouts and traditional players' club enhancements. Since
launching Gambler's Bonus, the gaming machines linked to Gambler's Bonus have
experienced an increase in average net win per day per machine. As of April 1,
1996, Alliance had the Gambler's Bonus system installed in 23 locations
representing approximately 360 machines, and management expects to have
Gambler's Bonus installed in approximately 88 locations or a total of 980
machines by June 1996. In 1992, Alliance expanded its machine management
operations to Louisiana, where it has an exclusive 10-year contract (seven years
remaining, plus a five-year right of first refusal thereafter) to operate
approximately 700 video poker devices at the only racetrack and 10 associated
OTBs in the greater New Orleans area. For the twelve-month period ended December
31, 1995, EBITDA for the gaming machine management operations unit was $18.3
million.
CASINO OPERATIONS. Alliance owns and operates two small full-service
casinos. In Mississippi, the Company's Rainbow Casino is part of the Vicksburg
Landing facility which opened in July 1994 and is the only casino/family
entertainment complex of its kind in Mississippi. The Rainbow Casino currently
has approximately 589 electronic gaming machines and 28 table games. In addition
to the approximately 24,000-square foot Rainbow Casino, Vicksburg Landing opened
an 89-room hotel and a 10-acre indoor/ outdoor amusement park in May 1995.
Although the hotel and amusement park are not owned or operated by Alliance,
management believes that such facilities have contributed significantly to the
recent strong financial results of the Rainbow Casino. Alliance's Plantation
Station Casino located in Reno/Sparks, Nevada is a 20,000-square foot casino
which currently contains approximately 453 electronic gaming machines, keno and
10 table games in addition to a 300-seat restaurant owned by Alliance. For the
twelve-month period ended December 31, 1995, EBITDA for the casino operations
unit was $10.5 million.
Alliance is a Nevada corporation organized in 1968. Alliance's principal
executive offices are located at 4380 Boulder Highway, Las Vegas, Nevada 89121,
and its telephone number is (702) 435-4200.
DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES
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Securities Offered................ Up to $85,000,000 aggregate principal amount of New
Convertible Debentures. The terms of the New Convertible
Debentures and the Old Convertible Debentures are
substantially identical in all material respects, except
that the New Convertible Debentures will have a lower
conversion price, will be senior in right of payment to
the Old Convertible Debentures and will automatically
convert as described below upon consummation of the
Merger (should it occur within 60 days of issuance). See
"Description of the New Convertible Debentures".
Interest Rate..................... 7 1/2% per annum.
Interest Payment Dates............ March 15 and September 15, commencing September 15,
1996.
Maturity.......................... September 15, 2003.
Ranking........................... The New Convertible Debentures are unsecured obligations
of Alliance and are subordinated to all existing and
future Senior Indebtedness of Alliance, and effectively
subordinated to all Indebtedness of Alliance's
subsidiaries, but will be senior in right of payment to
the Old Convertible Debentures. At March 31, 1996, there
was no outstanding Senior Indebtedness of Alliance and
the total amount of outstanding Indebtedness of
Alliance's subsidiaries was $14.1 million ($140.0
million and $33.5 million, respectively, on a pro forma
basis at March 31, 1996 assuming the Merger had occurred
on that date). At March 31, 1996, there was no
outstanding Indebtedness of Alliance ranking on a parity
with
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the New Convertible Debentures. In addition, the New
Convertible Debentures may become structurally senior to
the Old Convertible Debentures. See "Risk Factors --
Subordination" and "-- High Leverage and Fixed Charges;
Holding Company Structure; Working Capital" and
"Description of the New Convertible Debentures --
Subordination".
Conversion Rights................. At the option of the holder, the New Convertible
Debentures are convertible into shares of Common Stock
at any time prior to maturity, unless previously
redeemed or converted, at a conversion price of $8.33
per share, subject to adjustment under certain
circumstances. Accordingly, each $1,000 principal amount
of New Convertible Debentures is convertible initially
into approximately 120 shares of Common Stock subject to
adjustment.
Automatic Conversion upon
Occurrence of Merger............. If the Merger is consummated within 60 days after the
issuance of the New Convertible Debentures, then at the
effective time of the Merger, unless earlier redeemed or
converted, the New Convertible Debentures will be
automatically converted into Common Stock at the
conversion price of $5.56 per share (equivalent to a
conversion rate of approximately 180 shares of Common
Stock per $1,000 principal amount of New Convertible
Debentures), subject to adjustment in certain
circumstances. A holder tendering Old Convertible
Debentures in the Exchange Offer may elect in the Letter
of Transmittal, 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 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. See "The Exchange
Offer -- Election to Receive Series E Preferred Stock
upon Automatic Conversion", "Description of the New
Convertible Debentures -- Automatic Conversion upon
Consummation of Merger" and "Description of Capital
Stock -- Special Stock -- 10% Non-Voting Junior
Convertible Pay-in-Kind Special Stock, Series E". The
shares of Common Stock to be issued upon the Automatic
Conversion will be issued at a price significantly above
book value per share, so the holders of New Convertible
Debentures will, upon the Automatic Conversion, suffer
immediate and substantial dilution. See "Risk Factors --
Dilution; Outstanding Options and Convertible
Securities" and "Dilution". The Merger remains subject
to certain conditions, including regulatory approvals
and the obtaining of financing. ALTHOUGH THERE CAN BE NO
ASSURANCE, ALLIANCE CURRENTLY EXPECTS THAT THE MERGER
WILL BE CONSUMMATED WITHIN 60 DAYS AFTER THE NEW
CONVERTIBLE DEBENTURES ARE ISSUED AND THUS THAT THE
AUTOMATIC CONVERSION WILL OCCUR.
Mandatory Redemption.............. None.
Optional Redemption............... The New Convertible Debentures are redeemable in whole
or in part at the option of Alliance for cash (i) at any
time prior to September 15, 1996 at 105.63% of the
principal amount thereof, plus accrued interest to the
date of redemption, in the event that
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the trading price of the Common Stock exceeds 250% of
the Conversion Price (as defined in the New Convertible
Indenture) for 20 trading days during any period of 30
consecutive trading days and (ii) at any time
thereafter, at the redemption prices set forth herein,
plus accrued interest to the date of redemption.
Redemption at Holder's Option..... If a Change in Control (as defined in the New
Convertible Indenture) or other Redemption Event (as
defined in the New Convertible Indenture) occurs,
subject to certain conditions, each holder of New
Convertible Debentures will have the right to require
Alliance to purchase all or any part of such holder's
New Convertible Debentures at 101% of the principal
amount thereof, plus accrued interest to the date of
purchase. The right to require Alliance to redeem the
New Convertible Debentures as a result of the occurrence
of a Redemption Event could create an event of default
under Senior Indebtedness as a result of which any re-
demption could, absent a waiver, be blocked by the
subordination provisions of the Senior Indebtedness.
Moreover, there can be no assurance that, in the event a
Redemption Event were to occur, Alliance would have or
be able to obtain sufficient funds to satisfy its
obligation to purchase New Convertible Debentures. See
"Risk Factors -- Change of Control" and "Description of
New Convertible Debentures -- Redemption at Holder's
Option".
Interest and Liquidated Damages... The New Convertible Debentures will bear interest from
the date of issuance, payable on each of the Interest
Payment Dates, commencing September 15, 1996. In
addition, 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 there-
tofore 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. The
amount of liquidated damages accrued and unpaid to the
date hereof is $.71 per $1,000 principal amount of Old
Convertible Debentures, and additional liquidated
damages are currently accruing at the rate of $.10 per
$1,000 principal amount per week. See "Description of
the New Convertible Debentures -- Interest on New
Convertible Debentures" and "Comparison of New
Convertible Debentures and Old Convertible Debentures --
Redemption Rights; Liquidated Damages".
Absence of Public Market.......... Alliance does not currently intend to list the New
Convertible Debentures on any securities exchange or to
seek approval for quotation through any automated
quotation system. See "Risk Factors -- Absence of Public
Market; Volatility of Market Prices". Moreover, until
the earlier of (i) the 60th day after issuance of the
New Convertible Debentures and (ii) the effective time
of the Merger (if it occurs), the liquidity of the New
Convertible Debentures may be adversely affected by the
fact that upon an Automatic Conversion some New
Convertible Debentures would be converted into Common
Stock while other New Convertible Debentures would be
converted into Series E Preferred Stock, and different
New Convertible Debentures may trade at
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different prices depending on the class of capital stock
into which such New Convertible Debentures would be
converted in the event of the Automatic Conversion.
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DESCRIPTION OF SERIES E PREFERRED STOCK
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Dividends......................... Each share of the 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. Alliance currently expects
that so long as the Series E Preferred Stock remains
outstanding, Alliance will, subject to the terms
thereof, pay dividends thereon accruing through the
first dividend payment date occurring after the
fifteenth anniversary of the effective time of the
Merger in additional shares of such stock, rather than
in cash.
Voting Rights..................... Upon default in the payment of dividends for six
consecutive dividend payment dates, the number of
directors constituting the Board of Directors of
Alliance (the "Alliance Board") will be increased by
two, and the holders of shares of Series E Preferred
Stock will have the right, voting separately as a class
with the holders of any parity stock, to elect two
directors to the Alliance Board. Such right will exist
until all dividends accumulated on such shares have been
paid or set apart for payment in full. Other than as
described above, the holders of shares of Series E Pre-
ferred Stock have no other voting rights except as
required by law.
Conversion........................ The Series E Preferred Stock will be convertible, in
whole or in part, into shares of Common Stock at any
time at the option of the holder at a 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 in
certain circumstances.
Ranking........................... 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 and in proportion to any parity stock) to be
paid in cash out of the assets of Alliance an amount
equal to $100 per share (the "Liquidation Value"), plus
an amount equal to all accrued and unpaid dividends and
distributions. The Series E Preferred Stock will rank
junior in right of payment to the 15% Non-Voting
Pay-in-Kind Special Stock, Series B, par value $.10 per
share (the "15% Preferred Stock"), which is to be issued
as part of the Merger consideration and in a public
offering. There is no limitation on Alliance's ability
to issue additional equity securities ranking senior to
or on a parity with the Series E Preferred Stock.
Redemption........................ The Series E Preferred Stock can be redeemed at any time
in whole or in part at the option of Alliance for cash
at a price equal to the Liquidation Value plus any
accrued and unpaid dividends or distributions to the
date of redemption.
Absence of Public Market.......... Alliance does not currently intend to list the Series E
Preferred Stock on any securities exchange or to seek
approval for quotation through any automated quotation
system. See "Risk Factors -- Absence of Public Market;
Volatility of Market Prices".
</TABLE>
14
<PAGE>
DESCRIPTION OF THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The New Convertible Debentures are being offered in
exchange for a like principal amount of Old Convertible
Debentures. See "The Exchange Offer -- Terms of the
Exchange Offer".
Purpose........................... The Exchange Offer is being made to enhance Alliance's
capital structure and to facilitate financing of the
Merger. See "The Merger and Related Financings".
Tenders; Expiration Date.......... The Exchange Offer will expire at 12:00 midnight, New
York City time, on June 6, 1996, unless extended by
Alliance. See "The Exchange Offer -- Expiration;
Extension; Termination; Amendment".
Withdrawal of Tenders............. Tenders of Old Convertible Debentures may be withdrawn
at any time prior to the expiration of the Exchange
Offer. Thereafter, such tenders are irrevocable, except
that they may be withdrawn at any time after July 5,
1996, unless accepted for exchange prior to that date.
See "The Exchange Offer -- Withdrawal of Tenders".
Acceptance of Old Convertible
Debentures and Delivery of New
Convertible Debentures........... Alliance will accept for exchange any and all Old
Convertible Debentures that are properly tendered and
not withdrawn prior to the Expiration Date, subject to
the terms and conditions of the Exchange Offer. The New
Convertible Debentures to be issued pursuant to the
Exchange Offer will be delivered as promptly as
practicable following the Expiration Date. See "The
Exchange Offer -- Acceptance of Old Convertible
Debentures; Delivery of New Convertible Debentures".
Alliance reserves the right, subject to applicable laws,
to delay acceptance for exchange, to delay the exchange
or to terminate the Exchange Offer.
Election to Receive Series E Pre-
ferred Stock upon Automatic Con-
version.......................... If a holder tendering Old Convertible Debentures in the
Exchange Offer desires to receive Series E Preferred
Stock upon the Automatic Conversion with respect to all
or any part of the New Convertible Debentures received
in exchange for such Old Convertible Debentures, such
holder must so elect at the time of such tender by
following the procedures described in "The Exchange
Offer -- Election to Receive Series E Preferred Stock
upon the Automatic Conversion". Unless these election
procedures are followed, all of the New Convertible
Debentures issued in exchange for such Old Convertible
Debentures will be automatically converted into Common
Stock upon the Automatic Conversion.
Procedures for Tendering Old
Convertible Debentures;
Guaranteed Delivery.............. Each holder of Old Convertible Debentures wishing to
accept the Exchange Offer must either (i) complete and
sign the Letter of Transmittal (or a facsimile thereof),
in accordance with the instructions contained herein and
therein, and deliver such Letter of Transmittal,
together with any signature guarantees and any other
documents required by the Letter of Transmittal, to the
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
Exchange Agent at one of its addresses set forth on the
back cover page of this Prospectus and either (a) the
tendered Old Convertible Debentures must be physically
delivered to the Exchange Agent or (b) the Old
Convertible Debentures must be transferred pursuant to
the procedures for book-entry transfer described herein
and a confirmation of such book-entry transfer must be
received by the Exchange Agent, in each case on or prior
to the Expiration Date, or (ii) comply with the
guaranteed delivery procedures set forth herein. Any
beneficial owner of Old Convertible Debentures whose
securities are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee
is urged to contact the registered holder(s) of such
securities promptly to instruct the registered holder(s)
whether to tender such beneficial owner's securities.
See "The Exchange Offer -- Procedures for Tendering".
Conditions........................ The obligation of Alliance to consummate the Exchange
Offer is subject to certain conditions, including, among
others, the requirements that (i) the holders of a
majority of the outstanding shares of Common Stock shall
have approved the issuance of the New Convertible
Debentures pursuant to the Exchange Offer and of the
securities issuable directly or indirectly upon conver-
sion thereof (the "Issuance Proposal") (the holders of a
majority of the outstanding shares of Common Stock have
indicated their intention to approve such issuance) 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 upon conversion
thereof. See "The Exchange Offer -- Conditions to the
Exchange Offer".
Certain Federal Income Tax
Considerations................... For a discussion of certain federal income tax
consequences of the matters discussed herein to holders
of Old Convertible Debentures, see "Certain Federal
Income Tax Considerations".
Exchange Agent.................... The Bank of New York. See "The Exchange Offer --
Exchange Agent and Information Agent".
Information Agent................. Georgeson & Company Inc. See "The Exchange Offer -- Ex-
change Agent and Information Agent".
</TABLE>
16
<PAGE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with deciding whether to tender Old Convertible
Debentures in the Exchange Offer.
CERTAIN ADVANTAGES AND DISADVANTAGES OF THE EXCHANGE OFFER
Set forth below is a summary of certain potential benefits and risks to be
taken into account in considering whether to participate in the Exchange Offer.
This is not intended to be tax or legal advice and holders should seek their own
advice and counsel regarding the possible effects of the Exchange Offer.
ADVANTAGES TO TENDERING DEBENTUREHOLDERS
IF MERGER OCCURS
- Conversion price will decrease from $10.00 to $5.56, resulting in issuance
of more Common Stock and/or Series E Preferred Stock on conversion
IF MERGER DOES NOT OCCUR
- Conversion price will decrease from $10.00 to $8.33
- New Convertible Debentures will be senior in right of payment to the Old
Convertible Debentures
DISADVANTAGES TO TENDERING DEBENTUREHOLDERS
IF MERGER OCCURS (RESULTING IN AUTOMATIC CONVERSION)
- Holders of Common Stock and Series E Preferred Stock have the lowest two
priorities in the capital structure of the Company
- Series E Special Stock may have less liquidity than the Old Convertible
Debentures
IF MERGER DOES NOT OCCUR
- Liquidity of New Convertible Debentures may be less than that of the Old
Convertible Debentures currently
ADVANTAGES TO NON-TENDERING DEBENTUREHOLDERS
IF MERGER OCCURS
- Holders of Old Convertible Debentures will remain debtholders of the
combined company and will therefore have priority in right of payment over
holders of equity securities, including the Common Stock and the Series E
Preferred Stock
- Holders of Old Convertible Debentures will continue to be entitled to
receive fixed interest payments
DISADVANTAGES TO NON-TENDERING DEBENTUREHOLDERS
IF MERGER OCCURS
- Will be subordinated to all other indebtedness, including substantial
amounts of senior debt
- Fewer Old Convertible Debentures outstanding could reduce liquidity
IF MERGER DOES NOT OCCUR
- Old Convertible Debentures will be subordinated to New Convertible
Debentures
- Fewer Old Convertible Debentures outstanding could reduce liquidity
17
<PAGE>
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, $35.7 million in 15% Preferred
Stock and $2.9 million in Common Stock as set forth below. 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 Merger Agreement and the Merger. Alliance intends to seek
shareholder approval by written consent of the Issuance Proposal, and approval
of the Issuance Proposal is a condition to Alliance's obligation to consummate
the Exchange Offer. Holders of a majority of the outstanding shares of Common
Stock have indicated their intention to vote in favor of the Issuance Proposal,
which would insure approval of the Issuance Proposal. See "The Exchange Offer --
Conditions to the Exchange Offer" and "The Merger and Related Financings".
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". See "The Merger and Related
Financings".
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 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 preceeding 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.
The consummation of the Merger is contingent on completion of the Offerings
and obtaining requisite regulatory approval. The Merger Agreement terminates on
June 18, 1996. If the Merger is not consummated by that date, Alliance may seek
an extension, but has made no determination in that regard. 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. See "The Merger and Related Financings".
18
<PAGE>
SOURCES AND USES OF FUNDS
The following table sets forth the anticipated sources and uses of funds to
be used to consummate the Merger and the other elements of the Transaction based
on the Company's cash and debt balances as of March 31, 1996. The actual
balances and number of shares outstanding will vary based on the date of
consummation of the Transaction and the securities issued in connection with the
Merger and the financing thereof.
(IN MILLIONS)
<TABLE>
<S> <C> <C> <C>
ANTICIPATED SOURCES OF FUNDS ANTICIPATED USES OF FUNDS
CASH SOURCES: CASH USES:
</TABLE>
<TABLE>
<S> <C>
Senior Notes............................ $ 140.0
15% Preferred Stock..................... 15.0
Common Stock (Private Placement)........ 5.0
---------
Total Cash Sources.................. 160.0
---------
Cash to BGII Stockholders(a)............ $ 77.2
Retire BGII Debt(b)..................... 53.3
Employee Contract Termination Costs
and Performance Unit Awards(c)......... 7.6
Fees and Expenses(d).................... 21.9
---------
Total Cash Uses..................... 160.0
---------
</TABLE>
<TABLE>
<S> <C> <C> <C>
NON-CASH SOURCES: NON-CASH USES:
</TABLE>
<TABLE>
<S> <C>
New Convertible Debentures issued and
automatically converted into Common
Stock.................................. 50.0
15% Preferred Stock to BGII
Stockholders(e)........................ 35.7
Common Stock to BGII Stockholders(f).... 2.9
Common Stock(c)......................... 3.7
---------
Total Non-Cash Sources................ 92.3
---------
Total Sources....................... $ 252.3
---------
---------
Retire Old Convertible Debentures....... 50.0
15% Preferred Stock to BGII
Stockholders(e)........................ 35.7
Common Stock to BGII Stockholders(f).... 2.9
Common Stock(c)......................... 3.7
---------
Total Non-Cash Uses................... 92.3
---------
Total Uses.......................... $ 252.3
---------
---------
</TABLE>
- --------------------------
(a) Represents the cash consideration to be paid to BGII stockholders in the
Merger consisting of $7.83 per share of BGII common stock plus interest
accruing at a rate of 5.5% per annum from May 3, 1996 to the effective time
of the Merger (but not later than June 18, 1996, unless extended),
calculated in accordance with the terms of the Merger Agreement.
(b) Represents retirement of the following debt of BGII outstanding at March 31,
1996 together with accrued and unpaid interest thereon:
(i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a
prepayment price of 101% plus original issue discount of $0.3 million;
(ii) $9.3 million under a bank revolving line of credit of Bally Gaming
Inc., a wholly owned subsidiary of BGII;
(iii) other notes payable of BGII, aggregating $1.6 million; and
(iv) accrued and unpaid interest on the foregoing debt instruments, through
the effective time of the Merger, totaling approximately $2.0 million.
(c) Includes $5.0 million payable in cash to Richard Gillman, Chairman of the
Board and Chief Executive Officer of BGII, and $1.3 million payable to Neil
Jenkins, Executive Vice President and Secretary of BGII, consisting of $0.9
million in cash and $0.4 million in Common Stock, all pursuant to agreements
with Alliance in connection with the termination of their respective
employment agreements and performance unit awards. Additionally, Hans Kloss,
President and Chief Operating Officer of BGII and Managing Director of
Wulff, who will remain with the Company, will receive a total of $4.3
million consisting of $1.5 million in cash and $2.8 million in Common Stock,
and Robert Conover, President of Systems, who will remain with the Company,
will receive a total of $0.7 million consisting of $0.2 million in cash and
$0.5 million in Common Stock, in connection with their employment agreements
and
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
19
<PAGE>
performance unit awards. The Common Stock portion of each such payment will
be valued at the average daily closing price per share of Alliance Common
Stock as reported through NASDAQ for the ten consecutive trading days ending
on (and including) the fifth trading day prior to the Merger (the "Alliance
Average Trading Price") but in no event more than $6.00 nor less than $4.25
per share. See "The Merger and Related Financings".
(d) Total estimated Alliance and BGII Transaction-related fees and expenses are
$37.0 million, of which $15.1 million has been paid through March 31, 1996.
Excludes the value of Common Stock to be issued to a Dealer Manager as a
financial advisory fee. See "The Exchange Offer -- Dealer Managers".
(e) Represents the 15% Preferred Stock consideration to be paid to BGII
stockholders in the Merger consisting of $3.57 valued at liquidation value
of 15% Preferred Stock per share of BGII common stock, plus dividends
accruing at a rate of 15% per annum from May 3, 1996.
(f) Represents the Common Stock consideration to be paid to BGII stockholders in
the Merger consisting of $0.30 per share of BGII common stock valued at the
Alliance Average Trading Price.
PRO FORMA BUSINESS STRUCTURE OF THE COMPANY
The following chart presents the principal elements of the business
structure of the Company as management currently intends to operate following
the Merger, but does not reflect the legal structure of Alliance or BGII.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Alliance
Gaming
Corporation
Gaming Machine German Machine Casino
Manufacturing Operations Management Operations
and Systems Operations
Bally Bally Gaming Wulff Nevada: Louisiana: Nevada: Mississippi:
Gaming, Inc. International United Coin Video Plantation Rainbow
Services,
(including GmbH Machine Co. Inc. Station Casino Casino
Systems
Division)
</TABLE>
- ------------------------
(1) BGII entities to be acquired only on consummation of the Merger.
(2) Not wholly-owned. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
20
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following Summary Forecast of Operations (the "Summary 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
Summary Forecast, which consists of forward-looking statements, is qualified by,
and subject to, the assumptions set forth below and the other information
contained in this Prospectus, and should be read in conjunction with the
"Forecast of Operations", including the "Summary of Significant Assumptions and
Accounting Policies for the Forecast".
The following Summary Historical Financial Information tables set forth
summary consolidated financial information of Alliance, which has been derived
from the audited consolidated financial statements of Alliance, including the
notes thereto, as of June 30, 1995 and for the fiscal years ended June 30, 1993,
1994 and 1995, and the unaudited interim condensed consolidated financial
statements of Alliance, including the notes thereto, as of March 31, 1996 and
for the nine-month periods ended March 31, 1995 and 1996, which are included
elsewhere in this Prospectus. The following Summary Historical Financial
Information tables also set forth summary consolidated financial information of
BGII, which has been derived from the audited consolidated financial statements
of BGII, including the notes thereto, as of December 31, 1995 and for the fiscal
years ended December 31, 1993, 1994 and 1995, and the unaudited interim
condensed consolidated financial statements of BGII, including the notes
thereto, as of March 31, 1996, and for the three-month periods ended March 31,
1995 and 1996, which are included elsewhere in this Prospectus. The Summary
Historical Financial Information for Alliance and BGII reflects all adjustments
which management believes necessary to present fairly the financial position,
results of operations and cash flows of Alliance and BGII. 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 fiscal year as a whole.
The following tables also set forth Summary Unaudited Pro Forma Condensed
Combined Financial Information. The Pro Forma Statements of Operations Data
presents results of operations of the Company assuming the Transaction occurred
on July 1, 1994 for the statements for the twelve months ended June 30, 1995 and
the nine months ended March 31, 1996, and further assuming that the Rainbow
Casino operations were consolidated. The detailed presentation of revenues is
derived from internally prepared supporting schedules not otherwised presented
or incorporated herein. The Pro Forma Balance Sheet Data present the financial
position of the Company assuming the Transaction occurred on March 31, 1996. The
Summary Unaudited Pro Forma Condensed Combined Financial Information does not
purport to present the financial position or results of operations of the
Company had the Transaction and events assumed therein occurred on the dates
specified, nor is it necessarily indicative of the results of operations of the
Company as they may be in the future or as they may have been had the
Transaction and the consolidation of the Rainbow Casino operating results been
consummated on the dates described above. The Summary Unaudited Pro Forma
Condensed Combined Financial Information is based on certain assumptions and
adjustments described in the Notes to Unaudited Pro Forma Condensed Combined
Financial Information and should be read in conjunction therewith.
The tables should be read in conjunction with "Unaudited Pro Forma Condensed
Combined Financial Information", "Notes to Unaudited Pro Forma Condensed
Combined Financial Information", "Supplemental Analysis of Adjusted Operating
Cash Flow", "Forecast of Operations", "Summary of Significant Assumptions and
Accounting Policies for the Forecast", "Selected Historical Financial
Information of Alliance", "Selected Historical Financial Information of BGII",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the audited consolidated financial statements of Alliance,
including the notes thereto, the unaudited interim condensed consolidated
financial statements of Alliance, including the notes thereto, the audited
consolidated financial statements of BGII, including the notes thereto, the
unaudited interim condensed consolidated financial statements of BGII, including
the notes thereto, and other financial and operating information included
elsewhere in this Prospectus.
21
<PAGE>
SUMMARY FORECAST OF OPERATIONS (1)
<TABLE>
<CAPTION>
COMPARATIVE ANALYSIS OF
OPERATIONS (2)
-------------------------------------------------------------- FORECAST OF
OPERATIONS FOR
TWELVE MONTHS THREE MONTHS THE TWELVE MONTHS
ENDED DECEMBER 31, ENDED MARCH 31, ENDING
------------------------------ ------------------------------ DECEMBER 31,
1994 1995 1995 1996 1996
-------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS
INFORMATION:
Total Revenues...................... $ 373,031 $ 400,964 $ 105,778 $ 99,112 $ 425,957
Total Operating Costs............... 361,753(3) 381,720(3) 96,337(3) 95,185(3) 406,239(3)
-------------- -------------- -------------- -------------- --------
Operating Income.................... 11,278 19,244 9,441 3,927 19,718
Net Income (Loss)................... $ (12,181)(4) $ (7,153)(4) $ 2,906(4) $ (3,076)(4) $ (27,939)(4)
-------------- -------------- -------------- -------------- --------
-------------- -------------- -------------- -------------- --------
Income (Loss) per Common Share...... $ (0.89) $ (0.64) $ 0.04 $ (0.20) $ (1.42)(5)
-------------- -------------- -------------- -------------- --------
-------------- -------------- -------------- -------------- --------
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(6) 1,189(6) -- --
Unusual or Non-recurring
Charges.......................... 2,856(7) 7,783(7) 600(7) 3,487(7) 4,479(8)
Direct Merger Costs............... -- -- -- -- 12,815(9)
-------------- -------------- -------------- -------------- --------
Adjusted Operating Cash Flow........ $ 34,272(10) $ 47,345(10) $ 14,904(10) $ 11,269(10) $ 54,916(10)
-------------- -------------- -------------- -------------- --------
-------------- -------------- -------------- -------------- --------
OTHER DATA:
Net Interest Expense.............. $ 19,561 $ 20,743 $ 4,964 $ 5,191 $ 20,491
-------------- -------------- -------------- -------------- --------
-------------- -------------- -------------- -------------- --------
</TABLE>
- ------------------------------
(1) The Summary Forecast, which consists of forward-looking statements, gives
consideration to actual results for the three months ended March 31, 1996 as
well as a number of estimates and assumptions that, while presented with
numerical specificity and considered reasonable by management of the
Company, are inherently subject to significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of
which are difficult to predict and many of which are beyond the control of
the Company. The Summary Forecast is necessarily speculative in nature, and
it is usually the case that one or more of the assumptions do not
materialize. The Summary Forecast and actual results will vary, and those
variations may be material. Accordingly, the inclusion of the Summary
Forecast herein should not be regarded as a representation by the Company or
any other person (including the Dealer Managers) that the Summary Forecast
will be achieved. In addition, because the Summary Forecast has been
prepared on a consolidated basis, the Summary Forecast does not account for
the Company's holding company structure, which may result in cash flows
earned at some subsidiaries being unavailable for distribution to the
Company including to service indebtedness of the Company. Holders of Old
Convertible Debentures are cautioned not to place undue reliance on the
Summary Forecast.
(2) See Note (2) -- Presentation of Supplemental Comparative Information of the
"Summary of Significant Assumptions and Accounting Policies for the
Forecast" elsewhere in the Prospectus.
(3) Selling, general and administrative costs are net of the following: direct
Merger costs; the business development costs over (under) the $3.0 million
annual budgeted 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 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 (8) below for one-time $1.0 million costs to implement
synergy cost savings in 1996. See Note (9) below for the 1996 presentation
which includes direct Merger costs.
(4) Excludes 15% Preferred Stock dividends. Dividends on the 15% Preferred Stock
are compounded quarterly at a rate of 15% per annum; however, such dividends
are permitted to be paid in kind for the first five years after issuance and
partially in kind for the next two years.
(5) 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).
(6) Represents adjustment to reflect management's derivation of Rainbow Casino's
annualized results for the period, net of incremental royalty.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
22
<PAGE>
(7) 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 as used throughout the Prospectus are not
defined in generally accepted accounting principles ("GAAP"). See Notes
(10)(e),(f),(g) and (h) below.
(8) 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; the $1.0
million of one-time charges (which are included in Total Operating Costs) to
implement the expected annual synergy cost savings (which are reflected in
Total Operating Costs as well); and certain charges of $0.3 million relating
to a regulatory investigation and legal proceedings in Louisiana.
(9) 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 (3) above
for the presentation of direct Merger costs in earlier periods.
(10) The following is a reconciliation of the historical EBITDA (as defined in
Note (1) -- Summary Historical Financial Information -- Alliance Gaming
Corporation) 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 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. 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.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
23
<PAGE>
(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 Industries Inc. ("WMS"), a provision of $0.8
million at Wulff to write down to net realizable value the carrying value
of a building to be sold and a provision of $1.0 million to increase
Wulff's tax reserves primarily for German value added taxes ("V.A.T.").
(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 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. 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).
24
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
ALLIANCE GAMING CORPORATION
<TABLE>
<CAPTION>
FISCAL YEARS NINE MONTHS
ENDED JUNE 30, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net Revenues.................................................. $ 113,091 $ 123,054 $ 131,988 $ 93,776 $ 116,796
Operating Loss................................................ (52) (7,468) (4,261) (2,544) (5,872)
Net Interest Expense.......................................... (4,048) (4,746) (5,335) (3,609) (5,135)
Net Loss...................................................... $ (3,650) $ (13,128) $ (10,751) $ (6,793) $ (14,829)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Loss per Common Share..................................... $ (0.38) $ (1.28) $ (0.95) $ (0.61) $ (1.21)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Deficit of Earnings to Fixed Charges................... $ (3,650) $ (12,887) $ (10,487) $ (6,399) $ (14,248)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro Forma Deficit of Earnings to Fixed Charges......... $ (1,164) $ (200) $ (9,821)
--------- --------- ---------
--------- --------- ---------
Pro Forma Deficit of Earnings to Fixed Charges and 15%
Preferred Stock Dividend.............................. $ (9,203) $ (6,116) $ (15,737)
--------- --------- ---------
--------- --------- ---------
CASH FLOW INFORMATION:
Historical Cash Flows From:
Operating Activities................................. $ 5,909 $ 9,062 $ 957 $ 167 $ (533)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Investing Activities................................. $ (8,898) $ (27,299) $ (21,648) $ (9,791) $ 5,255
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Financing Activities................................. $ 2,430 $ 45,742 $ (2,660) $ (1,509) $ (2,495)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro Forma Cash Flows From:
Operating Activities................................. $ 7,225 $ 4,890 $ 20,564
--------- --------- ---------
--------- --------- ---------
Investing Activities................................. $ (26,936) $ (15,356) $ (1,088)
--------- --------- ---------
--------- --------- ---------
Financing Activities................................. $ (757) $ 1,528 $ (3,059)
--------- --------- ---------
--------- --------- ---------
OTHER DATA:
Gaming Machine Management:
Units................................................ 5,868 5,889 5,902 5,955 5,989
Locations............................................ 518 506 526 527 539
Casinos:
Tables............................................... 9 9 37 9 35
Slots Operated....................................... 428 434 1,005 486 1,038
Revenues:
Gaming Machine Management............................ $ 96,282 $ 102,830 $ 106,827 $ 79,389 $ 81,111
Casinos.............................................. 11,286 12,046 19,668 9,874 34,361
Discontinued Operations.............................. 5,523 8,178 5,493 4,513 1,324
--------- --------- --------- --------- ---------
Net Revenues....................................... $ 113,091 $ 123,054 $ 131,988 $ 93,776 $ 116,796
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EBITDA (1):
Gaming Machine Management............................ $ 14,564 $ 16,820 $ 18,562 $ 13,558 $ 12,967
Casinos (2).......................................... 1,963 2,190 5,359 2,444 10,789
Corporate Development Expenses (3)................... (900) (1,192) (7,843) (5,647) (14,234)
Corporate Administrative Expenses (4)................ (6,191) (7,882) (10,177) (5,906) (7,710)
Discontinued Operations (5).......................... (770) (7,874) (642) (59) (357)
Casino Royalty....................................... -- -- (810) (27) (2,931)
Minority Interest.................................... -- (506) (397) (252) (708)
--------- --------- --------- --------- ---------
Total EBITDA (1)................................... $ 8,666 $ 1,556 $ 4,052 $ 4,111 $ (2,184)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Depreciation and Amortization.......................... $ 8,718 $ 9,530 $ 9,520 $ 6,934 $ 7,328
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Capital Expenditures................................... $ 5,092 $ 7,022 $ 7,880 $ 7,816 $ 6,624
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents and Securities Available for Sale ........................................ $ 25,562
Working Capital..................................................................................... 15,583
Total Assets........................................................................................ 111,288
Long-term Debt, Including Current Maturities........................................................ 99,089
Stockholders' Deficiency............................................................................ (5,595)
</TABLE>
25
<PAGE>
- --------------------------
(1) EBITDA is defined as earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA"). Corporate expenses, casino
royalty, minority interest and unusual charges and other are shown as
separate components of EBITDA and are not allocated back to business units.
EBITDA should not be construed as an alternative to net income or any other
GAAP measure of performance as an indicator of Alliance's performance or to
cash flows generated by operating, investing and financing activities as an
indicator of cash flows or a measure of liquidity. Management believes that
EBITDA is a useful adjunct to net income and other measurements under GAAP
and is a conventionally used financial indicator.
(2) Since March 29, 1995, the Rainbow Casino operations have been consolidated
with Alliance.
(3) Includes direct Merger costs of $1.7 million and $12.2 million for the
fiscal year ended June 30, 1995 and the nine months ended March 31, 1996,
respectively.
(4) Includes one-time charges incurred by Alliance consisting of an executive
signing bonus of $1.3 million paid in Common Stock and $1.1 million of
termination costs for certain officers and directors, which were incurred
during the quarter ended June 30, 1995, and a provision for impaired assets
of two development projects totaling $3.2 million incurred in the quarter
ended March 31, 1996.
(5) Includes businesses now or previously considered as discontinued operations.
26
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ -----------------------------
1993 1994 1995 1995 1996
-------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................. $168,707 $236,192 $249,312(1) $ 68,289 $ 58,544
Operating Income
(Loss).................. (18,536)(2) 13,381 (3)(4) 8,364(1)(3)(4)(5)(6) 6,637(3)(4) 2,274(3)(7)
Interest Expense......... 4,424 6,768 6,853 1,733 1,665
Net Income (Loss)........ $(23,443) $ 3,793 $ (3,393) $ 2,862 $ (513)
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
Net Income (Loss) per
Share................... $ (2.19) $ 0.35 $ (0.31) $ 0.27 $ (0.05)
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
Ratio of Earnings to
Fixed Charges........... 1.93 1.21 3.76 1.37
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
Deficit of Earnings to
Fixed Charges........... $(22,960)
--------
--------
CASH FLOW INFORMATION:
Cash Flows From:
Operating Activities... $(29,548) $ 1,224 $ 3,795 $ (5,605) $ (1,757)
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
Investing Activities... $(13,407) $(6,391 ) $ (6,233) $ (2,108) $ (2,218)
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
Financing Activities... $ 38,980 $ 8,231 $ (1,961) $ 1,688 $ 590
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
OTHER DATA:
Unit Sales:
Gaming................. 10,156 21,625 18,084 4,862 4,041
Wulff.................. 12,552 13,100 12,000 2,900 2,400
Revenues:
Gaming (8)............. $ 49,298 $118,659 $111,849(1) $ 27,979 $ 24,784
Systems................ 12,748 13,386 20,681 6,088 5,004
-------- -------- ---------- ---------- ----------
Gaming Machine
Manufacturing and
Systems............. 62,046 132,045 132,530 34,067 29,788
Wulff.................. 106,661 104,147 116,782 34,222 28,756
-------- -------- ---------- ---------- ----------
Total Revenues....... $168,707 $236,192 $249,312 $ 68,289(9) $ 58,544(9)
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
EBITDA (10):
Gaming (8)............. $(24,747)(2) $ 7,304 $ 7,305(1)(5) $ 2,659 $ 1,046
Systems................ 3,829 3,593 5,788 1,997 1,620
-------- -------- ---------- ---------- ----------
Gaming Machine
Manufacturing and
Systems............. (20,918)(2) 10,897 13,093(1)(5) 4,656 2,666
Wulff.................. 15,959 15,575 15,172 5,106 3,406
BGII Corporate
Administrative Expense
(8)................... (5,473) (4,520 )(4) (3,732)(4) (1,285)(4) (604)
Unusual Charges and
Other................. -- (300 )(3) (7,216)(3)(6) (400)(3) (1,296)(3)(7)
-------- -------- ---------- ---------- ----------
Total EBITDA (10).... $(10,432) $21,652 $ 17,317 $ 8,077(9) $ 4,172(9)
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
Depreciation and
Amortization............ $ 8,103 $ 8,271 $ 8,953 $ 1,440 $ 1,898
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
Capital Expenditures..... $ 6,467 $ 9,537 $ 8,240 $ 2,232 $ 2,733
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1996
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents........................................................................ $ 2,009
Working Capital.................................................................................. 85,649
Total Assets..................................................................................... 186,936
Long-term Debt, Including Current Maturities..................................................... 69,971
Stockholders' Equity............................................................................. 86,000
</TABLE>
- ------------------------------
(1) Includes the impact of sales returns of $0.3 million by Gaming related to
two riverboats at the River City Complex in New Orleans which filed for
bankruptcy.
(2) Includes $6.2 million in charges to increase inventory valuation reserves in
1993 principally related to inventory originally intended for sale in the
Louisiana video lottery terminal market. Includes $1.2 million in charges
related to a management reorganization at Gaming in 1993. Includes a
provision for doubtful receivables totaling $5.1 million recorded by Gaming
in 1993 related to a former distributor who filed for bankruptcy during the
second quarter of 1993.
(3) Includes certain charges included in Unusual Charges and Other under Other
Data consisting of costs relating to a regulatory investigation and legal
proceedings in Louisiana totalling $0.3 million and $1.4 million for the
years ended December 31, 1994 and 1995, respectively, and $0.4 million and
$0.3 million for the three months ended March 31, 1995 and 1996,
respectively.
(4) Includes legal costs related to a former executive totaling $0.5 million
during the year ended December 31, 1994. Also includes legal costs related
to the "Bally" trade name litigation totaling $0.2 million during both the
year ended December 31, 1995 and the three months ended March 31, 1995.
(5) Includes a provision for doubtful receivables of $0.9 million related to the
bankruptcy described in Note (1) above.
(6) Includes $2.0 million in Merger transaction costs and related litigation
expenses, $2.0 million in costs related to the merger agreement with WMS, 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.
27
<PAGE>
(7) Includes $1.0 million in Merger transaction costs.
(8) Includes results of GmbH and BGI Australia Pty Limited in Gaming's results,
along with certain reclassifications from historical presentation.
(9) 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".
(10)See Note (1) to "Summary Historical Financial Information -- Alliance Gaming
Corporation" in this Prospectus Summary.
28
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
JUNE 30, MARCH 31,
1995 1996
----------- ------------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................................................................... $ 400,821 $ 287,117
Operating Income....................................................................... 22,677 9,136
Net Interest Expense................................................................... (20,431) (15,716)
Casino Royalty......................................................................... (3,431) (2,931)
Minority Interest...................................................................... (397) (708)
Other, net............................................................................. 418 398
----------- ------------
Loss Before Taxes...................................................................... (1,164) (9,821)
Provisions for Income Taxes............................................................ (2,555) (1,508)
----------- ------------
Net Loss............................................................................... $ (3,719) $ (11,329)
----------- ------------
----------- ------------
15% Preferred Stock Dividend........................................................... $ (8,039) $ (5,916)
----------- ------------
----------- ------------
Net Loss per Common Share.............................................................. $ (0.50) $ (0.70)
----------- ------------
----------- ------------
OTHER DATA:
Depreciation and Amortization.......................................................... $ 22,642 $ 17,114
Capital Expenditures................................................................... 16,484 13,166
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents and Securities Available for Sale......................................... $ 19,817
Working Capital..................................................................................... 107,330
Total Assets........................................................................................ 345,564
Long-term Debt, Including Current Maturities........................................................ 208,432
Stockholders' Equity................................................................................ 42,350
</TABLE>
29
<PAGE>
RISK FACTORS
PRIOR TO DECIDING WHETHER TO TENDER OLD CONVERTIBLE DEBENTURES IN THE
EXCHANGE OFFER, HOLDERS OF THE OLD CONVERTIBLE DEBENTURES SHOULD CAREFULLY
CONSIDER ALL OF THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, ESPECIALLY THE CONSIDERATIONS DESCRIBED OR REFERRED TO IN THE
FOLLOWING PARAGRAPHS.
SUBORDINATION
The Senior Notes expected to be issued in the Note Offering or, if the
Merger does not occur, the New Convertible Debentures, will be considered Senior
Indebtedness as defined in the Old Convertible Indenture (as defined below).
Therefore, the payment of the principal of (and premium, if any), interest on,
liquidated damages with respect to, and redemptions at the option of the holders
of Old Convertible Debentures will be subordinated in right of payment to prior
payment in full of all holders of the Senior Notes or, if the Merger does not
occur, the New Convertible Debentures. In addition, upon any payment or
distribution of assets to creditors upon any liquidation, dissolution, winding
up, receivership, reorganization, assignment for the benefit of creditors,
marshalling of assets and liabilities or any bankruptcy, insolvency or similar
proceedings of Alliance, the holders of all Senior Notes or, if the Merger does
not occur, the New Convertible Debentures, will first be entitled to receive
payment in full in cash of all amounts due or to become due thereon before the
holders of the Old Convertible Debentures will be entitled to receive any
applicable payments. The Senior Notes will also be Senior Indebtedness as
defined in the New Convertible Indenture; however, the Senior Notes are expected
to be issued only upon the consummation of the Merger (in which event the New
Convertible Debentures would be automatically converted into Common Stock or
Series E Preferred Stock). For further information with respect to the
subordination of Old Convertible Debentures and New Convertible Debentures to
Senior Indebtedness, see "Description of the New Convertible Debentures --
Subordination".
In addition, whether or not the Merger occurs, Alliance may transfer 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 (the "Drop-Down Transaction"). In connection with this
transfer, the subsidiary would become jointly and severally liable with Alliance
for all of Alliance's obligations with respect to the New Convertible Debentures
or the Senior Notes, as applicable. As a result of this transfer and assumption,
the holders of the New Convertible Debentures or the Senior Notes, as
applicable, but not of the Old Convertible Debentures, would in effect have a
claim prior to that of the holders of the Old Convertible Debentures on the
assets of Alliance (in addition to the claim the holders of the Senior Notes are
expected to have as a result of guarantees from Alliance's subsidiaries), and
the Old Convertible Debentures would accordingly be structurally subordinated to
the New Convertible Debentures or the Senior Notes, as applicable.
HIGH LEVERAGE AND FIXED CHARGES; HOLDING COMPANY STRUCTURE; WORKING CAPITAL
Alliance currently has, and after the Transaction the Company will have, a
substantial amount of indebtedness. As of March 31, 1996, Alliance had
outstanding debt (including the $85.0 million principal amount of Old
Convertible Debentures) of $99.1 million and a deficiency in stockholders'
equity of $5.6 million, and on a pro forma basis after giving effect to the
Transaction, the Company would have had outstanding debt of approximately $208.4
million (including $35.0 million of Old Convertible Debentures assumed not to
have been tendered in the Exchange Offer but excluding $50.0 million of New
Convertible Debentures assumed to have been issued in the Exchange Offer and
converted into Common Stock in the Automatic Conversion) and a long-term debt to
equity ratio of 4.9 to 1. If the 15% Preferred Stock were included in debt the
pro forma long-term debt to equity ratio would be 6.1 to 1. See "The Merger and
Related Financings", "Capitalization" and "Unaudited Pro Forma Condensed
Combined Financial Information". In addition, if the maximum amount of dividends
on the 15% Preferred Stock were paid in kind, as is anticipated, the liquidation
value of the 15% Preferred Stock would accrete to approximately $124.0 million
after seven years. The high level of indebtedness and the amount of 15%
Preferred Stock of the Company outstanding following the Transaction will have
important consequences, including without limitation the following: (i)
significant interest expense, cash dividend requirements (after five years),
principal repayment (primarily after seven years) and 15% Preferred Stock
redemption obligations (after eight years) resulting in substantial
30
<PAGE>
annual fixed charges and significant repayment and redemption obligations; (ii)
significant limitations on the Company's ability to obtain additional financing,
make capital expenditures, make acquisitions and take advantage of other
business opportunities that may arise; and (iii) increased vulnerability to
adverse general economic and industry conditions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources of the Company (Pro Forma)".
On a pro forma basis after giving effect to the Transaction and the use of
proceeds thereof, the Company's earnings would have been inadequate to cover
fixed charges (including the imputed fixed charges for contingent rental expense
related to revenue-sharing agreements in its Nevada gaming machine management
operations of approximately $18.0 million annually) by approximately $1.2
million for the year ended June 30, 1995 and $9.8 million for the nine-month
period ended March 31, 1996. On a pro forma basis after giving effect to the
Transaction, the Company would have annual fixed charges (including the imputed
charges referred to in the immediately preceding sentence) of approximately
$44.4 million plus dividends on the 15% Preferred Stock (aggregating $8.0
million in the first year permitted to be paid in kind for the first five years
after issuance and partially in kind for the next two years) and possibly
further amounts (payable in kind for the first 15 years following issuance ) on
the Series E Preferred Stock. Future operating results are subject to
significant business, economic, regulatory and competitive uncertainties and
contingencies, many of which are beyond the control of the Company. There can be
no assurance that the Company will be able to generate the cash flow necessary
to permit the Company to meet its fixed charges and repayment obligations. If
the Company is unable to generate sufficient cash flow from operations in the
future, it may be required to refinance all or a portion of its existing debt or
to obtain additional financing. There can be no assurance that any such
refinancing would be possible or that any additional financing could be obtained
on terms that are favorable or acceptable to the Company. Any inability of the
Company to service its fixed charges and repayment obligations would have a
significant adverse effect on the Company and the market value and marketability
of the Common Stock, the Series E Preferred Stock, the 15% Preferred Stock, the
Senior Notes, the Old Convertible Debentures and the New Convertible Debentures.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources of the Company (Pro Forma)".
Alliance is a holding company, the only material assets of which are equity
interests in its subsidiaries (including, if the Merger occurs, BGII and its
subsidiaries). The ability of Alliance to make interest and principal payments
on its obligations, including the Senior Notes, Old Convertible Debentures and
New Convertible Debentures, or to pay cash dividends, will depend on the
subsidiaries' ability to generate sufficient cash flow from operations and
distribute such amounts to Alliance. Such entities' ability to make these
distributions is restricted by, among other things, the indebtedness of
Alliance's Video Services, Inc. ("VSI") subsidiary and may be restricted by
other obligations which may be incurred in the future and by restrictions
imposed by gaming authorities on licensed enterprises.
The Company believes that if the Merger occurs its consolidated cash flow
needs for the next 12 months will increase as a result of an increase in
accounts receivable relating to the introduction of new machines and the
expected increases in production and sales levels from recent historical levels.
The Company expects that cash flow generated by operations and other available
cash will be sufficient to satisfy the Company's normal working capital needs,
although there can be no assurance the Company will generate such available
cash. See "-- Implementation of the Merger". In order to be competitive in
meeting the growing customer demand for financing of gaming equipment in
emerging gaming markets, the Company also plans to continue to involve
third-party finance companies to secure additional financing; however, there can
be no assurances that such additional financing will be obtained. Failure to
obtain such financing on terms acceptable to the Company could impair the
Company's operations and ability to pursue its business strategy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
RISKS OF EQUITY OWNERSHIP
If the Automatic Conversion occurs, the New Convertible Debentures will be
automatically converted into Common Stock or, if a tendering holder of Old
Convertible Debentures so elects at the time such Old Convertible Debentures are
tendered, into Series E Preferred Stock. See "Description of New Convertible
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Debentures -- Automatic Conversion upon Consummation of Merger" and "Description
of Capital Stock". The holders of Common Stock and Series E Preferred Stock
issued upon conversion of the New Convertible Debentures will no longer be
debtholders of the Company and thus will no longer be entitled to receive fixed
interest payments and will be subordinated to the holders of Senior Notes and
Old Convertible Debentures, as well as to all other creditors of the Company and
holders of the 15% Preferred Stock, upon any liquidation, dissolution or winding
up of the Company. The terms of the Senior Notes will impose restrictions on the
Company's ability to make cash distributions on its capital stock, including the
Common Stock and the Series E Preferred Stock. The terms of the Series E
Preferred Stock permit the Company to pay dividends on the Series E Preferred
Stock until the fifteenth anniversary of the issuance thereof in additional
shares of Series E Preferred Stock. Alliance currently expects that any
dividends declared on the Series E Preferred Stock during such 15-year period
will be paid in such additional shares. Moreover, Alliance has never paid cash
dividends on the Common Stock and does not currently expect to pay any cash
dividends on the Common Stock in the foreseeable future. There can be no
assurance that the Company will pay cash dividends at any time in the future on
any shares of its capital stock.
RESTRICTIONS ON CERTAIN ACTIVITIES
The indenture pursuant to which the Senior Notes will be issued (the "Senior
Indenture") is expected to provide that the Senior Notes will be guaranteed by
certain subsidiaries of the Company and secured by the stock thereof and will
impose restrictions on Alliance and its subsidiaries, in addition to
restrictions imposed by existing instruments, including the indenture for the
Old Convertible Debentures (the "Old Convertible Indenture"), and the
restrictions imposed by the New Convertible Indenture. Generally, the
restrictions contained in these indentures relate to the incurrence of
additional indebtedness, the distribution of cash and/or property to
shareholders, the repayment or repurchase of pari passu or junior securities,
investments, mergers and sales of assets and the creation of liens. These
restrictions and requirements could limit the ability of the Company to respond
to changing business and economic conditions. A failure to comply with any of
these obligations could also result in an event of default under the Senior
Indenture, which could permit acceleration of the Senior Notes and acceleration
of certain other indebtedness of the Company under other instruments which may
contain cross-acceleration or cross-default provisions. See "The Merger and
Related Financings".
OPERATING HISTORY -- RECENT LOSSES
Alliance incurred net losses of $3.7 million, $13.1 million and $10.8
million during its fiscal years ended June 30, 1993, 1994 and 1995,
respectively, and a net loss of $14.8 million during the nine months ended March
31, 1996, whereas BGII had net income of $5.3 million, a net loss of $23.4
million, net income of $3.8 million and a net loss of $3.4 million for its
fiscal years ended December 31, 1992, 1993, 1994 and 1995, respectively and a
net loss of $0.5 million for the three months ended March 31, 1996. There can be
no assurance that the Company will be profitable in the future, that there will
not be similar or other unusual or non-recurring charges in the future, or that
future results will improve as a result of the Merger if it occurs. See
"Unaudited Pro Forma Condensed Combined Financial Information", "Selected
Historical Financial Information of Alliance" and "Selected Historical Financial
Information of BGII".
The new wall machine unit sales of Wulff decreased by approximately 8% in
the year ended December 31, 1995 as compared to the year ended December 31, 1994
and by 17% in the three months ended March 31, 1996, as compared to the three
months ended March 31, 1995. Management believes new wall machine revenues for
the last six months of 1995 and the first three months of 1996 were adversely
affected by an industry downturn caused by regulations imposed in Germany
limiting the number of wall machines per square meter in arcade locations
effective January 1, 1996, thereby reducing sales opportunities, and by
increased competition from the sale of foreign-manufactured token machines in
Germany. Management expects the adverse impact of such regulations to continue
during the second quarter of 1996; however, there can be no assurance that this
impact will only be temporary. Foreign competition may also continue to have an
adverse impact on wall machine revenues.
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IMPLEMENTATION OF THE MERGER
The Company's future operations and earnings if the Merger occurs will be
largely dependent upon the Company's ability to integrate the businesses
separately conducted by Alliance and BGII prior to the Merger. Alliance and BGII
currently operate in different areas of the gaming entertainment industry, with
only modest overlap in their activities. There can be no assurance that the
Company will successfully integrate the businesses of Alliance and BGII, and a
failure to do so would have a material adverse effect on the Company's financial
position, results of operations and cash flows. Additionally, although the
Company does not currently have any specific acquisition plans other than the
Merger, the need to focus management's attention on integration of the separate
businesses may limit the Company's ability to successfully pursue acquisitions
or other opportunities related to its business for the foreseeable future.
Although the Company plans to introduce more sophisticated technology into
BGII's electronic gaming machines, there is no assurance that it will succeed in
doing so or that it will be able to enter into alliances with technology and
entertainment companies. In addition, although management cannot precisely
quantify future cost savings, the Company expects to realize cost savings of
approximately $5.0 million on an annual basis (primarily through the reduction
of duplicative costs, such as facility, legal, accounting and compensation
costs) as a result of the Merger. In order to achieve these cost savings, the
Company believes it will incur one-time costs of approximately $1.0 million. The
achievement of these savings is dependent on, among other things, the successful
integration of the businesses of Alliance and BGII. There can be no assurance,
however, that such savings will be achieved or sustained. See "Unaudited Pro
Forma Condensed Combined Financial Information".
BGII currently supplies electronic gaming machines to certain customers
which are in competition with Alliance. It is possible that, because of such
competition, certain of these customers may cease purchasing electronic gaming
machines from BGII if the Merger occurs. Alliance and BGII do not believe that
such discontinuations, if any, will be material. BGII sales to machine
management operators have historically been, and are likely to remain,
insignificant. Nevertheless, discontinuance of purchases by customers could
adversely affect the Company's sales.
FINANCIAL FORECAST
The Company was the sole preparer of the forecast (the "Forecast") set forth
under "Forecast of Operations". While such Forecast is presented with numerical
specificity, it is based on the Company's current best estimates of expected
results given the forecasted assumptions described in "Summary of Significant
Assumptions and Accounting Policies for the Forecast" for the period presented,
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
in this Prospectus. The Company does not intend to update or otherwise revise
the Forecast to reflect events or circumstances existing or arising after the
date of this Prospectus or to reflect the occurrence of unanticipated events.
The Forecast necessarily is based upon a number of estimates and assumptions,
that, while presented with numerical specificity and considered reasonable by
the Company, are inherently subject to significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of which
are difficult to predict and many of which are beyond the control of the
Company. Financial forecasts are necessarily speculative in nature, and it is
usually the case that one or more of the assumptions underlying such projections
do not materialize. The Forecast and actual results will vary, and those
variations may be material. The inclusion of the Forecast herein should not be
regarded as a representation by the Company or any other person that the
Forecast will be achieved. Prospective investors are cautioned not to place
undue reliance on the Forecast or the other forward-looking information
contained herein.
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.
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CHANGE OF CONTROL
Following consummation of the Transaction, Alliance's two largest
shareholders, Alfred Wilms and Kirkland Investment Corporation ("KIC"), who
currently 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. Accordingly,
following the Transaction, no one person or group will hold a majority interest
in the Company, and it is possible that the Company could be subject to a change
in control, either pursuant to a takeover attempt or otherwise, to a greater
degree than has been the case. Mr. Wilms is contractually obligated until
September 21, 1997 to vote his shares of Common Stock in favor of four nominees
of KIC to Alliance's seven-member Board of Directors. See "Security Ownership of
Certain Beneficial Holders and Management".
If a Redemption Event (including a Change of Control) should occur, the
Company will be required, subject to certain conditions, to offer to purchase
all outstanding Senior Notes, Old Convertible Debentures and New Convertible
Debentures, as applicable, at a price equal to 101% of the then outstanding
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. The Transaction will not constitute a Change of Control under the
Old Convertible Indenture. Alliance does not currently have sufficient funds
available to purchase all of the outstanding Old Convertible Debentures and/or
the New Convertible Debentures to be issued in the Exchange Offer (and on a pro
forma basis after giving effect to the Transaction, the Company will not have
sufficient funds available to purchase all of the outstanding Senior Notes
and/or Old Convertible Debentures) were they to be tendered in response to an
offer made as a result of a Redemption Event. There can be no assurance that
Alliance would have or be able to obtain such funds through a refinancing of the
Senior Notes, Old Convertible Debentures and New Convertible Debentures to be
repurchased or otherwise. In addition, the right to require Alliance to redeem
the New Convertible Debentures and/or the Old Convertible Debentures could
create an event of default under Senior Indebtedness as a result of which any
redemption could, absent a waiver, be blocked by the subordination provisions of
the New Convertible Indenture and the Old Convertible Indenture. Also, the
requirement that Alliance offer to repurchase the Senior Notes, Old Convertible
Debentures and New Convertible Debentures in the event of a Change of Control
may have the effect of deterring a third party from effecting a transaction that
would constitute a Change of Control.
COMPETITION
The respective business units of Alliance (gaming machine management
operations and casino operations) and of BGII (gaming machine manufacturing and
systems and German operations) are subject to vigorous competition.
GAMING MACHINE MANUFACTURING AND SYSTEMS. The market for gaming machines is
extremely competitive, and there are a number of established, well-financed and
well-known companies producing machines that compete with each of BGII's product
lines in each of the markets for BGII's gaming machine manufacturing operations.
The domestic market for gaming machines is dominated by a single competitor,
International Game Technology ("IGT"), with a number of smaller competitors in
the field. In addition, certain technology-oriented companies have recently
announced plans to enter the gaming machine market. Management believes that
some of these competitors have greater capital resources than BGII. Competition
among gaming product manufacturers, particularly with respect to sales of gaming
machines into new and emerging markets, is based on competitive customer pricing
and financing terms, appeal to the player and quality of the product, and having
an extensive distribution and sales network. Sales to established casinos in
Nevada normally require completion of a successful trial period for the machines
in the casino.
The competition for the computerized monitoring systems designed and sold by
Systems currently consists of IGT, Casino Data Systems ("CDS"), and, to a lesser
extent, Gaming Systems International, Inc. and Acres Gaming, Inc. Competition is
keen in this market due to the number of providers and the limited number of
casinos and the jurisdictions in which they operate. Pricing, product feature
and function,
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accuracy, and reliability are all main factors in determining a provider's
success in selling its system. Systems believes the future success of its
operations will be determined by its ability to bring new and innovative
products to the marketplace while at the same time maintaining the base of loyal
existing customers.
GERMAN OPERATIONS. Germany's wall machine manufacturing industry is
dominated by Wulff and two of its competitors. These three entities are believed
collectively to account for more than 90% of the entire market for wall machines
(which exists almost exclusively in Germany). Wulff's two major competitors have
greater resources than BGII and own and operate a significant number of arcades,
which may give them a competitive advantage arising from a built-in market for
their games and the ability to test market new games in their own arcades. In
addition, wall machines compete for floor space in arcades with token machines,
the sales of which have expanded rapidly in the last several years, in part as a
result of low price competitors from outside Germany and the popularity of these
machines. Token machines are not subject to the strict German licensing
requirements governing wall machines.
GAMING MACHINE MANAGEMENT OPERATIONS. The competition for obtaining and
renewing gaming machine routes in Nevada is high and continues to intensify.
Such competition has, over time, reduced Alliance's gross profit margins for
such operations. In addition, such competition has required Alliance to provide
substantial financial incentives and incur financial risks to retain or obtain
certain gaming machine route locations. Such incentives include long-term lease
commitments, guarantees of leases in favor of owners of local establishments,
substantial advance deposits, payments of lease rentals in advance and loans for
buildings and tenant-improvement costs. Although Alliance believes that it now
has adequate procedures for evaluating and managing such risks, historically
substantial losses have been incurred in connection with such transactions
reflecting, in part, former management's willingness to accept higher levels of
risk to further its policy of emphasizing market share. Notwithstanding the
change in Alliance's business strategy to one emphasizing profitability rather
than market share, the future success of Alliance's machine management
operations will continue to be dependent to some extent on its ability and
willingness to provide such financial inducements. Although Alliance has
historically generated sufficient new machine management contracts to offset the
loss of old machine management contracts, due to increased competition, the
increased sophistication and bargaining power of customers and possibly other
factors not yet known, there can be no assurance that Alliance will be able to
obtain new machine management contracts or renew or extend its current space
leases or revenue-sharing arrangements upon their expiration or termination, or
that, if renewed or extended, the terms will be favorable to Alliance. In
Louisiana, Alliance is subject to extensive competition for contracts to operate
video poker machines, and Alliance's racetrack and OTBs compete with various
truck stops and locations with liquor licenses throughout the New Orleans area,
as well as riverboat gaming and one land-based casino which may re-open in New
Orleans.
CASINO OPERATIONS. The operation of casinos is also a highly competitive
business. The principal competitive factors in the industry include the quality
and location of the facility, the nature and quality of the amenities and
customer services offered and the implementation and success of marketing
programs. In Sparks/Reno, Nevada, the principal competition for Alliance's
operations comes from larger casinos focusing on the local market. Alliance's
one dockside casino in Vicksburg, Mississippi faces substantial direct
competition from other dockside gaming facilities in the region.
PRODUCT DEVELOPMENT
The future success of the Company (if the Merger occurs) is expected to
depend to a large extent upon its ability to design, manufacture and market
technologically sophisticated products that achieve high levels of player
acceptance. The development of a successful new product or product design by a
competitor could adversely affect sales of the Company's products and force it
to respond quickly with its own competing products. The Company's plans with
respect to the introduction of more sophisticated technology into the electronic
gaming machine market are designed to lead to an increase in market share and
profitability for the Company. See "Business". However, no products
incorporating such technology have reached the development stage, and there is
no assurance that any such products will be developed, or that if developed they
will receive necessary regulatory approvals or be commercially successful.
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CUSTOMER FINANCING
Management believes that customer financing terms have become an
increasingly important competitive factor in certain emerging markets.
Competitive conditions sometimes require Gaming to grant extended payment terms
on electronic gaming machines and other gaming equipment. Approximately 75% of
Gaming's slot and video gaming machine customers pay within 90 days or less.
Approximately 25% of Gaming's sales, primarily in certain emerging gaming
markets such as riverboat casinos and Indian gaming casinos, are financed over
extended periods as long as 36 months and bear interest at rates ranging from 8%
to 14%. While customer financings are normally collateralized by such equipment,
the resale value of the collateral in the event of a default may be less than
the amount financed. Accordingly, Gaming has greater exposure to the financial
condition of its customers in emerging markets than has historically been the
case in established markets like Nevada and Atlantic City. In addition, in
certain situations, Gaming has participated in the financing of other
gaming-related equipment manufactured by third parties in the emerging North
American gaming markets. International sales by Gaming are generally consummated
on a cash basis or financed over a period of one year or less.
Wulff provides customer financing for approximately 20% of its sales, and
management expects this practice to increase during the latter half of 1996. See
"Business -- German Operations -- Operations of Wulff -- Sales and Marketing".
SALES TO NON-TRADITIONAL GAMING MARKETS
The continued growth of the non-traditional markets outside of Nevada and
Atlantic City for electronic gaming machines is contingent upon the public's
acceptance of these markets and an ongoing regulatory approval process by
Federal, state and local governmental authorities. The Company cannot predict
which new jurisdictions or markets, if any, will approve the operation of
electronic gaming machines, the timing of any such approval or the level of the
Company's participation in any such markets or that jurisdictions currently
permitting gaming will continue to do so in the future.
FOREIGN OPERATIONS
The Company's business in foreign markets is subject to the risks
customarily associated with such activities. These risks include fluctuations in
foreign currency exchange rates and controls, expropriation, nationalization and
other economic, tax and regulatory policies of local governments as well as the
laws and policies of the United States affecting foreign trade and investment.
BGII does not generally enter into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations.
KEY PERSONNEL
The success of the Company will be dependent, to a significant extent, upon
the continued services of a relatively small group of executive personnel. The
loss or unavailability of one or more of such executive officers or the
inability to attract or retain key employees in the future could have an adverse
effect upon the Company's operations. See "Management".
STRICT REGULATION BY GAMING AUTHORITIES
The manufacture and distribution of gaming machines and the conduct of
gaming operations is subject to extensive Federal, state, local and foreign
regulation by various gaming authorities (each, a "Gaming Authority"). Although
the laws and regulations of the various jurisdictions in which the Company
operates vary in their technical requirements and are subject to amendment from
time to time, virtually all of these jurisdictions require licenses, permits,
documentation of the qualification, including evidence of integrity and
financial stability, and other forms of approval for companies engaged in the
manufacture and distribution of gaming machines and gaming operations as well as
for the officers, directors, major stockholders and key personnel of such
companies. Alliance and BGII and their key personnel have obtained, or applied
for, all government licenses, registrations, findings of suitability, permits
and approvals necessary for the manufacture and distribution, and operation
where permitted, of their gaming machines in the jurisdictions in which Alliance
and BGII currently do business. However, there can be no assurance that such
licenses, registrations, findings of suitability, permits or approvals will be
given or renewed in the future or that the Company will obtain the licenses
necessary to operate in emerging markets.
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BGII was pursuing a permanent manufacturer's license for Gaming as it
relates to the land-based casino in New Orleans. However, in November 1995, the
operator of the land-based casino in New Orleans filed for bankruptcy
reorganization and ceased operations. That action resulted in the termination of
funding for the regulatory operations of the Louisiana Economic Development
Gaming Corporation ("LEDGC") and, shortly thereafter, the Attorney General of
Louisiana took control of the agency and effectively closed its operations and
dismissed its President and employees. The foregoing occurred prior to
completion of review of Gaming's pending application. In addition, BGII's
application for renewal of Gaming's license as a gaming-related casino service
industry in New Jersey is pending before the New Jersey Casino Control
Commission (the "New Jersey Commission"). See "-- Ongoing BGII Regulatory
Investigations" and "Gaming Regulation and Licensing".
Alliance currently has an agreement with Fair Grounds Corporation, Jefferson
Downs Corporation and Finish Line Management Corporation (collectively, "Fair
Grounds") to be the exclusive operator of video poker machines at the only
racetrack and ten associated OTBs in the greater New Orleans area. The Louisiana
legislature has recently passed a bill which would allow each parish to decide
whether to disallow video poker devices, riverboat casinos and, in Orleans
Parish, land-based casinos. If any parish in which Alliance operates elects to
disallow video poker devices, Alliance would have to cease its video poker
operations there by June 30, 1999. Alliance cannot predict which parishes will
so elect; however, if Orleans Parish or certain other parishes in which Alliance
operates so elect, the cessation of Alliance's video poker operations would have
a material adverse effect on the operations of Alliance. Alliance's operations
also depend on the financial viability of the racetrack, which is beyond the
control of Alliance.
OWNERSHIP LIMITATIONS ON SECURITIES OF THE COMPANY
The Gaming Authorities may, in their discretion, require the holder of any
security of the Company, such as the Common Stock, Old Convertible Debentures,
New Convertible Debentures or Series E Preferred Stock, to file applications, be
investigated and be found suitable to own such security of the Company. If a
record or beneficial owner of Common Stock, Old Convertible Debentures, New
Convertible Debentures or Series E Preferred Stock is required by a Gaming
Authority to be found suitable, such owner will be required to apply for a
finding of suitability generally within 30 days after request by such Gaming
Authority, or within such earlier time as required by such Gaming Authority. As
a general matter, assuming a passive investment intent, only owners of specified
percentages of the Company's securities are required to be found suitable,
absent unusual circumstances, which percentage is typically between 10% to 15%.
The applicant for a finding of suitability generally must pay all costs of the
investigation for such finding of suitability and in Nevada, must provide an
initial deposit as determined by the Nevada State Gaming Control Board to pay
the anticipated costs and charges incurred in the investigation and deposit such
additional sums as are required by the Nevada State Gaming Control Board to pay
final costs and charges. If a Gaming Authority determines that a holder is
unsuitable to own the Common Stock, Old Convertible Debentures, New Convertible
Debentures or Series E Preferred Stock or to have any other relationship with
the Company, then the Company can be sanctioned, including the loss of its
approvals, if without the prior approval of the Gaming Authorities, the Company:
(i) pays to the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such person in connection with
such securities; (iii) pays the unsuitable person remuneration in any form; (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction; or (v) fails to
pursue all lawful efforts to require such person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securites for cash at fair market value.
Any person who fails or refuses to apply for a finding of suitability within
the period of time required or prescribed by a Gaming Authority may be found
unsuitable. The same restrictions apply to a record owner if the record owner,
after request, fails to identify the beneficial owner. Any holder of the Common
Stock, Old Convertible Debentures, New Convertible Debentures or Series E
Preferred Stock found unsuitable and who holds, directly or indirectly, any
beneficial ownership of the Common Stock, Old Convertible Debentures, New
Convertible Debentures or Series E Preferred Stock beyond such period of time
prescribed by a Gaming Authority may be guilty of a criminal offense. See
"Gaming Regulation and Licensing". In addition, if a holder or beneficial owner
of a New Convertible Debenture, Old Convertible Debenture or any
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underlying Common Stock or Series E Preferred Stock is required to be found
suitable and is not found suitable by the Nevada Gaming Commission or
Mississippi Gaming Commission, Alliance may require such holder or beneficial
owner to dispose of his or her securities or may redeem or repurchase such
securities. See "Description of the New Convertible Debentures -- Mandatory
Disposition Pursuant to Gaming Laws".
ONGOING BGII REGULATORY INVESTIGATIONS
In May 1994, an investigation of BGII's former VLT Louisiana distributor
resulted in the indictment by a United States grand jury and subsequent
conviction in New Orleans of 18 individuals including certain of the former
distributor's officers, directors, employees and others. In addition, Alan
Maiss, a former director and president of BGII, pled guilty to misprision of a
felony in connection with such investigation. BGII, its subsidiaries and its
current employees were not subject to such investigation. BGII's activities with
regard to its former VLT distributor in Louisiana have been the subject of
current inquiries by gaming regulators. The gaming authorities in Ontario,
Canada, who have investigated the matter, issued a gaming registration to Bally
Gaming, Inc. on February 8, 1996. The New Jersey Commission is currently
reviewing such proceedings in connection with Gaming's application for a license
renewal. An adverse determination by a Gaming Authority in any jurisdiction
could result in the loss of the Company's ability to do business in that
jurisdiction and could have the effect of discouraging gaming operators from
doing business with the Company. In addition, further regulatory scrutiny in
other jurisdictions may follow any such adverse determination. See "Business --
Other Litigation" and "Gaming Regulation and Licensing".
CERTAIN LITIGATION; BALLY TRADE NAME
Bally Entertainment Corporation ("BEC"), the licensor of the "Bally" trade
name, has claimed that the Merger will result in the loss of BGII's right to use
such trade name. The "Bally" trade name is an important component of the
Company's marketing strategy. On November 20, 1995, Alliance and BGII commenced
an action against BEC in Federal District Court in Delaware seeking a
declaratory judgment that the Company will be permitted to use the "Bally" trade
name subsequent to the Merger. On November 28, 1995, BEC commenced an action
against BGII, Gaming and Alliance in Federal District Court in New Jersey
seeking to enjoin such parties from using the "Bally" trade name. On February
16, 1996 BGII received notice from BEC alleging that BGII had violated the
license agreement relating to such trade name by, among other things, granting
to Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which
provides Bally Gaming, Inc.'s revolving line of credit, a security interest in
general intangibles. In such notice, BEC also stated that as a result of the
foregoing, it was immediately terminating the License Agreement. Loss of the
"Bally" trade name, should such loss occur, may have a material adverse effect
on the business, results of operations and financial condition of the Company,
taken as a whole.
WMS has instituted a lawsuit in New York State Court against BGII alleging,
among other things, that $4.8 million is due and payable from BGII to WMS as a
result of the termination of BGII's merger agreement with WMS. Pursuant to the
Merger Agreement, Alliance has agreed to indemnify BGII against such a claim
under certain circumstances.
Prospective purchasers should read the description of these and other
litigation proceedings currently pending against Alliance and BGII, as well as
certain purported class actions, under the captions "Business -- Litigation
Relating to the Merger" and "-- Other Litigation".
GAMING TAXES AND VALUE ADDED TAXES
Gaming operators are typically subject to significant taxes and fees in
addition to corporate income taxes, and such taxes and fees are subject to
increase at any time. Any material increase in these taxes or fees, which could
occur prospectively or retroactively, would adversely affect the Company. Sales
of Wulff's products in Germany are generally subject to V.A.T. The operations of
Wulff had benefitted from a special tax rebate that was phased out from January
1, 1992 to January 1, 1994. See "Gaming Regulation and Licensing -- Germany". In
addition, during 1995, Wulff increased the amount of V.A.T. reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to
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$5.0 million. The Company pays and expects to continue to pay substantial taxes
and fees in Nevada, Louisiana and Mississippi and expects to pay substantial
taxes and fees in any other jurisdiction in which it conducts gaming operations.
ABSENCE OF PUBLIC MARKET; VOLATILITY OF MARKET PRICES
The New Convertible Debentures are being offered to the holders of Old
Convertible Debentures. The Old Convertible Debentures were issued in September
1993 and are eligible for trading in the Private Offerings, Resale and Trading
through Automatic Linkages ("PORTAL") market. The New Convertible Debentures and
the Series E Preferred Stock are newly issued securities for which there will at
the time of issuance be no market. Alliance does not currently intend to list
the New Convertible Debentures or the Series E Preferred Stock on any securities
exchange or to seek approval for quotation through any automated quotation
system, nor is there any assurance that the New Convertible Debentures or the
Series E Preferred Stock will be eligible for listing on any market.
Accordingly, there can be no assurance as to the development or liquidity of any
trading market for the New Convertible Debentures or the Series E Preferred
Stock. Moreover, until the earlier of (i) the 60th day after issuance of the New
Convertible Debentures and (ii) the effective time of the Merger (if it occurs),
the liquidity and market price of the New Convertible Debentures may be
adversely affected by the fact that upon an Automatic Conversion some New
Convertible Debentures would be converted into Common Stock while other New
Convertible Debentures would be converted into Series E Preferred Stock, and
different New Convertible Debentures may trade at different prices depending on
the class of capital stock into which such New Convertible Debentures would be
converted in the event of the Automatic Conversion.
There can be no assurance with respect to the prices at which the Common
Stock will trade after the date hereof. On May 7, 1996, the closing price of the
Common Stock as reported on NASDAQ was $4.00 per share. The trading price of the
Common Stock could be subject to wide fluctuations in response to quarter-
to-quarter variations in operating results and other events or factors,
including the success of the Company's development activities, legislation
approving or defeating gaming, other governmental actions, developments in the
gaming industry generally and announcements by the Company or by competitors.
Historical trading volumes for the Common Stock have been relatively low and
research coverage for the Common Stock is limited. See "Market Price Data and
Dividend Policy". In addition, the securities markets in general, and the gaming
industry in particular, experience extreme price and volume fluctuations in a
manner which is often unrelated to the operating performance of the companies
within the gaming industry. These broad market fluctuations may adversely affect
the market price of the Old Convertible Debentures, New Convertible Debentures,
Common Stock and Series E Preferred Stock. A shift away from investor interest
in gaming in general could adversely affect the trading price of the Old
Convertible Debentures, New Convertible Debentures, Common Stock and Series E
Preferred Stock.
DILUTION; OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES
The shares of Common Stock to be issued upon Automatic Conversion of the New
Convertible Debentures will be issued at a price significantly above book value
per share, so the holders of New Convertible Debentures will, upon the Automatic
Conversion, suffer immediate substantial dilution. See "Dilution". Moreover,
Alliance has outstanding options, warrants and convertible securities, many of
which are held by management and principal stockholders, which can be exercised
for or converted into in the aggregate approximately 12,400,000 shares of Common
Stock, excluding shares underlying the New Convertible Debentures and the Old
Convertible Debentures, and within 30 days of the consummation of the Merger,
Alliance will issue additional options exercisable for 150,000 shares of Common
Stock. Also, 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 will
result in issuance of additional shares of such stock also carrying conversion
rights. In addition, the Company will assume BGII's obligations with respect to
each outstanding stock option and warrant to purchase shares of BGII common
stock, which options and warrants will represent an aggregate of 552,500 shares
(based on the assumption that all eligible employees other than Messrs. Gillman,
Jenkins and Kloss elect to have their BGII options exercisable for the number of
shares of Common Stock equal to the number of shares of BGII common stock
subject thereto) and 112,350 shares of Common Stock,
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respectively (assuming each BGII warrant will be exercisable for the Merger
consideration per share of BGII common stock subject to such warrant at the
exercise price per share of such BGII warrant in effect immediately prior to the
Effective Time and further assuming a price of $4.00 per share of Common Stock).
Further, warrants exercisable for an additional 2,500,000 shares of Common Stock
will be issued to Alliance affiliates in connection with the Merger, and
warrants exercisable for an additional 250,000 shares of Common Stock have been
issued and will vest when the price of the Common Stock reaches $13.00 per share
following consummation of the Merger or any similar transaction. Additionally,
approximately 1,018,000 shares of Common Stock remain available for issuance
under the Alliance 1984 Stock Option Plan and the Alliance 1991 Stock Option
Plan. To the extent such outstanding options, warrants and other rights to
purchase Common Stock are exercised, there will be further significant dilution
to the shareholders of the Company. Additionally, if the Company consummates
further acquisitions or other transactions utilizing the Company's securities,
significant dilution to the Company's shareholders may result. See "Dilution"
and "Security Ownership of Certain Beneficial Holders and Management".
TRANSFER RESTRICTIONS ON NON-TENDERING HOLDERS
Holders of Old Convertible Debentures who purchased such securities from
Alliance and do not exchange their Old Convertible Debentures pursuant to the
Exchange Offer will continue to be subject to certain restrictions on transfer
of such Old Convertible Debentures which, in effect, prohibit transfers except
pursuant to exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws unless a
registration statement is in effect with respect thereto. Pursuant to a
registration rights agreement between Alliance and the holders of the Old
Convertible Debentures, Alliance is required to maintain an effective shelf
registration statement with respect to the Old Convertible Debentures at all
times prior to September 21, 1996, and in the event that Alliance fails in this
obligation for a period exceeding 90 days in the aggregate per year, liquidated
damages ("Liquidated Damages") accrue daily and become payable on each Interest
Payment Date to the holders of Old Convertible Debentures whose Old Convertible
Debentures are subject to transfer restrictions as a result of this failure. The
amount of Liquidated Damages accrued and unpaid to the date hereof is $.71 per
$1,000 principal amount of Old Convertible Debentures, and additional Liquidated
Damages are currently accruing at the rate of $.10 per $1,000 principal amount
per week. See "Comparison of New Convertible Debentures and Old Convertible
Debentures -- Registration Rights; Liquidated Damages". 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 are accrued and unpaid at the date of issuance of the New Convertible
Debentures. New Convertible Debentures issued pursuant to the Exchange Offer in
exchange for Old Convertible Debentures may be offered for resale, resold or
otherwise transferred by holders thereof (other than any such holder which is an
"affiliate" of Alliance within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act.
EFFECT OF EXCHANGE OFFER ON LIQUIDITY
The Old Convertible Debentures are not traded in an established market.
After the consummation of the Exchange Offer, it is anticipated that the
outstanding principal amount of Old Convertible Debentures may be significantly
reduced. To the extent that any such Old Convertible Debentures are tendered in
the Exchange Offer, any trading market for such Old Convertible Debentures may
be substantially more limited. A security with a smaller outstanding principal
amount available for trading may command a lower price than would a comparable
security with a larger outstanding principal amount. Therefore, to the extent
that Old Convertible Debentures are tendered and accepted pursuant to the
Exchange Offer, the reduced outstanding principal amount may adversely affect
the liquidity and market price of the unpurchased Old Convertible Debentures.
Similarly, if the Exchange Offer is consummated but substantial amounts of Old
Convertible Debentures are not exchanged therein, the amount of New Convertible
Debentures will be reduced, adversely affecting the liquidity of the market
therefor. For the first ten business days following completion of the Exchange
Offer, none of the Dealer Managers will be able to effect purchases of New
Convertible Debentures, Old Convertible Debentures or Common Stock, including
for market making and trading purposes.
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ELECTION TO RECEIVE SERIES E PREFERRED STOCK UPON AUTOMATIC CONVERSION
After the acceptance for exchange of any Old Convertible Debentures in
accordance with the terms of the Exchange Offer, the election of the tendering
holder to receive Common Stock or Series E Preferred Stock, as the case may be,
upon exchange thereof will be irrevocable and will be binding upon such holder
and all transferees of the New Convertible Debentures issued in exchange
thereof. As a consequence, if the Automatic Conversion occurs, holders of New
Convertible Debentures will receive upon conversion thereof either Common Stock
or Series E Preferred Stock, as the case may be, in accordance with such
election, even if at the time of the Automatic Conversion they might prefer to
receive the other security upon conversion thereof. Moreover, until the earlier
of (i) the 60th day after issuance of the New Convertible Debentures and (ii)
the effective time of the Merger (if it occurs), the liquidity and market price
of the New Convertible Debentures may be adversely affected by the fact that
upon an Automatic Conversion some New Convertible Debentures would be converted
into Common Stock while other New Convertible Debentures would be converted into
Series E Preferred Stock, and different New Convertible Debentures may trade at
different prices depending on the class of capital stock into which such New
Convertible Debentures would be converted in the event of the Automatic
Conversion.
LIMITATIONS ON NET OPERATING LOSSES; DISCHARGE OF DEBT INCOME
Alliance had net operating loss carryovers ("NOLs") into 1996 of
approximately $46 million, which Alliance believes are not currently subject to
an annual limitation on their utilization under Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). There is a material risk that the
Merger, the Exchange Offer and the related financings will result in an
"ownership change" under Section 382 of the Code, in which event the use of
these NOLs will likely be subject to an annual limitation of approximately $5
million on their utilization. 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.
HART-SCOTT-RODINO FILING
Any person acquiring New Convertible Debentures pursuant to the Exchange
Offer may be required to file a Premerger Notification and Report Form (an "HSR
Form") pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act") with respect to the Automatic Conversion or any optional
conversion of the New Convertible Debentures or Series E Preferred Stock into
Common Stock. In general, if (i) a person would hold, upon consummation of the
Automatic Conversion or any optional conversion, Common Stock exceeding $15
million in value, (ii) certain jurisdictional requirements are met and (iii) no
exemption applies, then the HSR Act would require that such person file an HSR
Form and observe the applicable waiting period under the HSR Act prior to
acquiring such Common Stock. If such waiting period has not expired or been
terminated at the date of the Automatic Conversion or any optional conversion,
Alliance may be required to deliver such recipient's Common Stock into an escrow
facility pending the expiration or termination of such waiting period.
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THE EXCHANGE OFFER
GENERAL
Alliance hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange an aggregate principal amount of up to $85,000,000 of New Convertible
Debentures for a like principal amount of the issued and outstanding Old
Convertible Debentures. It is Alliance's intention to exchange all Old
Convertible Debentures tendered to and accepted by Alliance pursuant to the
Exchange Offer for New Convertible Debentures and to cancel all such Old
Convertible Debentures.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, Alliance will accept for exchange
Old Convertible Debentures which are properly tendered on or prior to the
Expiration Date and not withdrawn as permitted below.
As of the date of this Prospectus, $85,000,000 aggregate principal amount of
Old Convertible Debentures was outstanding. This Prospectus, together with the
Letter of Transmittal, are first being sent on or about May 9, 1996, to all
holders of Old Convertible Debentures known to Alliance. Alliance's obligation
to accept Old Convertible Debentures for exchange pursuant to the Exchange Offer
is subject to certain conditions as set forth in "-- Conditions to the Exchange
Offer."
Although Alliance has no present intention to do so, it reserves the right,
subject to applicable law and any restrictions imposed by applicable debt
instruments, to purchase or make offers for any Old Convertible Debentures that
remain outstanding subsequent to the Expiration Date. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
Tendering holders of Old Convertible Debentures will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the conversion of Old Convertible
Debentures pursuant to the Exchange Offer. Alliance will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer.
CONDITIONS TO THE EXCHANGE OFFER
The obligation of Alliance to consummate the Exchange Offer is subject to
certain conditions, including, among others, the requirements that (i) 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 (the holders of a
majority of shares of the Common Stock have indicated their intention to approve
such issuance), 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. Furthermore, notwithstanding any other provision of the
Exchange Offer, Alliance shall not be required to accept for exchange, or to
issue New Convertible Debentures in exchange for, any Old Convertible
Debentures, subject to any applicable rules or regulations of the Commission,
and may terminate or amend the Exchange Offer, if at any time before the
acceptance of such Old Convertible Debentures for exchange, any of the following
events shall have occurred:
(1) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, in
connection with the Exchange Offer or any other aspect of the Transaction
that is, or is reasonably likely to be, in the reasonable judgment of
Alliance, materially adverse to the business, operations, properties,
condition (financial or otherwise), assets, liabilities or prospects of the
Company;
(2) there shall have occurred any material adverse development, in the
reasonable judgment of Alliance, with respect to any action or proceeding
concerning the Company;
(3) any order, statute, rule, regulation, executive order, notice,
ruling, stay, decree, judgment or injunction shall have been proposed,
enacted, entered, issued, promulgated, enforced or deemed
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applicable by an court or governmental, regulatory or administrative agency
or instrumentality that, in the reasonable judgment of Alliance, would or
might prohibit, prevent, restrict or delay consummation of the Transaction
or that is, or is reasonably likely to be, materially adverse to the
business, operations, properties, condition (financial or otherwise),
assets, liabilities or prospects of the Company;
(4) there shall have occurred or be likely to occur any event affecting
the business or financial affairs of the Company or which, in the reasonable
judgment of Alliance, would or might prohibit, prevent, restrict or delay
consummation of the Exchange Offer or any other part of the Transaction, or
that will, or is reasonably likely to, materially impair the contemplated
benefits to Alliance or the Company of the Transaction, including the
Exchange Offer, or otherwise result in the consummation of the Transaction,
including the Exchange Offer, not being or being not reasonably likely to be
in the best interests of Alliance or the Company;
(5) the trustee under the New Convertible Indenture (the "Trustee")
shall have objected in any respect to, or taken any action that could, in
the reasonable judgment of Alliance, adversely affect the consummation of,
the Exchange Offer or any other part of the Transaction, or shall have taken
any action that challenges the validity or effectiveness of the procedures
used by Alliance in the making of the Exchange Offer or the acceptance of,
or payment for, any of the Old Convertible Debentures or any other part of
the Transaction;
(6) Alliance shall not have received from any federal, state or local
governmental, regulatory or administrative agency or instrumentality any
approval, authorization or consent that, in the reasonable judgment of
Alliance, is necessary to effect the Exchange Offer or any other part of the
Transaction, including without limitation the approval of the Nevada Gaming
Commission and the Mississippi Gaming Commission for the issuance of the New
Convertible Debentures (or the issuance of shares issuable directly or
indirectly on conversion thereof);
(7) there shall have occurred (a) any general suspension of, or
limitation on prices for, trading in securities in the United States
securities or financial markets, (b) any significant adverse change in the
price of the Old Convertible Debentures or Common Stock in the United States
securities or financial markets, (c) a material impairment in the trading
market for debt or equity securities, (d) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States, (e) any limitation (whether or not mandatory) by any government or
governmental, administrative or regulatory authority or agency, domestic or
foreign, on, or other event that, in the reasonable judgment of Alliance,
might affect, the extension of credit by banks or other lending
institutions, (f) a commencement of a war or armed hostilities or other
national or international calamity directly or indirectly involving the
United States, (g) any imposition of a general suspension of trading or
limitation of prices on the New York Stock Exchange or NASDAQ, or (h) in the
case of any of the foregoing existing on May 9, 1996, a material
acceleration or worsening thereof; or
(8) any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus is a part.
All the foregoing conditions are for the sole benefit of Alliance and may be
asserted by Alliance regardless of the circumstances giving rise to such
conditions and may be waived by Alliance (except for any required approvals of
the Nevada Gaming Commission and the Mississippi Gaming Commission), in whole or
in part, at any time and from time to time, in the reasonable discretion of
Alliance. The failure by Alliance at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any such right, and each such right shall
be deemed an ongoing right which may be asserted at any time and from time to
time.
If any of the conditions set forth in this section shall not be satisfied,
Alliance may, subject to applicable law, (i) terminate the Exchange Offer and
return all Old Convertible Debentures tendered pursuant to the Exchange Offer to
tendering holders; (ii) extend the Exchange Offer and retain all tendered Old
Convertible Debentures, subject to the right of a tendering holder to withdraw
his or her Old Convertible Debentures, until the Expiration Date for the
extended Exchange Offer; (iii) amend the terms of the Exchange Offer or modify
the consideration to be paid by Alliance pursuant to the Exchange Offer; or (iv)
waive the unsatisfied
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conditions (except for any required approvals of the Nevada Gaming Commission
and the Mississippi Gaming Commission) with respect to the Exchange Offer and
accept all Old Convertible Debentures tendered pursuant to the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Convertible Debentures being tendered.
EXPIRATION; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 12:00 midnight, New York City time, on
June 6, 1996. Alliance expressly reserves 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. See "--
Withdrawal of Tenders". Under no circumstances will interest be paid by Alliance
by reason of any extension of the Exchange Offer.
Alliance also expressly reserves the right, subject to applicable law, to
delay acceptance for exchange of any Old Convertible Debentures or, regardless
of whether such Old Convertible Debentures were theretofore accepted for
exchange, to delay the exchange of any Old Convertible Debentures pursuant to
the Exchange Offer or to terminate the Exchange Offer and not accept for
exchange any Old Convertible Debentures, by giving oral (confirmed in writing)
or written notice of such delay or termination to the Exchange Agent, if any of
the conditions to the Exchange Offer specified herein fail to be satisfied . The
reservation by Alliance of the right to delay exchange or acceptance for
exchange of Old Convertible Debentures is subject to the provisions of Rule
13e-4(f)(5) under the Exchange Act, which requires that Alliance pay the
consideration offered or return the Old Convertible Debentures deposited by or
on behalf of holders thereof promptly after the termination or withdrawal of the
Exchange Offer.
Any extension, delay, termination or amendment of the Exchange Offer will be
followed as promptly as practicable by a public announcement thereof. Without
limiting the manner in which Alliance may choose to make a public announcement
of any extension, delay, termination or amendment of the Exchange Offer,
Alliance shall have no obligation to publish, advertise or otherwise communicate
any such public announcement, other than by issuing a release to the Dow Jones
News Service, except in the case of an announcement of an extension of the
Exchange Offer, in which case Alliance shall have no obligation to publish,
advertise or otherwise communicate such announcement, other than by issuing a
notice of such extension by press release or other public announcement no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
If Alliance increases or decreases or otherwise materially changes the
amount of consideration currently offered, the Exchange Offer will remain open
at least ten business days from the date that Alliance first publishes, sends or
gives notice, by public announcement or otherwise, of such increase or decrease.
Alliance has no current intention to increase or decrease or otherwise
materially change the amount of consideration currently offered.
If Alliance materially changes the terms of the Exchange Offer or the
information concerning the Exchange Offer, Alliance will extend the Exchange
Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(2) promulgated
under the Exchange Act. These rules provide that the minimum period during which
an offer must remain open following a material change in the terms of the offer
or information concerning the offer (other than a change in consideration
offered or a change in percentage of securities sought) will depend on the facts
and circumstances, including the relative materiality of such terms or
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information. The Commission has stated that, as a general rule, it is of the
view than an offer should remain open for a minimum of five business days from
the date that notice of such a material change is first published, sent or
given.
PROCEDURES FOR TENDERING
TENDERS OF OLD CONVERTIBLE DEBENTURES. For a holder validly to tender Old
Convertible Debentures pursuant to the Exchange Offer, either (i) a properly
completed and validly executed Letter of Transmittal (or a facsimile thereof),
together with any signature guarantees and any other documents required by the
instructions to the Letter of Transmittal, or (ii) an Agent's Message (as
defined below), must be received by the Exchange Agent on or prior to the
Expiration Date at the address set forth on the back cover page of this
Prospectus. In addition, either (i) the Exchange Agent must receive tendered Old
Convertible Debentures at such address or (ii) such Old Convertible Debentures
must be transferred pursuant to the procedures for book-entry transfer described
below and a confirmation of such book-entry transfer must be received by the
Exchange Agent prior to the Expiration Date. A holder who desires to tender Old
Convertible Debentures and who cannot comply with the procedures set forth
herein for tender on a timely basis or whose Old Convertible Debentures are not
immediately available must comply with the procedures for guaranteed delivery
set forth below. LETTERS OF TRANSMITTAL, OLD CONVERTIBLE DEBENTURES AND
CONFIRMATIONS OF BOOK-ENTRY TRANSFER SHOULD BE SENT ONLY TO THE EXCHANGE AGENT,
AND NOT TO ALLIANCE, THE TRUSTEE OR THE INFORMATION AGENT.
DELIVERY OF LETTERS OF TRANSMITTAL. If the Old Convertible Debentures are
registered in the name of a person other than the signer of the Letter of
Transmittal relating thereto, then in order to tender such Old Convertible
Debentures pursuant to the Exchange Offer, such Old Convertible Debentures must
be endorsed or accompanied by appropriate bond powers signed exactly as the name
or names of the registered owner or owners appear on the certificates, with the
signatures on the certificates or bond powers guaranteed as provided below.
Any beneficial owner whose Old Convertible Debentures are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender Old Convertible Debentures should contact such registered
holder promptly and instruct such registered holder to tender the Old
Convertible Debentures on such beneficial owner's behalf. If any beneficial
owner wishes to tender Old Convertible Debentures himself or herself, that
beneficial owner must, prior to completing and executing the Letter of
Transmittal and, where applicable, delivering his or her Old Convertible
Debentures, either make appropriate arrangements to register ownership of the
Old Convertible Debentures in such beneficial owner's name or follow the
procedures described in the immediately preceding paragraph. The transfer of
record ownership may take a considerable amount of time.
THE METHOD OF DELIVERY OF OLD CONVERTIBLE DEBENTURES, LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER TENDERING THE OLD CONVERTIBLE DEBENTURES. IF DELIVERY IS TO
BE MADE BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
BOOK-ENTRY TRANSFER. Promptly after the commencement of the Exchange Offer,
the Exchange Agent will seek to establish a new account or utilize an existing
account with respect to the Old Convertible Debentures at The Depository Trust
Company (the "DTC"). Any financial institution that is a participant in DTC's
system and whose name appears on a security position listing on DTC's system as
the owner of Old Convertible Debentures may make book-entry delivery of such Old
Convertible Debentures by causing DTC to transfer such Old Convertible
Debentures into the Exchange Agent's account with respect to the Old Convertible
Debentures in accordance with DTC's Automated Tender Offer Program procedures
for such book-entry transfers. However, the exchange for the Old Convertible
Debentures so tendered will be made only after book-entry confirmation of such
book-entry transfer of Old Convertible Debentures into the Exchange Agent's
account, and timely receipt by the Exchange Agent of an Agent's Message (as such
term is defined in the next sentence). The term "Agent's Message" means a
message, transmitted by DTC and received by the Exchange Agent and forming a
part of a book-entry confirmation, which states that DTC has
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received an express acknowledgment from a participant tendering the Old
Convertible Debentures that is the subject of such book-entry confirmation that
such participant has received and agrees to be bound by the terms of the Letter
of Transmittal, and that Alliance may enforce such agreement against such
participant.
Delivery of the Letter of Transmittal and any other required documents to
DTC does not constitute delivery to the Exchange Agent.
SIGNATURE GUARANTEES. Signatures on the Letter of Transmittal must be
guaranteed by a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., or by a
commercial bank or trust company having an office or correspondent in the United
States or by any other "eligible guarantor institution" as defined in Rule
17Ad-15 under the Exchange Act (each of the foregoing being an "Eligible
Institution") unless (a) the Letter of Transmittal is signed by the registered
holder of the Old Convertible Debentures tendered therewith (or by a participant
in DTC whose name appears on a security position listing as the owner of such
Old Convertible Debentures) and neither the "Special Payment Instructions" box
nor the "Special Delivery Instructions" box of the Letter of Transmittal is
completed or (b) the Old Convertible Debentures tendered therewith are tendered
for the account of an Eligible Institution. Signatures must also be guaranteed
by an Eligible Institution on any notice of withdrawal with respect to Old
Convertible Debentures tendered pursuant to a Letter of Transmittal with
signature guarantees.
GUARANTEED DELIVERY. If a holder desires to tender Old Convertible
Debentures pursuant to the Exchange Offer and (a) such Old Convertible
Debentures are not immediately available, (b) time will not permit such holder's
Letter of Transmittal, such Old Convertible Debentures or other required
documents to reach the Exchange Agent on or prior to the Expiration Date or (c)
such holder cannot complete the procedures for book-entry transfer on or prior
to the Expiration Date, a tender may be effected if all the following are
complied with:
(a) such tender is made by or through an Eligible Institution;
(b) on or prior to the Expiration Date, the Exchange Agent has received
from such Eligible Institution, at the address of the Exchange Agent set
forth on the back cover page of this Prospectus, a properly completed and
validly executed Notice of Guaranteed Delivery (by telegram, telex,
facsimile transmission, mail or hand delivery) in substantially the form
accompanying this Prospectus, setting forth the name and address of the
registered holder and the principal amount of Old Convertible Debentures
being tendered and stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days after
the date of the Notice of Guaranteed Delivery, the Letter of Transmittal (or
a facsimile thereof), properly completed and validly executed, together with
the Old Convertible Debentures in proper form for transfer (or confirmation
of book-entry transfer of such Old Convertible Debentures into the Exchange
Agent's account with DTC), and any other documents required by the Letter of
Transmittal and the instructions thereto, will be deposited by such Eligible
Institution with the Exchange Agent; and
(c) the Letter of Transmittal (or a facsimile thereof), properly
completed and validly executed, together with the Old Convertible Debentures
in proper form for transfer (or confirmation of book-entry transfer of such
Old Convertible Debentures into the Exchange Agent's account with DTC) and
any other documents required by the Letter of Transmittal and the
instructions thereto, are received by the Exchange Agent within three New
York Stock Exchange trading days after the date of such Notice of Guaranteed
Delivery.
MUTILATED, LOST OR MISSING CERTIFICATES. If a holder desires to tender Old
Convertible Debentures pursuant to the Exchange Offer but such Old Convertible
Debentures have been mutilated, lost, stolen or destroyed, such holder should
write to or telephone the trustee under the Old Convertible Indenture, at the
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address or telephone number listed below, about procedures for obtaining
replacements for such Old Convertible Debentures or arranging for
indemnification or any other matter that requires handling by such trustee:
The Bank of New York
101 Barclay Street
New York, New York 10286
(212) 495-1784
OTHER MATTERS. Notwithstanding any other provision of the Exchange Offer,
delivery of the New Convertible Debentures for Old Convertible Debentures
tendered and accepted pursuant to the Exchange Offer will occur only after
timely receipt by the Exchange Agent of such Old Convertible Debentures in
proper form for transfer (or confirmation of book-entry transfer of such Old
Convertible Debentures into the Exchange Agent's account with DTC), together
with properly completed and validly executed Letters of Transmittal (or a
facsimile thereof) and any other required documents.
Tenders of Old Convertible Debentures pursuant to any of the procedures
described above and acceptance thereof by Alliance will constitute a binding
agreement between Alliance and the tendering holder upon the terms and subject
to the conditions of the Exchange Offer.
All questions as to the form of all documents and the validity (including
time of receipt) and acceptance of tenders of the Old Convertible Debentures
will be determined by Alliance, in its reasonable discretion, and Alliance's
determination shall be final and binding. Alternative, conditional or contingent
tenders of Old Convertible Debentures will not be valid. Alliance reserves the
absolute right to reject any or all tenders of Old Convertible Debentures that
are not in proper form or the acceptance of which, in Alliance's opinion, would
be unlawful. Alliance also reserves the absolute right to waive any defects,
irregularities or conditions of tender as to particular Old Convertible
Debentures. If Alliance waives its right to reject a defective, irregular or
conditional tender of Old Convertible Debentures, the holder will be entitled to
New Convertible Debentures in exchange for such Old Convertible Debentures.
Alliance's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding. Any defect or irregularity in connection with tenders of Old
Convertible Debentures must be cured within such time as Alliance determines,
unless waived by Alliance. Tenders of Old Convertible Debentures shall not be
deemed to have been made until all defects and irregularities have been waived
by Alliance or cured. None of Alliance, the Dealer Managers, the Exchange Agent,
the Information Agent, the Trustee or any other person will be under any duty to
give notice of any defects or irregularities in tenders of Old Convertible
Debentures, or will incur any liability to holders for failure to give any such
notice.
ELECTION TO RECEIVE SERIES E PREFERRED STOCK UPON AUTOMATIC CONVERSION
If a holder tendering Old Convertible Debentures pursuant to the Exchange
Offer desires to receive Series E Preferred Stock upon the Automatic Conversion
with respect to all or any part of the New Convertible Debentures to be issued
in exchange for such Old Convertible Debentures, (i) either (a) a properly
completed and validly executed Letter of Transmittal (or a facsimile thereof),
together with any signature guarantees and any other documents required by the
instructions to the Letter of Transmittal or (b) a properly completed and
validly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail or hand delivery in substantially the form accompanying this
Prospectus) must be received by the Exchange Agent at the address set forth on
the back cover page of this Prospectus on or prior to the Expiration Date, (ii)
the principal amount of New Convertible Debentures to be converted into Series E
Preferred Stock in the event of the Automatic Conversion must be indicated in
the appropriate space on the Letter of Transmittal or the Notice of Guaranteed
Delivery, as the case may be, and (iii) the other procedures described in "The
Exchange Offer -- Procedures for Tendering" must be complied with. UNLESS THE
FOREGOING REQUIREMENTS ARE SATISFIED, ALL OF THE NEW CONVERTIBLE DEBENTURES
RECEIVED IN EXCHANGE FOR SUCH OLD CONVERTIBLE DEBENTURES WILL BE AUTOMATICALLY
CONVERTED INTO COMMON STOCK, RATHER THAN SERIES E PREFERRED STOCK, UPON THE
AUTOMATIC CONVERSION. Elections to receive shares of Series E Preferred Stock
upon the Automatic Conversion will be accepted only in integral multiples of
$1,000 principal amount. In order to change the election made pursuant to the
foregoing, a tendering holder must, on or prior to the
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Expiration Date, (i) withdraw his tender of Old Convertible Debentures in
accordance with the procedures set forth in "The Exchange Offer -- Withdrawal of
Tenders" and (ii) tender such Old Convertible Debentures again in accordance
with the foregoing provisions of this paragraph. After the acceptance for
exchange of any Old Convertible Debentures in accordance with the terms of the
Exchange Offer, the election of the tendering holder to receive Common Stock or
Series E Preferred Stock, as the case may be, upon exchange thereof will be
irrevocable and will be binding upon such holder and all future holders of the
New Convertible Debentures issued in exchange therefor.
WITHDRAWAL OF TENDERS
Tenders of Old Convertible Debentures may be withdrawn at any time until the
Expiration Date. Thereafter, such tenders are irrevocable, except that they may
be withdrawn at any time after July 5, 1996 unless accepted for exchange prior
to that date.
Holders who wish to exercise their right of withdrawal with respect to the
Exchange Offer must give written notice of withdrawal, delivered by mail or hand
delivery or facsimile transmission, to the Exchange Agent at one of its
addresses set forth on the back cover page of this Prospectus on or prior to the
Expiration Date or at such other time as otherwise provided for herein. In order
to be effective, a notice of withdrawal must specify the name of the person who
deposited the Old Convertible Debentures to be withdrawn (the "Depositor"), the
name in which the Old Convertible Debentures are registered if different from
that of the Depositor and the principal amount of the Old Convertible Debentures
to be withdrawn. If tendered Old Convertible Debentures to be withdrawn have
been delivered or identified through confirmation of book-entry transfer to the
Exchange Agent, the notice of withdrawal also must specify the name and number
of the account at DTC to be credited with the withdrawn Old Convertible
Debentures. The notice of withdrawal must be signed by the registered holder of
such Old Convertible Debentures in the same manner as the applicable Letter of
Transmittal (including any required signature guarantees), or be accompanied by
evidence satisfactory to Alliance that the person withdrawing the tender has
succeeded to the beneficial ownership of such Old Convertible Debentures.
Withdrawals of tenders of Old Convertible Debentures may not be rescinded, and
any Old Convertible Debentures withdrawn will be deemed not validly tendered
thereafter for purposes of the Exchange Offer. However, properly withdrawn Old
Convertible Debentures may be tendered again at any time prior to the Expiration
Date by again following the procedures for tendering Old Convertible Debentures
described herein.
All questions as to the form and validity (including time of receipt) of any
withdrawal of tendered Old Convertible Debentures will be determined by
Alliance, in its sole discretion, and Alliance's determination shall be final
and binding. None of Alliance, the Dealer Managers, the Exchange Agent, the
Trustee, the Information Agent or any other person will be under any duty to
give notification of any defect or irregularity in any withdrawal of tendered
Old Convertible Debentures, or will incur any liability for failure to give any
such notification.
If Alliance is delayed in its acceptance for exchange of any Old Convertible
Debentures or is unable to accept for exchange or exchange any Old Convertible
Debentures pursuant to the Exchange Offer for any reason, then, without
prejudice to Alliance's rights hereunder, tendered Old Convertible Debentures
may be retained by the Exchange Agent on behalf of Alliance and may not be
withdrawn (subject to Rule 13e-4(f)(5) under the Exchange Act, which requires
that an issuer making a tender offer pay the consideration offered, or return
the tendered securities, promptly after the termination or withdrawal of a
tender offer), except as otherwise permitted hereby.
ACCEPTANCE OF OLD CONVERTIBLE DEBENTURES; DELIVERY OF NEW CONVERTIBLE DEBENTURES
The acceptance of Old Convertible Debentures validly tendered and not
withdrawn will be made as promptly as practicable after the Expiration Date. For
purposes of the Exchange Offer, Alliance will be deemed to have accepted for
exchange validly tendered Old Convertible Debentures if, as and when Alliance
gives oral (confirmed in writing) or written notice thereof to the Exchange
Agent. Such notice of acceptance shall constitute a binding contract between
Alliance and the tendering holder pursuant to which Alliance will be obligated
to exchange the Old Convertible Debentures into a like principal amount of New
Convertible Debentures, and upon such notice of acceptance the tendered Old
Convertible Debentures will
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cease to be treated as outstanding indebtedness of Alliance. Subject to the
terms and conditions of the Exchange Offer, the New Convertible Debentures
issued in respect of Old Convertible Debentures accepted and exchanged pursuant
to the Exchange Offer will be made by the Exchange Agent as soon as practicable
after receipt of such notice. The Exchange Agent will act as agent for the
tendering holders of Old Convertible Debentures for the purposes of receiving
the New Convertible Debentures from Alliance and transmitting the New
Convertible Debentures to the tendering holders. Tendered Old Convertible
Debentures not accepted for exchange by Alliance, if any, will be returned
without expense to the tendering holder of such Old Convertible Debentures (or,
in the case of Old Convertible Debentures tendered by book-entry transfer into
the Exchange Agent's account at DTC, such Old Convertible Debentures will be
credited to an account maintained at DTC) as promptly as practicable following
the Expiration Date.
EXCHANGE AGENT AND INFORMATION AGENT
The Bank of New York has been appointed Exchange Agent for the Exchange
Offer. All deliveries and correspondence sent to the Exchange Agent should be
directed to its address set forth on the back cover page of this Prospectus.
Requests for assistance or additional copies of this Prospectus and the Letter
of Transmittal should be directed to Georgeson & Company Inc., as Information
Agent, at its address set forth on the back cover page of this Prospectus.
Alliance has agreed to pay the Exchange Agent and the Information Agent
customary fees for their services and to reimburse the Exchange Agent and the
Information Agent for their reasonable out-of-pocket expenses in connection
therewith. Alliance also has agreed to indemnify the Exchange Agent and the
Information Agent for certain liabilities, including certain liabilities under
the federal securities laws.
DEALER MANAGERS
Deutsche Morgan Grenfell/C. J. Lawrence Inc. ("Deutsche Morgan Grenfell"),
Jefferies & Company, Inc. ("Jefferies") and Ladenburg, Thalmann & Co. Inc.
("Ladenburg" and, together with Deutsche Morgan Grenfell and Jefferies, the
"Dealer Managers") have agreed to solicit exchanges of the New Convertible
Debentures for the Old Convertible Debentures, for which Alliance will pay the
Dealer Managers on consummation of the Merger a fee of 2.5% of the principal
amount of Old Convertible Debentures accepted pursuant thereto. The maximum fee
payable to the Dealer Managers is $2.1 million plus the amount that the Dealer
Managers are entitled to pursuant to the next paragraph. Alliance will also
reimburse the Dealer Managers for certain reasonable out-of-pocket expenses in
connection with the Exchange Offer and will indemnify the Dealer Managers
against certain liabilities, including liabilities under the Securities Act.
Jefferies and Ladenburg are also expected to serve as underwriters for the
Offerings, and Deutsche Morgan Grenfell and Jefferies, on the one hand, and
Ladenburg, on the other, are serving as financial advisors to Alliance and BGII,
respectively, for which they receive customary fees and reimbursement of
expenses, including in the case of Jefferies, 450,000 shares of Common Stock and
an advisory fee based on the principal amount of Old Convertible Debentures
accepted pursuant to the Exchange Offer.
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DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES
The New Convertible Debentures are a new issue of securities and will be
issued under the New Convertible Indenture. The terms of the New Convertible
Debentures include those stated in the New Convertible Indenture and those made
part of the New Convertible Indenture by the Trust Indenture Act of 1939, as
amended (the "TIA"). The New Convertible Debentures are subject to all such
terms and the holders of the New Convertible Debentures are referred to the New
Convertible Indenture filed as an exhibit to the Registration Statement of which
this Prospectus is a part and to the TIA for a statement of those terms. Certain
capitalized terms used and not defined in the following summary are defined in
the New Convertible Debentures and the New Convertible Indenture. This summary
does not purport to be complete, and is subject to, and is qualified in its
entirety by reference to, all the provisions of the New Convertible Indenture.
The terms of the New Convertible Debentures are substantially identical in all
material respects to the terms of the Old Convertible Debentures, except that
the New Convertible Debentures will have a lower conversion price, will be
senior in right of payment to the Old Convertible Debentures and will
automatically convert upon consummation of the Merger (should it occur within 60
days after issuance of the New Convertible Debentures). See "Comparison of New
Convertible Debentures and Old Convertible Debentures".
GENERAL
The New Convertible Debentures are unsecured senior subordinated obligations
of Alliance, are limited to $85,000,000 aggregate principal amount and will
mature on September 15, 2003. The New Convertible Debentures bear interest at
the rate of 7 1/2% per annum from the issue date or, thereafter, the most recent
interest payment date to which interest in respect of the New Convertible
Debentures has been paid or provided for. Interest on the New Convertible
Debentures is payable semi-annually on March 15 and September 15 of each year,
commencing September 15, 1996, to the holders of record of the New Convertible
Debentures at the close of business on the preceding March 1 or September 1, as
the case may be. Principal of (and premium, if any) and interest on the New
Convertible Debentures are payable, the transfer of the New Convertible
Debentures is registerable, and the New Convertible Debentures are convertible,
at the office of The Bank of New York, 101 Barclay Street, New York, New York
10286. Interest is computed on the basis of a 360-day year of twelve 30-day
months.
CONVERSION AT ELECTION OF HOLDER
The New Convertible Indenture provides that the New Convertible Debentures
or portions thereof (which are $1,000 or integral multiples thereof) are
convertible into shares of Common Stock at any time prior to the close of
business on the second Business Day prior to maturity, at the Conversion Price,
which will be $8.33 per share, subject to adjustment as provided below. The
right to convert New Convertible Debentures called for redemption will expire at
the close of business on the fifth Business Day prior to the redemption date,
except that in the case of redemption at the option of the holder as a result of
a Redemption Event (as defined below), such right will terminate upon receipt by
Alliance of written notice of the exercise of such option unless Alliance
subsequently fails to pay the Redemption Price (as defined below). The holders
of New Convertible Debentures who convert their New Convertible Debentures after
a record date but prior to the date which is five business days prior to an
Interest Payment Date are entitled to receive the interest payment made on such
interest payment date if the conversion is made following the issuance by
Alliance of a notice of redemption. Otherwise, holders of New Convertible
Debentures converted after a record date but prior to an interest payment date
will not be entitled to receive such interest payment. For information as to
notices of redemption, see "-- Redemption at Alliance's Option".
The Conversion Price is subject to adjustment in certain events, including
(i) dividends (and other distributions) payable in shares of Common Stock on any
class of capital stock of Alliance, (ii) the issuance to all holders of shares
of Common Stock or rights or warrants entitling them to subscribe for or
purchase shares of Common Stock at less than the current market price (as
defined in the New Convertible Indenture), (iii) subdivisions, combinations and
reclassifications of shares of Common Stock, (iv) certain tender offers by
Alliance or any subsidiary of Alliance for shares of Common Stock and (v)
distributions by Alliance to all holders of shares of Common Stock of evidences
of indebtedness, securities other than shares of
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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 Conversion Price will not be
adjusted until such time as the cumulative amount of all such distributions
exceed $0.10 per share.
In addition to the foregoing adjustments, Alliance is permitted to make such
reductions in the Conversion Price as it considers to be advisable in order that
any event treated for Federal income tax purposes as a dividend of stock or
stock rights will not be taxable to the holders of the shares of Common Stock.
In case of certain reclassifications, consolidations or mergers to which
Alliance is a party or the transfer of all or substantially all of the assets of
Alliance, each New Convertible Debenture then outstanding would, without the
consent of any holders of New Convertible Debentures, become convertible only
into the kind and amount of securities, cash and other property receivable upon
the reclassification, consolidation, merger or transfer by a holder of the
number of shares of Common Stock into which such New Convertible Debentures
might have been converted immediately prior to such reclassification,
consolidation, merger or transfer (assuming such holder of shares of Common
Stock failed to exercise any rights of election and received per share the kind
and amount received per share by a plurality of non-electing shares).
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, Alliance will pay a cash adjustment based upon market price (as
determined in accordance with the New Convertible Indenture). New Convertible
Debentures surrendered for conversion between the record date for an interest
payment and the interest payment date (except New Convertible Debentures called
for redemption on a redemption date within such period) must be accompanied by
payment of an amount equal to the interest thereon which the registered holder
is to receive on such interest payment date. A New Convertible Debenture
converted on an Interest Payment Date need not be accompanied by any payment and
the interest on the principal amount of the New Convertible Debentures being
converted will be paid on such interest payment date to the registered holder of
such New Convertible Debenture on the immediately preceding record date. Except
where New Convertible Debentures surrendered for conversion must be accompanied
by payment as described above, no interest on converted New Convertible
Debentures will be payable by Alliance on any interest payment date subsequent
to the date of conversion. No other payment or adjustment for interest or
dividends is to be made upon conversion.
AUTOMATIC CONVERSION UPON CONSUMMATION OF MERGER
The New Convertible Indenture provides that if the Merger is consummated
within 60 days after the issuance of the New Convertible Debentures, then at the
effective time of the Merger, the New Convertible Debentures will be
automatically converted into Common Stock at the Special 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). The Special Conversion
Price will be adjusted under the circumstances which would give rise to an
adjustment in the Conversion Price, as described in "-- Conversion at Election
of Holder". 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 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
held. See "The Exchange Offer -- Election to Receive Series E Preferred Stock
upon Automatic Conversion". Each share of Series E Preferred Stock will have the
terms described under "Description of Capital Stock -- Special Stock -- 10%
Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E". Fractional
shares of Common Stock will not be issued upon the Automatic Conversion, but, in
lieu thereof, Alliance will pay a cash adjustment based upon market price (as
determined in accordance with the New Convertible Indenture). Fractional shares
of Series E Preferred Stock will be issued, if necessary, upon the Automatic
Conversion, and no cash adjustment will be paid in lieu of fractional shares of
Series E
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Preferred Stock. The Merger remains subject to certain conditions, including
regulatory approvals and the obtaining of financing. 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.
INTEREST ON NEW CONVERTIBLE DEBENTURES
The New Convertible Debentures will bear interest from the date of issuance,
payable on each Interest Payment Date, commencing September 15, 1996. Holders
whose Old Convertible Debentures are accepted for exchange will also receive on
September 15, 1996 (the next interest payment date for the Old Convertible
Debentures) payment in respect of interest (provided such holders' New
Convertible Debentures are not theretofore 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.
SUBORDINATION
The payment of the principal of (and premium, if any), interest on and
redemptions at the option of holders of the New Convertible Debentures will, to
the extent set forth in the New Convertible Indenture, be subordinated in right
of payment to the prior payment in full of all Senior Indebtedness. Upon any
payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, receivership, reorganization, assignment for the
benefit of creditors, marshalling of assets and liabilities or any bankruptcy,
insolvency or similar proceedings of Alliance, the holders of all Senior
Indebtedness will first be entitled to receive payment in full in cash of all
amounts due or to become due thereon before the holders of the New Convertible
Debentures will be entitled to receive any payment in respect of the principal
of (and premium, if any), interest on, or redemptions at the option of holders
of the New Convertible Debentures. In the event of the acceleration of the
principal amount due on the New Convertible Debentures, the holders of all
Senior Indebtedness will first be entitled to receive payment in full in cash of
all amounts due or to become due thereon before the holders of the New
Convertible Debentures will be entitled to receive any payment of the principal
of (and premium, if any), interest on, or redemptions at the option of holders
of the New Convertible Debentures. No payments on account of principal of (and
premium, if any), interest on or redemptions at the option of holders of the New
Convertible Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior Indebtedness
permitting the holders thereof to accelerate the maturity thereof, or if any
judicial or other proceeding shall be pending with respect to any such default.
In addition, upon the occurrence of any other default with respect to Senior
Indebtedness permitting the holders thereof to accelerate the maturity thereof
and receipt by Alliance of written notice of such occurrence (a "Blockage
Notice"), no payment or distribution to the Trustee or any holder of the New
Convertible Debentures (other than in the form of securities that are
subordinated to a greater extent than the New Convertible Debentures are to
Senior Indebtedness) will be permitted to be made by Alliance for a period
commencing on the date of receipt of such Blockage Notice by Alliance and ending
179 days thereafter (unless such default is cured or waived). During any
consecutive 360-day period, only one 179-day period may commence during which
payment of principal of or interest on the New Convertible Debentures may not be
made and the duration of such period may not exceed 179 days. Only a holder of
in excess of $5,000,000 of Senior Indebtedness or an agent for any syndicate of
lenders which syndicate in the aggregate holds in excess of $5,000,000 of Senior
Indebtedness may initiate such a payment blockage. Because Alliance operates
largely through subsidiaries, the New Convertible Debentures are structurally
subordinated to the Indebtedness of such subsidiaries, including the trade
payables and other indebtedness of such subsidiaries.
"Senior Indebtedness" is defined in the New Convertible Indenture to mean
(i) all indebtedness of Alliance, including the principal of and premium, if
any, and interest on such indebtedness, whether outstanding currently or
hereafter created, for borrowed money, including certain guarantees, for
indebtedness incurred in connection with acquisitions, and for money owed or
reimbursement obligations under letters of credit or under any lease of any real
or personal property, which obligations are capitalized on Alliance's books,
(ii) all currency hedging obligations of Alliance, (iii) all interest on any of
the foregoing that would accrue but for the filing of a bankruptcy or similar
proceeding at the rate specified in the
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instrument governing such indebtedness, whether or not such interest is an
allowable claim in such proceeding and (iv) any modifications, refundings,
deferrals, renewals or extensions of any such indebtedness or securities, notes
or other evidences of indebtedness issued in exchange for such indebtedness
(collectively, "Indebtedness"), unless, by the terms of the instrument creating
or evidencing such Indebtedness, it is provided that such Indebtedness is not
superior in right of payment to the New Convertible Debentures or to other
Indebtedness which is pari passu with or subordinated to the New Convertible
Debentures, and except for the Old Convertible Debentures. The New Convertible
Debentures will be senior in right of payment to the Old Convertible Debentures
and to any other Indebtedness other than Senior Indebtedness.
At March 31, 1996, there was no Senior Indebtedness of Alliance and $14.1
million of indebtedness of Alliance's subsidiaries ($140.0 million and $33.5
million, respectively, on a pro forma basis at March 31, 1996 assuming the
Merger had occurred on that date). The New Convertible Indenture does not impose
any limitation on Alliance's ability to incur additional Senior Indebtedness or
Indebtedness of Subsidiaries. The Senior Notes will constitute Senior
Indebtedness as defined in the New Convertible Indenture. See "Risk Factors --
Subordination".
REDEMPTION AT ALLIANCE'S OPTION
The New Convertible Debentures are subject to redemption and will be
redeemable at the option of Alliance, in whole or in part (in any integral
multiple of $1,000), upon not less than 20 nor more than 60 days prior notice by
mail, provided that until September 15, 1996 the New Convertible Debentures
cannot be redeemed at the option of Alliance unless the closing price of the
Common Stock has equalled or exceeded 250% of the then existing Conversion Price
per share for at least 20 out of any 30 consecutive trading days ending within
60 days before the notice of redemption is first mailed. Thereafter, the New
Convertible Debentures may be redeemed at the following redemption prices
(expressed as percentages of the principal amount set forth below), if redeemed
during the 12-month period beginning September 15 of the years indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------ -----------------
<S> <C>
1995.............................................................. 105.63%
1996.............................................................. 104.69%
1997.............................................................. 103.75%
1998.............................................................. 102.81%
1999.............................................................. 101.88%
2000.............................................................. 100.94%
2001 and thereafter............................................... 100.00%
</TABLE>
in each case together with accrued interest to the redemption date (subject to
the right of holders of record on the relevant record date to receive interest
due on an Interest Payment Date). If less than all of the New Convertible
Debentures are to be redeemed, the Trustee will select the New Convertible
Debentures to be redeemed by lot, pro rata or by such other method as the
Trustee shall deem fair and equitable. On or after the redemption date, interest
will cease to accrue on the New Convertible Debentures, or portion thereof,
called for redemption.
No sinking fund is provided for the New Convertible Debentures.
REDEMPTION AT HOLDER'S OPTION
The New Convertible Indenture provides that if a Redemption Event occurs,
each holder of the New Convertible Debentures shall have the right, subject to
certain conditions, at the holder's option, to require Alliance to redeem all of
such holder's New Convertible Debentures, or any portion thereof that is an
integral multiple of $1,000, on the date (the "Redemption Date") that is 45 days
after the date of an Alliance Notice (as defined below), for cash at a price
equal to 101% of the principal amount of such New Convertible Debentures to be
redeemed (the "Redemption Price"), together with accrued interest to the
Redemption Date.
Within 15 days after the occurrence of a Redemption Event, Alliance, or at
Alliance's request, the Trustee, is obligated to mail to all holders of record
of the New Convertible Debentures a notice ("Alliance Notice") of the occurrence
of such Redemption Event and of the redemption right arising as a result
thereof.
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Alliance must deliver a copy of the Alliance Notice to the Trustee. To exercise
the redemption right a holder of such New Convertible Debentures must deliver on
or before the 15th business day after the date of the Alliance Notice written
notice to the Trustee of the holder's exercise of such right, together with the
New Convertible Debentures with respect to which the right is being exercised,
duly endorsed for transfer to Alliance.
A Redemption Event will be deemed to have occurred at such time as:
(i) there is a Change of Control of Alliance; or
(ii) Alliance's Common Stock (or other common stock into which the New
Convertible Debentures are then convertible) is not listed for trading on a
United States national securities exchange or the NASDAQ NMS or the NASDAQ
listing of Small Capitalization Stocks.
Under the New Convertible Indenture, a "Change of Control" is deemed to have
occurred at such time as (i) any person or group (as the term "person" or
"group" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act)
other than an Exempt Person (as defined below) files a Schedule 13D or 14D-1 (or
any successor schedule, form or report under the Exchange Act) disclosing that
such person or group (excluding any Exempt Person) has become the beneficial
owner of 50% or more of Alliance's capital stock having the power to vote in the
election of directors under ordinary circumstances ("Voting Stock"), (ii) there
shall be consummated any consolidation or merger of Alliance that is not
approved by at least a majority of the Continuing Directors (A) in which
Alliance is not the continuing or surviving corporation or (B) pursuant to which
any Voting Stock of Alliance would be converted into cash, securities or other
property, in each case other than a consolidation or merger in which the holders
of such Voting Stock immediately prior thereto have at least a majority of the
Voting Stock, directly or indirectly, of the resulting or surviving corporation
immediately after the consolidation or merger or (iii) any person acquires all
or substantially all of the assets of Alliance; provided, however, that a Change
of Control shall not be deemed to have occurred if either (x) the closing price
per share of the Common Stock for any five trading days within the period of ten
consecutive trading days ending immediately before the Change of Control shall
equal or exceed 105% of the conversion price of the New Convertible Debentures
in effect on such trading day, or (y) with respect to a Change of Control
described in clause (ii) or clause (iii) above, at least 90% of the
consideration to be paid for the Voting Stock of Alliance in the transaction or
transactions constituting the Change of Control consists of common stock traded
on a national securities exchange or quoted on the NASDAQ NMS and, as a result
of the transaction or transactions referred to in clause (ii) or clause (iii)
above, the New Convertible Debentures become convertible solely into such common
stock. Under the New Convertible Indenture, an "Exempt Person" is defined as (A)
Alliance, any subsidiary of Alliance or any employee benefit plan or stock
ownership plan of either Alliance or any subsidiary of Alliance or (B) any of
Kirkland Ft. Worth Investment Partners, L.P. ("Kirkland"), KIC, Gaming Systems
Advisors, L.P. ("GSA") or Mr. Wilms, or any of their respective Affiliates, or
any successor to any of Kirkland, KIC or GSA or any of their respective
Affiliates by merger, sale or transfer of assets or similar transaction or by a
transfer from Mr. Wilms to any estate planning vehicle controlled by Mr. Wilms
or established for the benefit of Mr. Wilms' family or his estate. The phase
"substantially all" does not have a readily established meaning under applicable
law; accordingly, there may be uncertainty as to whether any specific
transaction may properly be characterized as a Change of Control or a sale,
lease or conveyance of substantially all the assets of Alliance.
The Merger will not result in a Change of Control of Alliance under the New
Convertible Indenture.
The right to require Alliance to redeem the New Convertible Debentures as a
result of the occurrence of a Redemption Event could create an event of default
under Senior Indebtedness as a result of which any redemption could, absent a
waiver, be blocked by the subordination provisions of the New Convertible
Debentures. At March 31, 1996, Alliance did not have any Senior Indebtedness
with respect to which such waivers would be required. See "-- Subordination".
Failure of Alliance to redeem the New Convertible Debentures when required would
result in an Event of Default with respect to the New Convertible Debentures
whether or not such redemption is permitted by the subordination provisions.
Alliance does not
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currently have sufficient funds available to purchase all the New Convertible
Debentures were they to be tendered in response to an offer upon a Redemption
Event, and there can be no assurance that Alliance would have or be able to
obtain such funds. See "Risk Factors -- Change of Control".
CERTAIN COVENANTS
The New Convertible Indenture provides that Alliance will not, and will not
permit any of its Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are no
less favorable to Alliance or the relevant Subsidiary than those that would have
been obtained in a comparable transaction by Alliance or such Subsidiary with an
unrelated person and (b) Alliance delivers to the Trustee with respect to any
Affiliate Transaction involving aggregate payments in excess of $500,000 a
resolution of the Alliance Board set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (a) above and
such Affiliate Transaction is approved by a majority of the independent members
of the Alliance Board; provided, however, that (i) any employment agreement
entered into by Alliance or any of its subsidiaries in the ordinary course of
business or (ii) the continuation, extension, or renewal of any transaction
entered into between Alliance or any Subsidiary and any Affiliate on or prior to
October 31, 1993 or (iii) transactions among Alliance and any of Kirkland, KIC,
GSA, Mr. Wilms, or their respective Affiliates pursuant to or contemplated by
agreements existing on October 31, 1993 as in effect on such date or (iv) any
agreement between Alliance, KIC, Kirkland, GSA or their respective affiliates
providing for the payment by Alliance of management or related fees in
connection with providing services to Alliance in an aggregate amount not
exceeding $1,400,000 per annum, plus reimbursement of reasonable related
expenses or (v) any agreement between Alliance and Mr. Wilms or any of his
affiliates providing for the payment by Alliance of consulting or similar fees
in an aggregate amount not to exceed $500,000 per annum or (vi) any agreement
with Mr. Wilms pursuant to which Alliance loaned funds to Mr. Wilms to be used
to exercise stock purchase warrants if such exercise occurred so that Mr. Wilms
could comply with his commitment to Alliance to obtain sufficient shares to
approve the Kirkland Investment and the increase in the authorized number of
shares of Alliance's Common Stock to 100,000,000 or (vii) transactions between
or among Alliance and/or its Subsidiaries, in each case, shall not be deemed
Affiliate Transactions.
EVENTS OF DEFAULT
The following are Events of Default under the New Convertible Indenture: (a)
failure to pay principal of (and premium, if any, on) any New Convertible
Debentures when due, whether or not such payment is prohibited by the
subordination provisions of the New Convertible Indenture; (b) failure to pay
any interest on any New Convertible Debentures when due, continued for 30 days,
whether or not such payment is prohibited by the subordination provisions of the
New Convertible Indenture; (c) failure to perform certain covenants of Alliance
in the New Convertible Indenture, continued for 60 days after written notice as
provided in the New Convertible Indenture; (d) certain events of bankruptcy,
insolvency or reorganization; (e) default under any mortgage indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by Alliance or any of its
Subsidiaries, and as a result of such default the maturity of such Indebtedness
has been accelerated prior to its express maturity and the principal amount of
such Indebtedness, together with the principal amount of any other such
Indebtedness the maturity of which has been accelerated, aggregates $5,000,000
or more, provided, that if such default under such indenture or instrument shall
be remedied or cured by Alliance or waived by the holders of such Indebtedness
within 90 days of the date of acceleration of such Indebtedness, then the Event
of Default under the New Convertible Indenture by reason thereof shall be deemed
likewise to have been thereupon remedied, cured or waived without further action
upon the part of either the Trustee or any of the holders; and (f) a final
judgment or judgments or order or orders for the payment of money which
aggregates $5,000,000 or more is entered against Alliance or one or more of its
Subsidiaries, which judgment or judgments or order or orders shall not have been
discharged or stayed pending appeal within 75 days after the entry thereof or
discharged within 75 days after the expiration of any such stay.
The New Convertible Indenture provides that, if an Event of Default shall
have occurred and be continuing either the Trustee or the holders of at least
25% of the principal amount of the New Convertible
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Debentures then outstanding may declare the principal amount of all New
Convertible Debentures and interest accrued thereon to be due and payable
immediately, but upon certain conditions such declarations may be annulled and
past defaults may be waived (except a continuing default in payment of principal
of (and premium, if any) or interest on the New Convertible Debentures or a
default in respect of certain provisions which cannot be amended without the
consent of the holder of each New Convertible Debenture affected) by the holders
of a majority in principal amount of the New Convertible Debentures then
outstanding. In the case of an Event of Default resulting from bankruptcy,
insolvency or certain reorganizations, such amounts will be due and payable
without any declaration or any other act on the part of the holders or the
Trustee.
The New Convertible Indenture provides that the Trustee, subject to the duty
of the Trustee during a default to act with the required standard of care, will
have no obligation to exercise any right or power granted it under the New
Convertible Indenture at the request of the holders of the New Convertible
Debentures unless the Trustee shall have been indemnified by such holders.
Subject to such provisions in the New Convertible Indenture for the
indemnification of the Trustee and certain other limitations, the holders of a
majority in principal amount of the New Convertible Debentures then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee.
The New Convertible Indenture provides that no holder of New Convertible
Debentures will have any right to institute any action against Alliance under
the New Convertible Indenture (except actions for payment of overdue principal
(and premium, if any) or interest or to enforce conversion rights) unless such
holder previously shall have given to the Trustee written notice of default and
continuance thereof and the holders of not less than 25% in principal amount of
the New Convertible Debentures then outstanding shall have requested the Trustee
to institute such action and shall have offered the Trustee reasonable
indemnity, the Trustee shall not have instituted such action within 60 days of
such request and the Trustee shall not have received direction inconsistent with
such written request by the holders of a majority in principal amount of the New
Convertible Debentures then outstanding.
MERGER AND CONSOLIDATION
The New Convertible Indenture provides that Alliance will not merge or
consolidate with any corporation, partnership or other entity and will not sell,
lease or convey all or substantially all its assets to any entity, unless
Alliance shall be the surviving entity, or the successor entity that acquires
all or substantially all of the assets of Alliance shall be a corporation,
partnership or limited liability company or trust organized under the laws of
the United States or a State therein or the District of Columbia and shall
expressly assume by supplemental indenture all obligations of Alliance under the
New Convertible Indenture and the New Convertible Debentures, and immediately
after giving effect to such merger, consolidation, sale, lease or conveyance, no
Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have happened and be continuing.
ASSUMPTION OF OBLIGATIONS
The New Convertible Indenture provides that if the Drop-Down Transaction
occurs, the existing Subsidiary which becomes the owner of substantially all of
Alliance's assets (including the stock of BGII if the Merger occurs but
excluding the stock of such existing Subsidiary) would become jointly and
severally liable with Alliance with respect to all of Alliance's obligations
under the New Convertible Debentures and the New Convertible Indenture. Alliance
is permitted, pursuant to Section 8.1 of the Old Convertible Indenture, to
transfer assets freely except in the case of a transfer of all or substantially
all of Alliance's assets. The Drop-Down Transaction will not involve a transfer
of substantially all Alliance's assets (since the stock of the transferee
subsidiary would not itself be transferred) and thus would not be prohibited by
the Old Convertible Indenture. The Drop-Down Transaction will be conditioned
upon the receipt of an opinion of nationally recognized counsel confirming that
the holders of the New Convertible Debentures will not recognize income, gain or
loss for United States Federal income tax purposes as a result of such Drop-Down
Transaction, and will be subject to United States Federal income tax in the same
amount, in the same manner
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and at the same time as would have been the case if such Drop-Down Transaction
had not occurred. The Drop-Down Transaction would require approval of the Nevada
Gaming Authorities and perhaps other gaming authorities as well.
MODIFICATION AND WAIVER
Modifications and amendments of the New Convertible Indenture may be made by
Alliance and the Trustee, with the consent of the holders of not less than a
majority in principal amount of the New Convertible Debentures then outstanding
and affected, to add any provisions to, or change in any manner or eliminate any
of the provisions of, such New Convertible Indenture or modify in any manner the
rights of the holders of the New Convertible Debentures; provided that Alliance
and the Trustee may not without the consent of the holder of each outstanding
New Convertible Debenture affected thereby (a) extend the stated maturity of the
principal amount of any New Convertible Debenture, or reduce the principal
amount thereof or any premium thereon or reduce the rate or extend the time of
payment of interest thereon, or reduce any amount payable on redemption thereof
or otherwise change the redemption provisions, or impair the right to institute
suit for the enforcement of any conversion or any payment on any New Convertible
Debenture when due or adversely affect any conversion rights or redemption
rights upon a Redemption Event or (b) reduce the aforesaid percentage in
principal amount of the New Convertible Debentures, the consent of the holders
of which is required for any such modification.
The New Convertible Indenture may not be amended to alter the subordination
of any outstanding New Convertible Debentures without consent of each holder of
Senior Indebtedness then outstanding that would be adversely affected thereby.
The holders of a majority in aggregate principal amount of outstanding New
Convertible Debentures may waive any past default under the New Convertible
Indenture, except a default in the payment of principal (and premium, if any) or
interest or default with respect to certain covenants under the New Convertible
Indenture.
The New Convertible Indenture can be supplemented by Alliance without
consent of the holders under certain circumstances, including (i) to convey,
transfer, assign, mortgage or pledge to the Trustee as security for the New
Convertible Debentures any property or assets; (ii) to evidence the succession
of another corporation to Alliance, and the assumption by the successor
corporation of certain covenants, agreements, and obligations of Alliance; (iii)
to add additional covenants of Alliance to the New Convertible Indenture for the
protection of holders of New Convertible Debentures; (iv) to cure any ambiguity
or to correct or supplement any provision of the New Convertible Indenture (or
any supplement thereto); (v) to make any changes required by amendments to the
TIA; (vi) to unilaterally reduce the conversion price of the New Convertible
Debentures; and (vii) subject to certain conditions, to appoint a successor
Trustee.
SATISFACTION AND DISCHARGE OF THE NEW CONVERTIBLE INDENTURE
The New Convertible Indenture provides that Alliance may terminate its
obligations under the New Convertible Indenture at any time by delivering all
outstanding New Convertible Debentures to the Trustee for cancellation and
paying all sums required to be paid pursuant to the terms of the New Convertible
Indenture. In addition, Alliance is permitted to terminate all of its
obligations under the New Convertible Indenture by irrevocably depositing with
the Trustee money or U.S. government obligations sufficient to pay principal and
interest on the New Convertible Debentures to maturity or redemption and all
other sums payable pursuant to the terms of the New Convertible Indenture, after
complying with certain other procedures set forth in the New Convertible
Indenture.
CONTROL BY DEBENTUREHOLDERS
The holders of a majority in aggregate principal amount of outstanding New
Convertible Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee by the New Convertible Indenture;
provided that such direction shall not be otherwise than in accordance with law
and the provisions of the New Convertible Indenture. The Trustee has the right
to decline to follow any such direction if (i) the Trustee determines that the
action or proceeding may not lawfully be taken, (ii) the Trustee determines that
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the actions or proceedings so directed would involve it in personal liability or
(iii) the Trustee determines that the actions or forbearances specified in or
pursuant to such direction would be unduly prejudicial to the interests of
holders of the New Convertible Debentures not joining in the giving of said
direction.
MANDATORY DISPOSITION PURSUANT TO GAMING LAWS
If a holder or a beneficial owner of a New Convertible Debenture or any
underlying Common Stock or Series E Preferred Stock is required by the Nevada
Gaming Commission or Mississippi Gaming Commission to be found suitable, such
holder or beneficial owner must apply for a finding of suitability within 30
days after the Nevada Gaming Commission or Mississippi Gaming Commission
request. The applicant for a finding of suitability must pay all costs of the
investigation for such finding of suitability. If a holder or beneficial owner
is required to be found suitable and is not found suitable by the Nevada Gaming
Commission or Mississippi Gaming Commission, (i) the holder or beneficial owner
must upon request of Alliance dispose of his or her New Convertible Debentures
and underlying Common Stock and Series E Preferred Stock within 30 days or
within that time prescribed by the Nevada Gaming Commission or Mississippi
Gaming Commission, whichever is earlier, or (ii) Alliance may, at its option,
redeem the holder's or beneficial owner's New Convertible Debentures in cash at
the lesser of (w) the principal amount thereof or (x) the price at which the New
Convertible Debentures were acquired by the holder or beneficial owner, together
with, in either case, accrued interest to the date of the finding of
unsuitability by the Nevada Gaming Commission or Mississippi Gaming Commission
and repurchase the holder's or beneficial owner's underlying Common Stock and
Series E Preferred Stock at the lesser of (y) the market price thereof on the
date of the finding of unsuitability or (z) the price at which such Common Stock
or Series E Preferred Stock was acquired by the holder or beneficial owner. Such
mandatory disposition could be required at a time when market conditions are not
favorable to the affected holder or beneficial owner or at a time or at costs
which are otherwise unfavorable to such holder or beneficial owner. See "Gaming
Regulation and Licensing".
COMPARISON OF NEW CONVERTIBLE DEBENTURES
AND OLD CONVERTIBLE DEBENTURES
The terms of the New Convertible Debentures and the Old Convertible
Debentures are identical in all material respects, except as follows:
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 in such holder's Letter of
Transmittal 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.
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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
pursuant to the Drop-Down Transaction. See "Risk Factors -- Subordination".
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 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 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.
In addition, for so long as the Old Convertible Debentures and Common Stock
are outstanding, Alliance will continue to provide to holders of the Old
Convertible Debentures and Common Stock and to prospective purchasers of the Old
Convertible Debentures and Common Stock the information required by Rule
144A(d)(4), if applicable.
A Registration Default occurred on 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 the date of the Prospectus 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, other than the Registration
Statement of which this Prospectus is a part. 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
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Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Convertible Debentures are acquired in the ordinary course of such holders'
businesses and such holders have no arrangement with any person to participate
in the distribution of the New Convertible Debentures.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING IS INTENDED ONLY AS A SUMMARY OF THE MATERIAL UNITED STATES
FEDERAL INCOME TAX ASPECTS OF THE EXCHANGE OFFER AND IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF EACH
HOLDER OF OLD CONVERTIBLE DEBENTURES.
In the opinion of Milbank, Tweed, Hadley & McCloy, based on the assumptions
and subject to the qualifications set forth herein, the succeeding discussion
accurately describes the material United States Federal income tax consequences
of the Exchange Offer to holders of the Old Convertible Debentures who hold the
Old Convertible Debentures and the New Convertible Debentures, the Common Stock
and the Series E Preferred Stock to be issued pursuant to the Exchange Offer or
Automatic Conversions as the case may be as capital assets within the meaning of
Section 1221 of the Code. Milbank, Tweed, Hadley & McCloy is rendering no other
opinion concerning the tax consequences of the Transaction. This discussion does
not address the United States Federal income tax consequences to holders of Old
Convertible Debentures subject to special treatment under the United States
Federal income tax laws, such as dealers in securities or foreign currency,
tax-exempt entities, banks, thrifts, insurance companies, and investors in
pass-through entities. The discussion does not describe any tax consequences
arising out of the tax laws of any state, local or foreign jurisdiction. This
summary is based upon the Code, existing and proposed regulations thereunder,
and current administrative rulings and court decisions. All of the foregoing are
subject to change, and any such change, which may be retroactive, could affect
the continuing validity of this discussion.
The following discussion is limited to the United States Federal income tax
consequences relevant to a holder of Old Convertible Debentures that is (i) a
citizen or resident of the United States, (ii) a corporation organized under the
laws of the United States or any political subdivision thereof or therein, or
(iii) an estate or trust, the income of which is subject to United States
Federal income tax regardless of the source.
CONSIDERATION ALLOCABLE TO INTEREST
A portion of the New Convertible Debentures received in exchange for the Old
Convertible Debentures and the Common Stock or Series E Preferred Stock received
in exchange for New Convertible Debentures may be allocated to unpaid interest,
and the remainder of the consideration will be allocated to the principal amount
of the Old Convertible Debentures or New Convertible Debentures, as the case may
be. However, the manner in which such allocation must be done for United States
Federal income tax purposes is not clear. The tax consequences of the receipt of
New Convertible Debentures in the Exchange Offer or shares of Common Stock or
Series E Preferred Stock allocable to unpaid interest on the Old Convertible
Debentures or New Convertible Debentures, as the case may be, differ from the
tax consequences of the receipt of New Convertible Debentures in the Exchange
Offer or shares of Common Stock or Series E Preferred Stock allocable to the
principal amount of the New Convertible Debentures.
Holders of Old Convertible Debentures upon receipt of New Convertible
Debentures pursuant to the Exchange Offer will recognize ordinary interest
income to the extent that any New Convertible Debentures received pursuant to
the Exchange Offer are allocable to interest that has not previously been
included in the holder's taxable income. Moreover, a holder of New Convertible
Debentures upon receipt of Common Stock or Series E Preferred Stock received
pursuant to the Automatic Conversion will recognize ordinary interest income to
the extent that any Common Stock or Series E Preferred Stock received pursuant
to the Automatic Conversion is allocable to interest which has not already been
included in the holder's taxable income. In the event amounts allocable to
interest are less than amounts previously included in the holder's taxable
income, the difference should result in an ordinary loss. Any New Convertible
Debentures or shares of Common Stock or Series E Preferred Stock not allocable
to interest will be allocated to the principal amount of the Old Convertible
Debentures or New Convertible Debentures, as the case may be, and will be
treated as discussed below. Alliance intends to take the position that none of
the principal of the New Convertible Debentures issued in the Exchange Offer is
allocable to accrued and unpaid interest on the Old Convertible Debentures, that
payment with respect to the Old Convertible Debentures on the first Interest
Payment Date following the issuance of the New Convertible Debentures represents
a payment of accrued interest on the Old Convertible Debentures and that the
Common Stock or Series E Preferred Stock issued
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in the Automatic Conversion is allocable first to principal and is allocable to
interest only to the extent that the fair market value of the shares of Common
Stock or Series E Preferred Stock issued in exchange for New Convertible
Debentures exceeds the principal amount of the New Convertible Debentures. The
Internal Revenue Service (the "IRS") may take a contrary position. Holders of
New Convertible Debentures should consult their own tax advisors as to the
amount of the Common Stock or Series E Preferred Stock received that will be
allocated to accrued and unpaid interest.
The discussion set forth below pertains only to New Convertible Debentures
received in exchange for the stated principal amount of the Old Convertible
Debentures or the Common Stock or Series E Preferred Stock received in exchange
for the stated principal amount of the New Convertible Debentures and does not
address consideration properly allocable to accrued and unpaid interest.
THE TRANSACTION
The exchange of Old Convertible Debentures for New Convertible Debentures
pursuant to the Exchange Offer and the exchange of New Convertible Debentures
for Common Stock or Series E Preferred Stock pursuant to the Automatic
Conversion each will be a tax-free "recapitalization" within the meaning of
Section 368(a)(1)(E) of the Code. However, holders of New Convertible Debentures
that receive cash in lieu of fractional shares of Common Stock or Series E
Preferred Stock will be treated as having received such fractional shares
pursuant to the Automatic Conversion and then as having exchanged such
fractional shares for cash in a redemption by Alliance. Accordingly, a holder
exchanging Old Convertible Debentures for New Convertible Debentures pursuant to
the Exchange Offer and New Convertible Debentures for Common Stock or Series E
Preferred Stock pursuant to the Automatic Conversion will not recognize gain or
loss in respect of such exchange for United States Federal income tax purposes,
except that gain will be recognized upon the Automatic Conversion to the extent
cash received in lieu of fractional shares exceeds the adjusted tax basis
allocated to such fractional shares. A holder's adjusted tax basis in the New
Convertible Debentures received will be equal to the holder's adjusted tax basis
in the Old Convertible Debentures exchanged therefor, increased by any gain
recognized. A holder's adjusted tax basis in the Common Stock or Series E
Preferred Stock received will be equal to the holder's adjusted tax basis in the
New Convertible Debentures exchanged therefor (other than the portion of the
adjusted tax basis in the New Convertible Debentures allocated to fractional
shares). A holder's holding period in the New Convertible Debentures received
will include the holder's holding period in the Old Convertible Debentures
exchanged therefor. A holder's holding period in the Common Stock or Series E
Preferred Stock received will include the holder's holding period in the New
Convertible Debentures exchanged therefor.
MARKET DISCOUNT
An Old Convertible Debenture has "market discount" in the hands of a holder
if the principal amount of the Old Convertible Debenture when acquired exceeded
the basis of the Old Convertible Debenture by an amount equal to or greater than
0.25% of the principal amount of the Old Convertible Debenture multiplied by the
number of complete years after the acquisition date to the maturity date of the
Old Convertible Debenture. Generally, gain on the disposition of any bond having
market discount (a "Market Discount Bond") must be recognized and is treated as
ordinary income to the extent it does not exceed the accrued market discount on
that bond. Market discount generally accrues under a ratable method determined
by the product of total market discount and the ratio of days held to the total
days after the date of acquisition up to (and including) the date of maturity of
the Old Convertible Debentures. In lieu of the ratable method of accrual, a
holder of Old Convertible Debentures may elect to compute accrued market
discount on the basis of a constant interest rate, I.E., taking into account the
compounding of interest.
It is anticipated that Treasury Regulations will be issued to provide
guidance with respect to the treatment of accrued market discount on bonds
transferred in connection with certain tax-free reorganizations. Although such
regulations have not yet been issued, the legislative history of Section 1276 of
the Code indicates that a holder who acquires stock or new debt obligations in
exchange for Market Discount Bonds pursuant to a tax-free recapitalization or
conversion of a convertible debt obligation should not be required to recognize
accrued market discount with respect to the Market Discount Bonds as a result of
the recapitalization or conversion. Instead, the holder should treat accrued
market discount on the Market
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<PAGE>
Discount Bond as accrued market discount on the new obligation and as ordinary
income to the extent of gain recognized on the subsequent disposition of the
stock or new debt obligation received in exchange for the Market Discount Bond.
No such regulations have been issued, however, and it is impossible to predict
exactly what any such regulations would provide or whether they would apply to
the Exchange Offer or Automatic Conversion.
NEW CONVERTIBLE DEBENTURES
Assuming that neither the Old Convertible Debentures nor the New Convertible
Debentures will be "traded on an established market" (within the meaning of
Treasury Regulation section 1.1273-2(f)) within the sixty day period ending
thirty days after consummation of the Exchange Offer, the New Convertible
Debentures will not be issued with original issue discount ("OID") for United
States Federal income tax purposes. If, however, either the Old Convertible
Debentures or the New Convertible Debentures are so traded during that period,
the New Convertible Debentures may be issued with OID, the result of which may
be to require the holder of the New Convertible Debentures to recognize income
in advance of the receipt of cash attributable to that income. Stated interest
on the New Convertible Debenture will be taxable as ordinary income when
received or accrued by the holder in accordance with his method of accounting.
Upon the sale, exchange or redemption of a New Convertible Debenture, the
holder will recognize gain or loss equal to the difference between the amount
realized on such sale, exchange or redemption and his adjusted tax basis in the
New Convertible Debenture. Subject to the application of the market discount
rules discussed above, such gain or loss will be long-term capital gain or loss
if the New Convertible Debenture was held for more than one year.
Conversion of a New Convertible Debenture (other than with respect to any
accrued but unpaid interest) into Common Stock pursuant to its terms is not
taxable. The holder's basis and holding period for the Common Stock will include
his basis and holding period in the New Convertible Debenture.
COMMON STOCK AND SERIES E PREFERRED STOCK
Under Section 301(c) of the Code, distributions made with respect to shares
of Common Stock or Series E Preferred Stock generally will be treated as
ordinary income to the extent of Alliance's current and/ or accumulated earnings
and profits for the taxable year of the distribution. Amounts distributed in
excess of such earnings and profits are treated as a tax-free return of capital
to the extent of the holder's adjusted tax basis in his shares of Common Stock
or Series E Preferred Stock, with any amount distributed in excess of such
adjusted tax basis being treated as an amount received on a sale or exchange of
the stock. A 70% dividends received deduction (80% for corporate holders owning
20% or more in voting power and fair market value of Alliance's stock) may be
available for certain corporate holders, subject to numerous conditions and
exceptions.
The precise treatment of distributions of Series E Preferred Stock as a
dividend on such stock is subject to uncertainty. It is possible that the
distribution of Series E Preferred Stock would not be subject to tax at the time
of distribution but, in such case, a subsequent disposition of such stock would
be subject to the special rules of section 306 of the Code which could result in
dividend treatment at the time of disposition. Alternatively, the distribution
of such stock could be subject to tax as a dividend at the time of distribution
in accordance with the rules set forth above. The amount of the distribution
would be equal to the fair market value of the Series E Preferred Stock at such
time. Holders of New Convertible Debentures are urged to consult their tax
advisors regarding the choice of receiving Common Stock or Series E Preferred
Stock upon Automatic Conversion of their New Convertible Debentures.
Generally, gain or loss is recognized on a sale or other disposition of
Common Stock or Series E Preferred Stock to the extent of the difference between
the amount of cash (and the fair market value of other property) received in the
disposition and the holder's adjusted tax basis in his Common Stock or Series E
Preferred Stock. Subject to the market discount rules discussed above, such gain
or loss will be long-term capital gain or loss if the Common Stock or Series E
Preferred Stock has been held for more than one year (which holding period
includes the period during which the holder of the Common Stock or Series E
Preferred Stock held the Old Convertible Debentures and New Convertible
Debentures). Currently, net
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<PAGE>
capital gains and ordinary income of corporations are taxable at the same
maximum rate (35%), whereas net long-term capital gains of individuals are
taxable at a maximum rate (28%) that is lower than the maximum rate applicable
to ordinary income (39.6%). In the case of both individuals and corporations,
capital losses generally may be used to offset only capital gains, except to the
extent of $3,000 per annum in the case of individuals.
If Alliance redeems the holder's shares of Series E Preferred Stock or
Common Stock for cash, the following would be applicable. Under the rules of
section 302 of the Code, a redemption of shares of Series E Preferred Stock by
Alliance for cash will be treated as a distribution taxable as a dividend to
redeeming stockholders to the extent of Alliance's current or accumulated
earnings and profits unless the redemption (i) results in a "complete
termination" of the stockholder's interest in Alliance (within the meaning of
section 302(b)(3) of the Code), (ii) is "substantially disproportionate" (within
the meaning of section 302(b)(2) of the Code) with respect to the holder or
(iii) is "not essentially equivalent to a dividend" (within the meaning of
section 302(b)(1) of the Code). In determining whether any of the Code section
302(b) tests have been met, shares of Common Stock and of any other class of
stock of Alliance will be taken into account along with shares of Series E
Preferred Stock. Moreover, shares considered to be owned by the holder by reason
of the constructive ownership rules set forth in section 318 of the Code, as
well as shares actually owned, will be taken into account. If any of the
foregoing tests is met, then, except with respect to declared and unpaid
dividends, if any, the redemption of shares of Series E Preferred Stock for cash
will result in taxable gain or loss equal to the difference between the amount
of cash received and the holder's adjusted tax basis in the redeemed shares. Any
such gain or loss will be capital gain or loss and will be long-term capital
gain or loss if the shareholder's holding period exceeds one year. Based on a
published IRS ruling, the redemption of a shareholder's Series E Preferred Stock
for cash will be treated as "not essentially equivalent to a dividend" if,
taking into account the constructive ownership rules, (a) the shareholder's
relative stock interest in Alliance is minimal, (b) the shareholder exercises no
control over Alliance's affairs and (c) there is a reduction in the holder's
proportionate interest in Alliance.
No gain or loss generally will be recognized upon conversion of shares of
Series E Preferred Stock into shares of Common Stock, except with respect to any
cash paid in lieu of fractional shares of Common Stock. However, under certain
circumstances, a holder of Series E Preferred Stock may recognize gain or
dividend income to the extent there are dividends in arrears on such stock at
the time of conversion into Common Stock. The tax basis of the Common Stock
received upon conversion of shares of Series E Preferred Stock generally will be
equal to the tax basis of the shares of Series E Preferred Stock so converted
and the holding period of the Common Stock generally will include the holding
period of the shares of Series E Preferred Stock converted. However, the tax
basis of any Common Stock received on conversion and treated as a dividend will
be equal to its fair market value on the date of the distribution and the
holding period of such stock will commence on the day after its receipt.
PROPOSED LEGISLATION
President Clinton's Fiscal Year 1997 Budget Proposal, released March 19,
1996 (the "Administration's Proposal"), contains a provision reducing the
dividends received deduction for corporations (other than those that own at
least 20% (by vote and value) of the paying corporation) to 50% of the dividends
received, effective for dividends paid after the 30th day after the date of
enactment of the provision. The Administration's Proposal also contains a
provision that would require the dividends received deduction holding period
requirement to be met with respect to each dividend payment, effective for
dividends paid after the 30th day after the date of enactment of the provision.
Certain other pending legislative proposals would treat as a sale or exchange
the entering into of one or more transactions that tend to "hedge" the economic
risks of owning stock or debt. Holders of Old Convertible Debentures are urged
to consult their tax advisors about these proposals. No assurance can be given
as to whether or when legislation containing any or all of the above-mentioned
or similar provisions will be enacted, and if enacted, when such provisions will
be effective.
BACKUP WITHHOLDING
A holder of New Convertible Debentures, Common Stock or Series E Preferred
Stock may be subject to backup withholding at the rate of 31% with respect to
interest paid on the New Convertible Debentures and
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<PAGE>
dividends paid on the Common Stock or Series E Preferred Stock, unless the
holder (i) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (ii) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the applicable requirements of the
backup withholding rules. Holders receiving New Convertible Debentures in
exchange for Old Convertible Debentures or Common Stock or Series E Preferred
Stock upon the Automatic Conversion should consult their tax advisors as to
their qualification for exemption from backup withholding and the procedure for
obtaining such an exemption. Any amount paid as backup withholding will be
creditable against the holder's United States Federal income tax liability.
HOLDERS OF OLD CONVERTIBLE DEBENTURES WHO DO NOT PARTICIPATE IN THE EXCHANGE
OFFER
Holders of Old Convertible Debentures who elect not to participate in the
Exchange Offer and who consequently do not exchange their Old Convertible
Debentures for New Convertible Debentures will not recognize gain or loss as a
consequence of the Exchange Offer.
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THE MERGER AND RELATED FINANCINGS
On October 18, 1995, Alliance entered into the Merger Agreement with BGII, a
Delaware corporation, and BGII Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of Alliance (the "Merger Subsidiary"). Pursuant to the
Merger Agreement and subject to the terms and conditions set forth therein, the
Merger Subsidiary would merge into BGII which will become a wholly-owned
subsidiary of Alliance. The Merger consideration to BGII stockholders will be
approximately $77.2 million in cash, $35.7 million in 15% Preferred Stock and
$2.9 million in Common Stock, assuming that the effective time of the Merger
occurs on or about June 18, 1996 and 10,799,501 shares of BGII common stock are
outstanding, less 1,000,000 shares owned by Alliance which will be canceled upon
consummation of the Merger. Alliance will also retire approximately $53.3
million of BGII's outstanding debt (including prepayment premium, original issue
discount and accrued and unpaid interest through the effective time of the
Merger) in connection with the Merger.
At meetings held on April 2, 1996, the shareholders of Alliance and BGII
approved the Merger Agreement and the Merger. The rules of the National
Association of Securities Dealers, Inc. (the "NASD") require each NASDAQ issuer,
such as Alliance, to obtain stockholder approval in connection with the
acquisition of the stock or assets of another company where the present or
potential issuance of common stock, or securities convertible into or
exercisable for common stock, other than a public offering for cash, 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. In accordance with the NASD's rules, Allliance intends to
seek shareholder approval by written consent of (i) the issuance of the New
Convertible Debentures pursuant to the Exchange Offer and (ii) the issuance of
securities issuable directly or indirectly on conversion thereof, and approval
of the Issuance Proposal is a condition to Alliance's obligation to consummate
the Exchange Offer. Certain executive officers and directors of Alliance have
advised Alliance that they intend to vote the shares of Common Stock,
representing a majority of the outstanding shares of Common Stock, as to which
they have voting power, for the approval of the Issuance Proposal. This would
insure adoption of the Issuance Proposal. See "The Exchange Offer -- Conditions
to the Exchange Offer" and "Security Ownership of Certain Beneficial Holders and
Management".
At May 7, 1996, an aggregate of 1,052,500 shares of BGII common stock were
subject to options granted to employees and directors under various stock option
plans or as replacement options with respect thereto (of which options with
respect to 552,500 shares are expected to remain outstanding after the Merger)
and an aggregate of 1,498,000 shares of BGII common stock were subject to
warrants issued by BGII in connection with certain financing transactions.
The Merger and related transactions will be financed through the issuance of
an aggregate of $5.0 million of Common Stock in the Private Placement, the
issuance of an aggregate of $15.0 million of 15% Preferred Stock in the 15%
Preferred Stock Offering and the issuance of $140.0 million aggregate principal
amount of the Senior Notes in the Note Offering, all in conjunction with the
Exchange Offer and the Automatic Conversion.
A financial institution has agreed to purchase privately in the Private
Placement, simultaneously with the consummation of the Merger, $5.0 million of
the Common Stock of Alliance at a price equal to the lower of $4.56 per share
(the average trading price of the Common Stock for the five trading day period
immediately preceding the agreement) and the average of the last sales price of
the Common Stock for the five trading days immediately preceding the Merger.
This investment would be in the form of Common Stock to the extent of 4.9% of
the total Common Stock outstanding at the time, taking into account Common Stock
to be issued in the Merger and the 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 $5.0
million will be issued in the form of Common Stock.
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<PAGE>
Alliance currently expects to issue in the 15% Preferred Stock Offering
approximately $15.0 million aggregate liquidation value of 15% Preferred Stock.
The 15% Preferred Stock will accrue dividends at an annual rate of 15% ($3.75
per share), payable quarterly in cash or, at Alliance's option through the first
dividend payment date following the seventh anniversary of issuance, in
additional shares of 15% Preferred Stock, will have a $100 per share liquidation
preference and will be senior in right of payment to the Series E Preferred
Stock. See "Description of Capital Stock -- Special Stock -- 15% Non-Voting
Pay-in-Kind Special Stock, Series B".
Alliance currently intends to issue in the Note Offering approximately
$140.0 million aggregate principal amount of Senior Notes with an expected
maturity of seven years. The Senior Notes are expected to be guaranteed by
subsidiaries of the Company and secured by their stock and are likely to include
restrictive covenants prohibiting or limiting, among other things, the sale of
assets, the making of acquisitions and other investments, capital expenditures,
the incurrence of additional debt and liens and the payment of dividends and
distributions. Non-compliance could result in the acceleration of such
indebtedness. In addition, it is anticipated that the Senior Notes will contain
a requirement that Alliance make periodic offers to repurchase the Senior Notes
at 101% of the principal amount thereof together with accrued and unpaid
interest to the date of repurchase upon a Change of Control.
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 approval. The Merger Agreement terminates on June 18, 1996. If the
Merger is not consummated by that date, Alliance may seek an extension, but has
made no determination in that regard.
Consummation of the Exchange Offer is subject to satisfaction of certain
conditions, including, among others, the requirements that (i) the holders of a
majority of the outstanding shares of Common Stock shall have approved the
issuance of New Convertible Debentures and of the securities issuable upon
conversion thereof (the holders of a majority of outstanding shares of Common
Stock have indicated their intention to approved such issuance) and (ii) the
Nevada Gaming Commission and the Mississippi Gaming Comission shall each have
approved the issuance of New Convertible Debentures and of the Securities
issuable upon conversion thereof. See "Gaming Regulation and Licensing". In the
event that the Merger is consummated, all of the New Convertible Debentures will
be automatically converted into Common Stock or, if so elected by a tendering
holder of Old Convertible Debentures, Series E Preferred Stock. It is assumed
for all purposes herein that (i) $50.0 million principal amount of New
Convertible Debentures will be issued in the Exchange Offer, (ii) the Automatic
Conversion will occur, and (iii) no holders of New Convertible Debentures will
elect to receive Series E Preferred Stock upon conversion thereof.
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<PAGE>
SOURCES AND USES OF FUNDS
The following table sets forth the anticipated sources and uses of funds to
be used to consummate the Merger and the other elements of the Transaction based
on the Company's cash and debt balances as of March 31, 1996. The actual
balances and number of shares outstanding may vary based on the date of
consummation of the Transaction and the securities issued in connection with the
Merger and the financing thereof.
(IN MILLIONS)
<TABLE>
<S> <C> <C> <C>
ANTICIPATED SOURCES OF FUNDS ANTICIPATED USES OF FUNDS
CASH SOURCES: CASH USES:
</TABLE>
<TABLE>
<S> <C> <C> <C>
Senior Notes........................ $ 140.0 Cash to BGII Stockholders (a)....... $ 77.2
15% Preferred Stock................. 15.0 Retire BGII Debt (b)................ 53.3
Common Stock (Private Placement).... 5.0 Employee Contract Termination Costs
---------
and Performance Unit Awards (c)..... 7.6
Fees and Expenses (d)............... 21.9
---------
Total Cash Sources.............. 160.0 Total Cash Uses..................... 160.0
--------- ---------
NON-CASH SOURCES: NON-CASH USES:
New Convertible Debentures issued
and automatically converted into
Common Stock....................... 50.0 Retire Old Convertible Debentures... 50.0
15% Preferred Stock to BGII 15% Preferred Stock to BGII
Stockholders (e)................... 35.7 Stockholders (e).................... 35.7
Common Stock to BGII Stockholders Common Stock to BGII
(f)................................ 2.9 Stockholders (f).................... 2.9
Common Stock (c).................... 3.7 Common Stock (c).................... 3.7
--------- ---------
Total Non-Cash Sources............ 92.3 Total Non-Cash Uses................. 92.3
--------- ---------
Total Sources................... $ 252.3 Total Uses.......................... $ 252.3
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(a) Represents the cash consideration to be paid to BGII stockholders in the
Merger consisting of $7.83 per share of BGII common stock plus interest
accruing at a rate of 5.5% per annum from May 3, 1996 to the effective time
of the Merger (but not later than June 18, 1996, unless extended),
calculated in accordance with the terms of the Merger Agreement.
(b) Represents retirement of the following debt of BGII outstanding at March 31,
1996 together with accrued and unpaid interest thereon:
(i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a
prepayment price of 101% plus original issue discount of $0.3 million;
(ii) $9.3 million under a bank revolving line of credit of Bally Gaming,
Inc., a wholly-owned subsidiary of BGII;
(iii) other notes payable of BGII, aggregating $1.6 million; and
(iv) accrued and unpaid interest on the foregoing debt instruments, through
the effective time of the Merger, totaling approximately $2.0 million.
(c) Includes $5.0 million payable in cash to Richard Gillman and $1.3 million
payable to Neil Jenkins consisting of $0.9 million in cash and $0.4 million
in Common Stock, all pursuant to agreements with Alliance in connection with
the termination of their respective employment agreements and performance
unit awards. Additionally, Hans Kloss, who will remain with the Company,
will receive a total of $4.3 million consisting of $1.5 million in cash and
$2.8 million in Common Stock, and Robert Conover, who will remain with the
Company, will receive a total of $0.7 million consisting of $0.2 million in
cash and $0.5 million in Common Stock, in connection with their employment
agreements and performance unit awards. The Common Stock portion of each of
such payment will be valued at the Alliance Average Trading Price but in no
event more than $6.00 nor less than $4.25 per share.
(d) Total estimated Alliance and BGII Transaction-related fees and expenses are
$37.0 million, of which $15.1 million has been paid through March 31, 1996.
Excludes the value of Common Stock to be issued to a Dealer Manager as a
financial advisory fee. See "The Exchange Offer -- Dealer Managers".
(e) Represents the 15% Preferred Stock consideration to be paid to BGII
stockholders in the Merger consisting of $3.57 valued at liquidation value
of 15% Preferred Stock per share of BGII common stock, plus dividends
accruing at a rate of 15% per annum from May 3, 1996.
(f) Represents the Common Stock consideration to be paid to BGII stockholders in
the Merger consisting of $0.30 per share of BGII common stock valued at the
Alliance Average Trading Price.
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MARKET PRICE DATA AND DIVIDEND POLICY
The Old Convertible Debentures are not traded in an established market. The
Common Stock is quoted on NASDAQ under the symbol "ALLY". The following table
sets forth, for the fiscal quarters indicated, the high and low sales price per
share of the Common Stock as reported on NASDAQ.
<TABLE>
<CAPTION>
FISCAL PERIOD HIGH LOW
<S> <C> <C>
1994
First Quarter.................................................................. $ 93/8 $ 67/8
Second Quarter................................................................. 111/2 77/8
Third Quarter.................................................................. 101/4 7
Fourth Quarter................................................................. 71/4 51/4
1995
First Quarter.................................................................. $ 81/2 $ 51/8
Second Quarter................................................................. 77/8 51/4
Third Quarter.................................................................. 8 51/2
Fourth Quarter................................................................. 61/8 43/8
1996
First Quarter.................................................................. $ 6 $ 45/8
Second Quarter................................................................. 55/8 23/4
Third Quarter.................................................................. 53/8 31/4
Fourth Quarter (through May 7, 1996)........................................... 47/8 31/2
</TABLE>
On October 18, 1995 (the day the Merger Agreement was entered into), January
23, 1996 (the day the Merger Agreement was amended and restated), April 17 (the
day the Extension Agreement was signed) and May 7, 1996, the closing price per
share of the Common Stock as reported on NASDAQ was $4 1/2, $4 3/16, $4 and $4,
respectively.
The market price of shares of the Common Stock is subject to fluctuation. As
a result, prospective purchasers are urged to obtain current market quotations.
No cash dividends were declared or paid by Alliance during the fiscal years
ended June 30, 1994 or June 30, 1995 or thereafter. The Alliance Board does not
currently intend to pay cash dividends on the Common Stock. Future dividends on
the Common Stock will be determined by the Alliance Board of Directors in light
of the Company's alternative opportunities for investment and the earnings and
financial condition of the Company, among other factors. The 15% Preferred Stock
will accrue dividends at the rate of 15% per year, which may be paid for a
period of time in the form of additional shares of 15% Preferred Stock. The
Series E Preferred Stock will accrue dividends at the rate of 10% per year,
which may be paid for ten years in the form of additional shares of Series E
Preferred Stock. See "Description of Capital Stock -- Special Stock".
On May 7 1996, there were approximately 1,612 holders of record of the
Common Stock.
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DILUTION
The conversion price per share of Common Stock to be issued to the holders
of the New Convertible Debentures pursuant to the Automatic Conversion exceeds
the negative net tangible book value per share. Therefore, holders acquiring
shares of Common Stock pursuant to the Automatic Conversion will realize an
immediate dilution in the value of their shares. Net tangible book value per
share is determined by subtracting total liabilities from total tangible assets
and dividing the remainder by the applicable number of shares of Common Stock.
Dilution assumes a conversion price of $5.56 per share in the Automatic
Conversion. The following table illustrates the dilution to holders acquiring
shares pursuant to the Automatic Conversion:
<TABLE>
<S> <C> <C>
Conversion price per share.......................................... $ 5.56
Negative net tangible book value per share prior to the Automatic
Conversion and the Transaction as of March 31, 1996(a)............. $ (1.46)
---------
---------
Increase in net tangible book value per share attributable solely to
the Automatic Conversion excluding shares issuable pursuant to
stock options and warrants (b)..................................... $ 2.84
---------
---------
Pro forma net tangible book value per share after the Automatic
Conversion and the Transaction excluding shares issuable pursuant
to stock options and warrants...................................... (1.20)
---------
Dilution in pro forma net tangible book value per share to
converting holders of Old Convertible Debentures (c)............... $ (6.76)
---------
---------
</TABLE>
- ------------------------
(a) Negative net tangible book value per share is determined by dividing
negative net tangible book value of the Company (tangible assets less
liabilities and minority interest) by 12,987,483 shares of Common Stock
outstanding at March 31, 1996.
(b) Based on the conversion price of $5.56 per share pursuant to the Automatic
Conversion.
(c) Dilution is determined by subtracting pro forma net negative tangible book
value (tangible assets less liabilities, minority interest and liquidation
preference of Preferred Stock) per share after the Transaction from the
conversion price of $5.56 pursuant to the Automatic Conversion.
The dilution per share reflects the historical cost of Alliance's assets at
March 31, 1996. Alliance's management believes such dilution would be
substantially reduced if it were calculated based upon the fair market value of
Alliance's assets.
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CAPITALIZATION
The following table sets forth the consolidated capitalization as of March
31, 1996 of (i) Alliance on a historical basis, (ii) BGII on a historical basis,
and (iii) the Company on a pro forma basis as adjusted to reflect the
Transaction (including the use of the estimated proceeds from the Offerings and
the Private Placement) and the Automatic Conversion. See "The Merger and Related
Financings" and "Unaudited Pro Forma Condensed Combined Financial Information".
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------------------------
THE COMPANY
ALLIANCE BGII PRO FORMA
ACTUAL ACTUAL AS ADJUSTED
---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-Term Debt, excluding current maturities:
Senior Notes (1)....................................................... $ -- $ -- $ 140,000
Old Convertible Debentures (2)......................................... 85,000 -- 35,000
Hospitality Franchise Systems.......................................... 6,902 -- 6,902
Due to Stockholder, Net of Unamortized Discount of $0.629 at March 31,
1996.................................................................. 1,442 -- 1,442
10 3/8% Senior Secured Notes due July 1998............................. -- 39,688 --
Other Notes Payable.................................................... 1,704 5,605 5,582
---------- ---------- --------------
Total Long-Term Debt, excluding current maturities (3)................... 95,048 45,293 188,926
15% Preferred Stock (1).................................................. -- -- 50,662
Total Stockholders' Equity (Deficiency) (1)(2)(4)(5)(6).................. (5,595) 86,000 42,350
---------- ---------- --------------
Total Capitalization..................................................... $ 89,453 $ 131,293 $ 281,938
---------- ---------- --------------
---------- ---------- --------------
</TABLE>
- ------------------------
(1) Issuance costs relative to the Note Offering and the 15% Preferred Stock
Offering are assumed to be capitalized and amortized over the relative terms
of these instruments. Issuance costs relative to the Private Placement have
been offset against proceeds.
(2) Assumes $50.0 million of New Convertible Debentures are issued in exchange
for a like amount of Old Convertible Debentures and are converted into
Common Stock at a conversion price of $5.56 per share pursuant to the
Exchange Offer and the Automatic Conversion.
(3) Actual amounts exclude borrowings under lines of credit of $9.3 million at
Gaming (which are being repaid in connection with the Merger) and $14.8
million at Wulff and current maturities of long-term debt of $4.7 million.
Cash, cash equivalents and securities available for sale at March 31, 1996
on a pro forma basis were $19.8 million. The Wulff lines of credit have
additional availability of $7.1 million and are expected to remain in place
upon consummation of the Transaction. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources of the Company (Pro Forma)".
(4) Excludes (i) 2,162,834 shares subject to options issued and outstanding
under the United Gaming, Inc. 1991 Long-Term Incentive Plan, as amended (the
"Alliance 1991 Stock Option Plan") and the Gaming and Technology, Inc. 1984
Employee Stock Option Plan (the "Alliance 1984 Stock Option Plan"), of which
options covering 1,088,644 shares were exercisable as of March 31, 1996;
(ii) 2,000,000 shares issuable upon exercise of warrants issued to Mr.
Wilms, all of which where exercisable at March 31, 1996; (iii) warrants
issued at the time of the funding of the Old Convertible Debentures, which
are exercisable only if the price of the Common Stock reaches $11, $13, and
$15, consisting of: 2,750,000 shares issuable upon exercise of warrants
issued to Kirkland, 1,250,000 shares issuable upon exercise of warrants
issued to GSA and 30,000 shares issuable upon exercise of warrants issued to
Friend;
71
<PAGE>
(iv) 500,000 shares issuable upon exercise to members of management, which
are exercisable only if the price of the Common Stock reaches $11, $13 and
$15; and (v) warrants to acquire 1,000,000 shares, all of which are held by
former underwriters or lenders and are exercisable as of March 31, 1996.
Additionally excludes the shares underlying the $85.0 million of Old
Convertible Debentures outstanding at March 31, 1995, convertible into
8,500,000 shares of Common Stock. Assuming $50.0 million of Old Convertible
Debentures exchange into New Convertible Debentures and then are converted
into 9,000,000 shares of Common Stock, there will remain $35.0 million of
Old Convertible Debentures outstanding, which would be convertible into
3,500,000 shares of Common Stock. Additionally, upon consummation of the
Merger the following warrants for shares of Common Stock will be issued: (a)
warrants to acquire 2,500,000 shares issuable to GSA, exercisable only if
the price of the Common Stock reaches $11, $13 and $15; (b) warrants to
acquire 250,000 shares of Common Stock issuable to a financial advisor,
exercisable only if the Common Stock price reaches $13; and (c) 450,000
shares to be issued to a Dealer Manager. Also, the Company intends to
satisfy a requirement to pay $1,000,000 to Rainbow Casino Corporation
("RCC"), the limited partner in Rainbow Casino Vicksburg Partnership L.P.
("RCVP"), by issuing $1,000,000 worth of Common Stock by September 30, 1996,
which, based on the May 7, 1996 stock price, equates to 250,000 shares. If
the Merger were not to occur, the 9,000,000 shares noted above would not be
issued, and there would be 6,000,000 shares of Common Stock underlying the
$50.0 million of New Convertible Debentures outstanding. See "Security
Ownership of Certain Beneficial Holders and Management -- Outstanding
Options and Convertible Securities", "The Exchange Offer -- Dealer Managers"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
(5) Excludes (i) approximately 15,000 shares of Common Stock issuable to the
non-employee directors of BGII upon exercise of options granted under BGII's
1991 Non-employee Directors' Option Plan (the "BGII 1991 Directors' Plan")
and BGII's 1994 Stock Option Plan for Non-Employee Directors (the "BGII 1994
Plan") (assuming a price of $4.00 per share of Common Stock) and (ii)
552,500 shares of Common Stock issuable immediately prior to the Effective
Time upon the exercise of options held by employees other than Messrs.
Gillman, Jenkins and Kloss granted under the BGII 1991 Incentive Plan, based
on the assumption that all such employees elect to have their BGII options
exercisable for the number of shares of Common Stock equal to the number of
shares of BGII common stock subject thereto. See "The Merger and Related
Financings" and "Security Ownership of Certain Beneficial Holders and
Management -- Outstanding Options and Convertible Securities".
(6) Includes approximately $3.7 million payable in shares of Common Stock,
subject to a collar on the Common Stock price (932,533 shares, assuming a
share price at the low end of the collar of $4.25) to Messrs. Jenkins, Kloss
and Conover in connection with employment contract termination payments and
performance unit awards.
72
<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 "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.
73
<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
74
<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
75
<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
76
<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 ($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
"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,
77
<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.
78
<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.
79
<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.
80
<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.
81
<PAGE>
SUPPLEMENTAL ANALYSIS OF
ADJUSTED OPERATING CASH FLOW
The Company believes that it is important to present supplementally an
analysis of its Adjusted Operating Cash Flow, given the pro forma leverage ratio
of the Company. Reference should be made to the Unaudited Pro Forma Condensed
Combined Financial Information presented elsewhere herein. The information
presented in the following schedule is being provided solely for the purposes of
assisting a holder of Old Convertible Debentures in determining whether to
participate in the Exchange Offer.
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
82
<PAGE>
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.
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 detailed in this Prospectus, included under "Risk Factors".
BGII ONE-TIME COSTS. Certain charges incurred by BGII consist of costs
relating to a regulatory investigation and legal proceedings in Louisiana
totalling $1.0 million, legal costs related to a former executive totaling $0.5
million, and legal costs related to the "Bally" trade name litigation that were
directly caused by the investigation totaling $0.2 million during the fiscal
year ended June 30, 1995. 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.
83
<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 in this
Prospectus, 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
Prospectus or to reflect the occurrence of unanticipated events. BGII's
independent accountants, Coopers & Lybrand L.L.P., have neither examined nor
compiled nor had any other involvement with the preparation of the Forecast and
accordingly do not express an opinion or any other form of assurance with
respect thereto, nor do they assume any responsibility for the Forecast.
Independent accountants for Alliance, KPMG Peat Marwick LLP, have not examined
the Forecast presented herein and, accordingly, do not express an opinion or any
other form of assurance with respect thereto, and no other independent expert
has examined the Forecast.
The Forecast is based upon a number of estimates and assumptions that while
presented with numerical specificity and considered reasonable by management of
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, as disclosed elsewhere in this Prospectus under "Risk Factors", the
business and operations of the Company are subject to substantial risks which
increase the uncertainty inherent in the Forecast. Many of the factors disclosed
under "Risk Factors" in this Prospectus could cause actual results to differ
materially from those expressed in the Forecast. The Forecast and actual results
will vary, and those variations may be material. 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.
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.
84
<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".
(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
See accompanying Summary of Significant Assumptions and Accounting Policies for
the Forecast
85
<PAGE>
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.
86
<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 Prospectus 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. Holders of Old Convertible Debentures are cautioned not to place undue
reliance on the Forecast.
The Forecast assumes that, among other things: (i) the proceeds of the
Offerings and the Private Placement are used as contemplated in "The Merger and
Related Financings -- Sources and Uses of Funds"; (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 Prospectus.
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
Prospectus. 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.
87
<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.
88
<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. See "Risk Factors -- Strict
Regulation by Gaming Authorities". 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.
89
<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.
90
<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
91
<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 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.
92
<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' 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 half of 1996
principally due to the expected impact of new regulations going into effect on
January 1, 1997,
93
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
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>
94
<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
95
<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)".
96
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE
The following table sets forth selected consolidated financial information
of Alliance as of and for the fiscal years ended June 30, 1991, 1992, 1993, 1994
and 1995, and as of and for the nine months ended March 31, 1995 and 1996. The
historical financial information of Alliance as of June 30, 1991, 1992 and 1993
and for the years ended June 30, 1991 and 1992 as set forth below has been
derived from the audited consolidated financial statements of Alliance not
included in this Prospectus. The results for the period ended March 31, 1996
will not necessarily be indicative of the results for the fiscal year ended June
30, 1996, and in the opinion of Alliance include all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the information set
forth herein. The table should also be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Unaudited Pro Forma Condensed Combined Financial Information", the audited
consolidated financial statements of Alliance and the unaudited interim
condensed consolidated financial statements of Alliance including the notes
thereto and other financial and operating information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED JUNE 30, ENDED MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES:
Gaming:
Routes................................. $ 77,150 $ 77,940 $ 96,282 $ 102,830 $ 106,827 $ 79,389 $ 81,111
Casinos and Taverns.................... 11,281 11,560 12,526 15,679 21,287 11,523 32,698
Food and Beverage Sales.................. 3,120 3,376 4,184 4,480 3,847 2,842 2,976
Net Equipment Sales (1).................. 214 379 99 65 27 22 11
--------- --------- --------- --------- --------- --------- ---------
91,765 93,255 113,091 123,054 131,988 93,776 116,796
COSTS AND EXPENSES:
Cost of Gaming:
Routes................................. 58,299 58,585 72,614 76,332 79,875 59,411 62,293
Casinos and Taverns.................... 8,528 8,459 8,667 11,871 11,436 6,743 14,726
Cost of Food and Beverage................ 2,249 2,367 2,876 3,084 2,795 2,038 1,992
Cost of Equipment Sales.................. 151 284 49 20 12 10 3
Selling, General and Administrative...... 8,059 8,950 12,667 13,555 14,633 9,279 14,308
Business Development Costs............... -- -- 900 1,192 7,843 5,647 14,233
Corporate Expenses....................... 7,567 5,290 6,191 7,882 9,735 6,258 4,606
Provision for Impaired Assets............ -- -- -- -- -- -- 3,179
Bad Debt Expense......................... 4,845 539 461 705 400 -- --
Write-off of Inventories, Intangibles and
Other Assets............................ 4,982 -- -- -- -- -- --
Loss on Abandoned Casinos................ 7,847 2,307 -- 3,713 -- -- --
Loss on Abandoned Taverns................ -- -- -- 2,638 -- -- --
Depreciation and Amortization............ 7,092 7,355 8,718 9,530 9,520 6,934 7,328
--------- --------- --------- --------- --------- --------- ---------
Total cost and expenses................ 109,619 94,136 113,143 130,522 136,249 96,320 122,668
--------- --------- --------- --------- --------- --------- ---------
Operating Loss............................. (17,854) (881) (52) (7,468) (4,261) (2,544) (5,872)
OTHER INCOME (EXPENSE):
Interest Income.......................... 1,750 1,324 998 2,084 2,798 2,235 1,206
Interest Expense......................... (4,663) (4,505) (5,046) (6,830) (8,133) (5,844) (6,341)
Minority Interest........................ -- -- -- -- (397) (252) (708)
Royalty.................................. -- -- -- -- (810) (27) (2,931)
Other Net................................ (1,007) (618) 450 (673) 317 33 398
--------- --------- --------- --------- --------- --------- ---------
Loss Before Income Taxes................... (21,774) (4,680) (3,650) (12,887) (10,486) (6,399) (14,248)
Income Tax (Expense) Benefit............... 5,958 -- -- (241) (265) (394) (581)
--------- --------- --------- --------- --------- --------- ---------
Net Loss............................... $ (15,816) $ (4,680) $ (3,650) $ (13,128) $ (10,751) $ (6,793) $ (14,829)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net Loss Per Common Share.................. $ (1.73) $ (0.51) $ (0.38) $ (1.28) $ (0.95) $ (0.61) $ (1.21)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted Average Common Shares
Outstanding............................... 9,151 9,248 9,696 10,251 11,300 11,192 12,245
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Deficit of Earnings to Fixed Charges (2)... $ (21,744) $ (4,680) $ (3,650) $ (12,887) $ (10,487) $ (6,399) $ (14,248)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro Forma Deficit of Earnings to Fixed
Charges................................... $ (1,164) $ (200) $ (9,821)
--------- --------- ---------
--------- --------- ---------
Pro Forma Deficit of Earnings to Fixed
Charges and 15% Preferred Stock
Dividends................................. $ (9,203) $ (6,116) $ (15,737)
--------- --------- ---------
--------- --------- ---------
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED JUNE 30, ENDED MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CASH FLOW INFORMATION:
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Cash Flows From:
Operating Activities................... $ 4,889 $ 12,311 $ 5,909 $ 9,062 $ 957 $ 167 $ (533)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Investing Activities................... $ (7,159) $ (6,887) $ (8,998) $ (27,299) $ (21,648) $ (9,791) $ 5,255
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Financing Activities................... $ 766 $ (959) $ 2,430 $ 45,742 $ (2,660) $ (1,509) $ (2,495)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro Forma Cash Flows From:
Operating Activities................... $ 7,225 $ 4,890 $ 20,564
--------- --------- ---------
--------- --------- ---------
Investing Activities................... $ (26,936) $ (15,356) $ (1,088)
--------- --------- ---------
--------- --------- ---------
Financing Activities................... $ (757) $ 1,528 $ (3,059)
--------- --------- ---------
--------- --------- ---------
<CAPTION>
AT JUNE 30, AT MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.................. $ 5,774 $ 10,239 $ 9,580 $ 37,085 $ 13,734 $ 25,952 $ 15,971
Securities Available for Sale.............. -- -- -- 12,489 23,680 13,240 9,591
Net Working Capital........................ 10,450 11,557 7,991 50,926 31,552 37,749 15,583
Total Assets............................... 79,024 75,594 73,768 119,416 126,348 128,103 111,288
Total Long-term Debt, including
Current Maturities........................ 44,450 43,282 44,798 90,726 101,397 102,718 99,089
Total Stockholders' Equity (Deficiency).... 27,008 23,660 22,665 15,099 9,985 12,699 (5,595)
Book Value per Share....................... 2.95 2.51 2.27 1.28(3) .77(3) 1.00(3) (.43)(3)
Pro Forma Book Value per Share............. 2.28 1.67
</TABLE>
- ------------------------------
(1) Includes sales to related parties of $86 (1991), $236 (1992), $2 (1993), $6
(1994), $0 (1995) and for the nine-month periods ended March 31, 1995 and
1996.
(2) No dividends were paid by Alliance during any period presented.
(3) Computed including Common Stock and Special Stock owned by KIC which was
converted into Common Stock in December 1995.
98
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII
The following table sets forth selected financial information of BGII
(consolidated for the periods 1992 through 1995 and combined for 1991), as of
and for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 and as of
and for the three months ended March 31, 1995 and 1996, of which certain periods
are included elsewhere in this Prospectus. See "Basis of Presentation and
Description of Business" in BGII's Notes to Consolidated Financial Statements.
The historical financial information of BGII as of December 31, 1991, 1992 and
1993 and for the years ended December 31, 1991 and 1992 as set forth below has
been derived from the audited financial statements of BGII not included in this
Prospectus. The unaudited results for the period ended March 31, 1996 will not
necessarily be indicative of the results for the year ending December 31, 1996
and in the opinion of BGII include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the information set forth
herein. The selected historical consolidated financial data for periods prior to
November 18, 1991 (the date BGII completed its initial public offering of common
stock), present, on a historical cost basis, the financial position, results of
operations and cash flows of the subsidiaries and divisions of BEC which
formerly conducted operations as Gaming, Systems and Wulff. This table should
also be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Unaudited Pro Forma Condensed
Combined Financial Information", the audited consolidated financial statements
of BGII including the notes thereto and the unaudited interim condensed
consolidated financial statements of BGII including the notes thereto and other
financial and operating information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- ----------------------
1991 1992 1993(1) 1994(1) 1995(1) 1995(1) 1996(1)
--------- --------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues................................. $ 153,648 $ 163,781 $ 168,707 $ 236,192 $ 249,312(2) $ 68,289 58,544
Cost of Sales............................ 102,357 99,906 121,710(3) 157,059 163,131(2) 43,500 37,757
Selling, General and Administrative
Expenses................................ 36,725 46,348 57,357(4) 59,989 65,289 16,998 16,526
Provision for Doubtful Receivables....... 2,176 3,597 8,176(5) 5,763 6,712(2) 1,154 991
Unusual Charges.......................... -- -- -- -- 5,816(6) -- 996(7)
Interest Expense, Primarily Charged by
BEC in 1991............................. 1,602 1,951 4,424 6,768 6,853 1,733 1,665
Provision for Income Taxes............... 5,784 6,725 4,242 2,820 4,904 2,042 1,122
--------- --------- --------- --------- --------- --------- -----------
Income (Loss) before Extraordinary
Gain.................................... 5,004 5,254 (27,202) 3,793 (3,393) 2,862 (513)
Extraordinary Gain on Early
Extinguishment of Debt.................. -- -- 3,759 -- -- -- --
--------- --------- --------- --------- --------- --------- -----------
Net Income (Loss)........................ $ 5,004 $ 5,254 $ (23,443) $ 3,793 $ (3,393) $ 2,862 $ (513)
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Income (Loss) Per Share before
Extraordinary Gain...................... $ 0.48 $ 0.50 $ (2.54) $ 0.35 $ (0.31) $ 0.27 $ (0.05)
Extraordinary Gain on Early
Extinguishment of Debt Per Share........ -- -- 0.35 -- -- -- --
--------- --------- --------- --------- --------- --------- -----------
Net Income (Loss) Per Share.............. $ 0.48 $ 0.50 $ (2.19) $ 0.35 $ (0.31) $ 0.27 $ (0.05)
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Pro Forma Net Income..................... $ 2,435(8)
---------
---------
Pro Forma Net Income Per Share........... $ 0.23(8)
---------
---------
Average Number of Common Shares
Outstanding............................. 10,450 10,573 10,685 10,727 10,776 10,751 10,805
Ratio of Earnings to Fixed Charges....... 6.51 6.19 1.93 1.21 3.69 1.35
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Deficit of Earnings to Fixed Charges..... $ (22,960)
---------
---------
CASH FLOW INFORMATION:
Historical Cash Flows From:
Operating Activities................... $ 24,960 $ (17,604) $ (29,548) $ 1,224 $ 3,795 $ (5,605) $ (1,757)
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Investing Activities................... $ (2,878) $ (5,175) $ (13,407) $ (6,391) $ (6,233) $ (2,108) $ (2,218)
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Financing Activities................... $ (13,134) $ 18,506 $ 38,980 $ 8,231 $ (1,961) $ 1,688 $ 590
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
----------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents................ $ 14,429 $ 9,800 $ 5,436 $ 9,204 $ 5,526 $ 3,959 $ 2,009
Working Capital.......................... 69,350 82,481 83,009 95,772 97,357 103,369 85,649
Property, Plant and Equipment, Net....... 19,650 18,695 24,042 24,358 23,244 26,412 23,615
Total Assets............................. 131,342 150,805 170,830 192,242 194,316 205,112 186,936
Long-term Debt, Including Current
Maturities.............................. 7,186 25,950 62,458 69,762 69,944 73,936 69,971
Stockholders' Equity..................... 98,605 101,277 74,879 85,883 88,410 97,314 86,000
</TABLE>
- ------------------------------
(1) Includes results from the acquisition of a distribution business by Wulff in
January 1993.
(2) Includes the impact of sales returns of $0.3 million and a provision for
doubtful receivables of $0.9 million recorded in the second quarter of 1995
by Gaming related to two riverboats at the River City Complex in New Orleans
which filed for bankruptcy.
(3) Includes $6.2 million in charges to increase inventory valuation reserves in
1993 principally related to inventory originally intended for sale in the
Louisiana video lottery terminal market.
(4) Includes $1.2 million in charges related to a management reorganization at
Gaming in 1993.
(5) Includes a provision for doubtful receivables totaling $5.1 million recorded
by Gaming in 1993 related to a former distributor who filed for bankruptcy
during the second quarter of 1993.
(6) Includes $4.0 million in merger transaction costs and related litigation
expenses, a provision of $0.8 million at Wulff to 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.
(7) Includes $1.0 million in Merger transaction costs.
(8) Includes pro forma income tax information for the year ended December 31,
1991 to reflect the provision for income taxes and net income as if Gaming
and Systems had filed separate income tax returns. The pro forma information
assumes that Gaming and Systems would have been unable to utilize operating
losses on a carry back basis.
100
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides an assessment of the liquidity and capital
resources of Alliance, the pro forma liquidity and capital resources of the
Company, and the results of operations of each of Alliance and BGII. The
discussion should be read in conjunction with the audited consolidated financial
statements of Alliance and BGII, and the unaudited interim condensed
consolidated financial statements of Alliance, in each case including the notes
thereto, which are included elsewhere in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES OF ALLIANCE
At 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. See "Business --
Casino Operations".
On March 29, 1995, Alliance consummated certain transactions whereby
Alliance acquired from RCC the controlling general partnership interest in RCVP
and increased its limited partnership interest. In exchange for commitments by
Alliance and National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National
Gaming Corporation, to provide additional financing (up to a maximum of
$2,000,000 each) to be used, among other things, for the completion of certain
elements of the project which survived the opening of the casino (for which RCC
was to have been responsible, but failed to satisfy) and for a $500,000 payment
paid to HFS as a waiver fee, a commitment by Alliance to fund any additional
capital necessary for the completion, upgrading or working capital of the
project, the following occurred: (i) a subsidiary of Alliance
101
<PAGE>
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 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
102
<PAGE>
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.
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
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Alliance's Non-Voting Junior Convertible Special Stock and warrants to purchase
up to 2,750,000 shares of Common Stock, subject to certain conditions. A portion
of the net proceeds from these transactions was used to repay previously
existing debt and accrued interest of approximately $38,245,000. In December
1995, Kirkland elected to convert the entire 1,333,333 shares of 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), $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) 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 "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
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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. See "Risk Factors -- High Leverage and Fixed
Charges; Holding Company Structure; Working Capital".
Management believes that customer financing terms have become an
increasingly important competitive factor in certain emerging markets.
Competitive conditions sometimes require Gaming and Systems to grant extended
payment terms on gaming machines and other gaming equipment. While these
financings are normally collateralized by such equipment, the resale value of
the collateral in the event of a default may be less than the amount financed.
In conjunction with sales by Gaming, with recourse to Gaming and/or BGII , of
certain trade receivables to third parties, Gaming and/or BGII have guaranteed
amounts due from various customers of approximately $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
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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 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
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$4,975,000 (24.6%) during fiscal 1995 over those for fiscal 1994 as revenues
recognized from the Rainbow Casino, which were consolidated beginning March 29,
1995, exceeded the revenues lost as a result of the closing of Alliance's
properties in downtown Las Vegas and the termination of Alliance's lease at the
Royal Casino.
COSTS AND EXPENSES
COSTS OF REVENUES. Cost of gaming machine management revenues for the
fiscal year ended June 30, 1995 increased $3,543,000 (4.6%) over that for fiscal
1994. Costs of revenues for gaming machine management operations in Louisiana
decreased $1,199,000 (10.7%) from fiscal 1994 as revenues declined primarily as
a result of increased competition in that market. As a percent of related
revenues, Louisiana gaming machine management costs of revenues remained
relatively constant. Cost of gaming revenues for Nevada gaming machine
management revenues for fiscal 1995 increased $4,742,000 (7.3%) over that in
fiscal 1994 and increased slightly as a percent of Nevada gaming machine
management revenues due primarily to increased costs associated with additional
and renewed space lease contracts. Cost of gaming machine management revenues
includes rents under both space lease and revenue-sharing arrangements, gaming
taxes and direct labor, including related taxes and benefits. The cost of casino
and tavern revenues, including the cost of food and beverage sales, for fiscal
1995 decreased $724,000 (4.8%) over that in fiscal 1994 primarily due to the
closing of Alliance's properties in downtown Las Vegas and the termination of
Alliance's lease at the Royal Casino. These decreases were partially offset by
increases in Rainbow Casino costs of revenues which were consolidated beginning
in March 1995. Cost of casino and tavern revenues includes cost of goods sold,
gaming taxes, rent and direct labor expenses, including taxes and benefits.
Although the gross margin percentage for Nevada operations declined slightly
during fiscal 1995, the decline was completely offset by the addition of the
Rainbow Casino and a small improvement in the Louisiana gross margin percentage.
As a result, the total cost of revenues as a percentage of total revenues
declined by 2.9% over that in fiscal 1994.
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%)
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from fiscal 1994. Selling, general and administrative expenses for Louisiana
gaming machine management operations declined approximately $660,000 (23.8%) as
staff reductions and cost containment measures were implemented to counter
increased competition in that market. The same costs for Nevada gaming machine
management operations in fiscal 1995 decreased $680,000 (9.8%) as the benefit of
staff reductions and cost controls taken in late fiscal 1994 was realized.
Selling, general and administrative costs increased for casino and tavern
operations by $1,595,000 (44.0%) over those in fiscal 1994. The acquisition of
the Rainbow Casino, which contributed $1,984,000 to the increase, was partially
offset by the closing of Alliance's downtown Las Vegas properties and the
termination of the lease at the Royal Casino. Also contributing to the increase
in selling, general and administrative expenses were $478,000 of expenses
related to certain service contracts and termination costs. Selling, general and
administrative expenses may be subject to further increases.
In fiscal 1994, due to continuing losses from operations, negative cash
flows and incompatibility with Alliance's long-term growth strategy, Alliance's
Board of Directors resolved to (i) exit the downtown Las Vegas gaming market and
(ii) dispose of the currently operated small independent tavern operations.
Based on these decisions, Alliance recognized total expenses of approximately
$5,884,000 in fiscal 1994. As a result of the decision to exit the downtown Las
Vegas gaming market, in September 1994, Alliance substantially reduced
operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall &
Saloon. Included in the fiscal 1994 statements of operations are total expenses
of approximately $3,246,000 related to these actions. The total charge included
approximately $488,000 related to the write-down of assets and approximately
$2,758,000 representing primarily the present value of the future lease payments
net of estimated future sublease income. The decision to withdraw from the
tavern business resulted in expenses of approximately $2,638,000 being
recognized in fiscal 1994. Approximately $1,813,000 of the total amount was
related to the write-down of assets while approximately $825,000 represented
primarily the present value of the future lease payments net of estimated future
sublease income.
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.
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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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general and administrative costs for casinos and taverns were $3,622,000 (18.0%)
of related revenues for fiscal 1994 as compared to $3,511,000 (21.0%) for fiscal
1993. The same costs for gaming machine management operations were $9,736,000
(9.5%) of revenues for fiscal 1994 and $8,916,000 or (9.3%) of revenues for
fiscal 1993.
Bad debt expense in fiscal 1994 increased 52.9% to approximately $705,000
over that for fiscal 1993 expense of $461,000 due primarily to the financial
difficulties of a particular customer in Northern Nevada.
On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race
Course in New Orleans, Louisiana where Alliance operated 199 electronic gaming
machines prior to the fire (of which 193 were destroyed by the fire) through its
controlled subsidiary, VSI. Alliance is fully insured for all equipment,
leasehold improvements, other assets and business income with the exception of
approximately $46,000 in deductibles. Through June 30, 1994, Alliance had
recorded approximately $241,000 of income from business interruption insurance
proceeds. Alliance will continue to receive proceeds under this policy while the
Fairgrounds Race Course is rebuilt. Alliance also received insurance proceeds
based on the replacement value of the assets destroyed in the fire and,
therefore, recognized a gain of approximately $156,000 which is included in
other income in fiscal 1994.
BGII RESULTS OF OPERATIONS
GENERAL
BGII was formed in August 1991 to consolidate BEC's gaming machine
manufacturing and distribution operations which are conducted through Wulff,
Gaming and Systems. The operations of Wulff were conducted through Bally Wulff
Automaten GmbH and Bally Wulff Vertriebs GmbH, two direct subsidiaries of BEC,
until their transfer to BGII in contemplation of the initial public offering of
common stock of BGII. The operations of Gaming and Systems were conducted as
divisions or subsidiaries of BEC until substantially all of the assets and
liabilities of these divisions and subsidiaries were transferred to BGII in
contemplation of the initial public offering of common stock of BGII. For
purposes of this discussion of results of operations of BGII, the operations of
Wulff, Gaming and Systems are described separately as well as on a consolidated
basis and GmbH results are included in Wulff's results. The results of
operations for Wulff and Gaming include an allocation of BGII, the parent
company, revenues and expenses, and intercompany transactions which are
eliminated on a consolidated basis.
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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. See "Risk Factors --
Operating History -- Recent Losses." Revenues from the distribution of
recreational and amusement machines increased by approximately 8.7% during 1995.
Operating income was $5.6 million for 1995 compared to $9.2 million in 1994,
a decrease of $3.6 million or 40%. This decrease resulted from lower gross
margins, higher selling, general and administrative expenses, and unusual
charges, offset in part by a lower provision for doubtful receivables. Gross
margins for 1995 were 33% compared to 35% in the prior year. Gross margin was
unfavorably impacted by higher unit costs associated with lower production
levels, a change in product mix to lower priced used machines and a decrease in
average selling price of new wall machines sold. Selling, general and
administrative expenses increased by $3.5 million resulting from the effect of
currency translation rates between years and costs associated with the increased
revenues in GmbH. Wulff recorded unusual charges in 1995 of $0.8 million to
writedown to net realizable value the carrying value of a building to be sold
and $1.0 million to increase its tax reserves primarily for value added taxes.
In addition, Wulff incurred $2.0 million of unusual charges representing an
allocation of merger transaction costs and litigation expenses related to the
proposed merger with WMS, which has since been terminated, and to a tender offer
by Alliance which was subsequently terminated in connection with the execution
of a definitive merger agreement between BGII and Alliance.
The effective tax rate for the year ended December 31, 1995 was 50% compared
to an effective rate of 26% in 1994. The 1994 rate was lower due to
implementation of a tax planning strategy that reduced the effective tax rate by
approximately 50%.
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<PAGE>
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.
115
<PAGE>
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
116
<PAGE>
cost of sales is due to increased absorption of overhead manufacturing expenses
attributable to increased production in 1994 as compared to 1993 and lower costs
of materials attributed to ongoing redesign of products and volume discounts
from suppliers.
Selling, general and administrative expenses increased to $25.9 million in
1994 compared to $23.4 million in 1993, an increase of 11%. The $2.5 million
increase was caused principally by increased staffing levels in the sales
departments and sales related costs associated with the aforementioned sales
volume increase in 1994 compared to 1993. Bad debt expense provisions increased
to $3.6 million in 1994 from $3.2 million in 1993, excluding a $5.1 million
increase in the provision in 1993 primarily relating to Gaming's former
distributor of VLT devices in Louisiana. This $0.4 million increase (13%)
resulted from increased sales volume in the 1994 period.
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.
117
<PAGE>
BUSINESS
OVERVIEW
Alliance is a diversified gaming company that currently operates
approximately 6,000 electronic gaming machines (primarily video poker devices
and slot machines) and also owns and operates a small casino in each of
Vicksburg, Mississippi and Sparks/Reno, Nevada. Alliance is the largest gaming
machine management operator in Nevada and is the exclusive operator of video
poker devices at the only racetrack and ten associated OTBs in the greater New
Orleans area.
As part of its long-term growth strategy, Alliance entered into the Merger
Agreement on October 18, 1995 with BGII pursuant to which BGII will become a
wholly-owned subsidiary of Alliance. BGII, through subsidiaries in the United
States and Germany, is a leading designer, manufacturer and distributor of
electronic gaming machines. BGII also designs, assembles and sells computerized
monitoring systems for slot and video gaming machines which provide casino
operators with on-line real time player tracking, security and maintenance
capabilities.
BGII is currently the second largest manufacturer of casino-style electronic
gaming machines in North America and since 1993 has made significant inroads in
recapturing a portion of its once dominant market share of the late 1970s.
Although BGII sells gaming devices to most of the major participants in the
United States casino industry, the Company hopes to continue to increase its
penetration in such casinos by capitalizing on Alliance's and BGII's
management's relationships within the gaming industry to enable the Company to
demonstrate the performance capabilities of its current products.
Alliance believes that the Merger represents an opportunity to acquire an
established company with a well-recognized presence in the gaming industry and a
significant base of assets and experience. Management estimates that the
installed base of casino-style electronic gaming machines (for these purposes,
primarily slot and video machines) is approximately 650,000 units, of which
approximately 50% are located in North America, and that annual sales in North
America have grown from approximately 30,000 units in 1991 to approximately
89,000 units in 1995, reflecting a period of exceptional growth in the number
and size of casinos in North America. Historically, growth in the gaming machine
market has been principally fueled by sales to new casinos and to a lesser
degree by replacement of machines (which have an average replacement cycle of
three to seven years) and the application of new technology. In the future,
management believes that annual sales growth resulting from replacement
requirements and the application of new technology should outpace growth in
demand generated by new casino openings, which growth rate is expected to
decline. Management believes that the Merger provides Alliance with an avenue
for entering a business historically characterized by effective barriers to
entry in that the BGII assets being acquired are difficult to replicate and
require significant time and investment to develop successfully.
The Merger is subject to significant conditions, including obtaining
financing on specified terms and receipt of regulatory approvals. Even if the
Exchange Offer is consummated there is no assurance that the Merger will occur.
BUSINESS STRATEGY
The Company's strategic objective is to build a pre-eminent gaming
entertainment company to capitalize on what management believes to be gaming's
continuing growth within the entertainment industry. In addition to continuing
the development of the Company's existing business units, the Company's
strategic focus if the Merger occurs will be on the Gaming and Systems business
unit, key elements of which include:
CAPITALIZE ON BGII'S CURRENT SALES MOMENTUM. Since 1993, BGII's management
has initiated steps to increase its share of gaming machine sales in traditional
markets and capture increased gaming machine market share in new and emerging
jurisdictions. In the mid-1980s, BGII management's slow response to rapidly
evolving technology, new competitors and changing customer preferences
contributed to a significant reduction in Gaming's market position. Hans Kloss,
who became President of BGII in 1993, and other members of the current BGII
senior management have led BGII's efforts to rebuild its market position, and
have effectively increased its presence in major casinos in the Las Vegas
market, including Caesars Palace and the MGM Grand. As part of its long-term
growth strategy, Gaming has increased its research and
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development efforts, focusing on upgrading its gaming machine product line, and
has increased its sales and marketing efforts. For example, Gaming introduced
its ProSeries-TM- reel-type slot machines during the third quarter of 1993 and
its multi-game touch screen machine, the Game Maker-Registered Trademark- during
the third quarter of 1994, which have contributed significantly to an increase
in Gaming's unit sales which have approximately doubled the level of unit sales
in 1993. See "-- Gaming Machine Manufacturing and Systems -- Gaming --
Products".
DEVELOP AND MARKET PREMIER GAMING ENTERTAINMENT PRODUCTS EMPLOYING NEW
TECHNOLOGY. The Company intends to continue to develop, market and sell premier
gaming entertainment products and systems that employ available information
technology currently in common use in other segments of the entertainment
industry, but not yet prevalent in the gaming industry. The Company believes
that technological enhancements are the key to improving the appeal of its games
and locations. To implement this strategy, the Company will draw upon the
resources of Dr. Craig Fields, Vice Chairman of the Board, who has over 20 years
of experience with advanced information technology from his work with several
leading companies and government agencies. Alliance has developed and is
currently marketing a next-generation computerized product called "Gambler's
Bonus", a cardless slot players' club and player tracking system for use in its
gaming machine management operations which will allow multiple locations to be
linked together into a distributed gaming environment. Management believes that
"Gambler's Bonus" offers a wider variety of gaming choices to players than any
other gaming device currently available for use in route locations.
Additionally, BGII is in the process of developing an innovative form of
cashless wagering that uses bar-coded coupons which can be read by bill
validators in slot machines with the resulting information being transmitted to
a computerized monitoring system, subject to testing and regulatory approval. In
addition, both BGII and Alliance have developed electronic gaming machines with
bill acceptor and ticket printer features, as well as touch screen and
multi-game capabilities.
ENHANCE OPERATING EFFICIENCIES AND IMPROVE THE QUALITY OF THE COMPANY'S
PRODUCTS AND SERVICES. The Company is taking a number of steps in different
business units to improve its operating efficiencies while at the same time
improving the quality of its products and services, including (i) engineering
improvements in its gaming machine manufacturing operations and reducing per
unit costs by increasing production throughput and negotiating decreases in
materials costs; (ii) continuing to improve Wulff's manufacturing efficiency and
productivity through the use of computer-aided design systems, automated
production equipment and devotion of substantial resources to product quality
control in its wall machine operations; (iii) expanding the installed base of
electronic gaming machines equipped with Gambler's Bonus, and updated
bill-acceptor devices throughout its Nevada gaming machine management
operations, which is expected to improve Alliance's revenues and operating
efficiencies; (iv) initiating improved customer service programs and increasing
employee responsiveness to customers' needs for after-sale services. Management
will continue to seek cost reductions and efficiencies and (v) eliminating
duplicative executive, insurance, rent, outside professional services and other
administrative costs.
CAPITALIZE ON RELATIONSHIPS AND ENTER INTO ALLIANCES WITH TECHNOLOGY AND
ENTERTAINMENT COMPANIES. Management's focus on technological developments in
gaming entertainment has created the potential for alliances with other
technology-oriented companies for the purpose of sharing information or
professional services in developing product concepts. The Company intends to
continue to develop or license technology which can be integrated into various
aspects of the gaming entertainment industry in the future. In addition, the
Company intends to make strategic acquisitions of rights to use proprietary
technology when attractive opportunities arise. There can be no assurance,
however, that any such alliances or acquisitions will be available to the
Company or will result in sustained beneficial results to the Company.
BUSINESS UNITS
Following the Merger, the Company will operate through four business units:
(i) casino-style electronic gaming machine manufacturing and systems, (ii)
German operations (consisting of the manufacture and distribution of
wall-mounted gaming machines and distribution of other recreational and
amusement
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machines), (iii) gaming machine management operations and (iv) casino
operations. The business units described in clauses (i) and (ii) are currently
operated by BGII and will be part of the Company only if the Merger occurs, and
the business units described in clauses (iii) and (iv) are currently operated by
Alliance.
GAMING MACHINE MANUFACTURING AND SYSTEMS
INDUSTRY OVERVIEW
Gaming's primary markets for its gaming machine products are the United
States and Europe and, to a lesser extent, Canada, the Far East, Latin America
and the Caribbean. The following table sets forth the percentage of Gaming's new
unit sales by market segment during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF NEW UNITS SOLD
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
NEW UNIT SALES BY MARKET SEGMENT 1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Nevada and Atlantic City............................................... 27% 34% 42%
International.......................................................... 27 21 30
Riverboats............................................................. 31 31 12
Indian Gaming.......................................................... 12 13 14
Other (principally VLTs)............................................... 3 1 2
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
UNITED STATES MARKETS. Within the United States, Nevada represents the
largest installed base of gaming machines with an installed base of
approximately 185,000 machines as of December 31, 1995. Atlantic City is the
second largest market which management estimates had an installed base of
approximately 30,000 machines as of December 31, 1995. Product sales in these
markets are primarily to established casino customers to either replace existing
machines or as part of an expansion or refurbishment of the casino. Also,
because gaming machine revenues have increased at a higher rate than table game
revenues over the past decade, casino operators have frequently increased floor
space dedicated to gaming machines. In addition, major casino openings in
Nevada, expansions of existing casinos and the proliferation of casinos in
emerging markets have created additional floor space available for new machines
and are anticipated to further increase competitive pressures on casino
operators to replace existing equipment with new machines on an accelerated
basis.
Riverboat casinos began operating in 1991 and, as of December 31, 1995,
riverboat casinos were operating in Indiana, Iowa, Illinois, Mississippi,
Missouri and Louisiana. The estimated installed base of gaming machines on
riverboats is approximately 61,000 machines as of December 31, 1995.
Casino-style gaming continues to expand on North American Indian lands.
Indian gaming is regulated under the Indian Gaming Regulatory Act of 1988 which
permits specific types of gaming. Gaming's machines are placed only with Indian
gaming operators who have negotiated a compact with the state and received
approval by the U.S. Department of the Interior. Gaming has, either directly or
through its distributors, sold machines for casinos on Indian lands in Arizona,
Connecticut, Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico, North
Dakota, South Dakota and Wisconsin. Compacts have also been approved in Oregon,
Colorado and Louisiana, although Gaming made no deliveries in these
jurisdictions during 1995. In addition to the approved states, compacts are
under consideration in several states, including Alabama, California, Maine,
Massachusetts, Rhode Island, Texas and Washington. The installed base of all
Indian gaming machines as of December 31, 1995 was approximately 52,000 units.
In addition, there are currently casinos in Colorado and South Dakota. The
estimated installed base of machines in these markets as of December 31, 1995
was approximately 13,000 machines.
The continued growth of domestic emerging markets for gaming machines is
contingent upon the public's acceptance of these markets and an ongoing
regulatory approval process by Federal, state and local governmental
authorities. Management cannot predict which new jurisdictions or markets, if
any, will approve the operation of gaming machines, the timing of any such
approval or the level of Gaming's participation in any such new markets.
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INTERNATIONAL MARKETS. In addition to the domestic markets, the gaming
industry is also expanding in international markets. Gaming's primary
international market is Europe, and to a lesser extent, Canada, the Far East,
Latin America and the Caribbean. Gaming has begun, and plans to continue,
expansion into the Australian market, and in 1995, BGII established an office in
Sydney, Australia. No new machines have yet been sold into Australia.
The percentage of Gaming's international revenues by geographic area for the
periods indicated are set forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Europe (including sales to GmbH)......................................... 69.2% 55.6% 51.4%
Canada................................................................... 12.7 16.6 21.6
Latin America............................................................ 16.3 20.5 19.7
Far East................................................................. 1.8 4.4 4.0
Other.................................................................... -- 2.9 3.3
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
MARKETS FOR SYSTEMS. Systems' primary markets for its computerized
monitoring systems are the United States and, to a lesser extent, Canada, New
Zealand, Latin America, Europe, and the Caribbean. Markets for Systems within
the United States include traditional land-based casinos predominately in Nevada
and Atlantic City, New Jersey, Indian gaming and riverboats. Domestically, the
market for monitoring systems is divided equally between selling to new
installations and to existing customers who are either expanding their casino
floors or are upgrading their hardware to a new product release. Unlike the
United States, where most jurisdictions require the implementation of systems,
there have been few international markets to do so. Management believes,
however, that the international market for such systems is increasing, and that
Systems' sales to such markets will increase accordingly.
GAMING
PRODUCTS. Gaming designs, manufactures and distributes a variety of
electronic slot and video gaming machines. Machines are differentiated from one
another by graphic design and theme, cabinet style and size, payout, reel-type
design and minimum/maximum betting amount. Slot machines are normally produced
to specific order, with design and configuration customized to a customer's
particular requirements. Customers may also change from one gaming model to
another gaming model by ordering a "conversion kit" which consists of artwork,
reel strips and a computer chip. Gaming's video gaming machines are designed to
simulate various live card games and keno through a video display. New games and
themes are introduced periodically in order to satisfy customer demand and to
compete with product designs introduced by competitors. Gaming introduced its
"ProSeries-TM-" reel-type slot machines during the third quarter of 1993 and its
multi-game touch screen machine, the Game Maker-Registered Trademark-, during
the third quarter of 1994.
The Game Maker-Registered Trademark- can offer up to 10 different video
games within one gaming device. Various games can be selected from a game
library that has over 200 games. The games simulate various card games, keno and
popular reel-spinning games. The Game Maker-Registered Trademark- machines
contain bill acceptors and many other features believed to be popular with
casinos and their customers. The Game Maker-Registered Trademark- machines are
available in upright, bar top and slant top cabinets. Based on Gaming's sales of
this product to date, management believes that Gaming is currently more
competitive than in the past in the video gaming device market. Revenues from
sales of Game Maker-Registered Trademark- machines were approximately $0.1
million, $6.7 million and $27.4 million during 1993, 1994 and 1995,
respectively.
The ProSeries-TM- was the result of a comprehensive product development
effort which began in 1991. The development process included extensive testing
of the new products in-house and on casino floors for reliability and player
appeal. Based on Gaming's sales of the ProSeries-TM- products to date,
management believes that the ProSeries-TM- has been the catalyst to allow Gaming
to increase market share in traditional
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and emerging markets for gaming machines as the product becomes accepted by
casino customers. Revenues from sales of ProSeries-TM- machines were
approximately $19.3 million, $86.2 million and $57.1 million during 1993, 1994
and 1995, respectively.
Gaming typically offers a 90-day labor and up to a one-year parts warranty
for new gaming machines sold and is actively involved in customer service after
the original installation. Gaming provides several after-sale, value-added
services to its customers including customer education programs, a 24-hour
customer service hot-line, and field service support programs and spare parts
programs.
In addition, Gaming sells and services used gaming machines and sells parts
for existing machines. Sales of used gaming machines increased for 1995 as
management implemented a policy to reduce inventory levels. Sales of used
equipment were $2.7 million, $4.2 million and $9.2 million for the years ended
December 31, 1993, 1994 and 1995, respectively.
The following table sets forth the percentages of Gaming's revenues provided
by each of its major product lines during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Slot machines..................................................... 67.0% 74.2% 52.8%
Video gaming machines............................................. 18.9 16.3 31.0
Other (primarily used machines, parts and services)............... 14.1 9.5 16.2
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
Gaming machines have a mechanical life that can exceed 10 years. However, in
the established markets, Gaming's experience is that casino operators usually
replace gaming machines after three to seven years. The factors which result in
replacement of gaming machines sooner than their mechanical life include
technological advances, development of new games, new sound and visual features
and changing preferences of casino patrons. Casinos typically recoup the
purchase cost of their electronic gaming machines in a few months, which allows
casinos to replace machines with new models that are popular with casino
patrons.
Gaming often accepts used machines as trade-ins toward the purchase of new
gaming equipment. While a small secondary market exists in the United States,
used machines are typically resold into the international market. While some
used equipment is reconditioned for direct sale, much is sold in container lots
on an "as is" condition through independent brokers.
In the past, Gaming had designed, manufactured and distributed VLTs, which
are generally operated by, or under the regulation of, state or provincial
lottery commissions. The VLT business was less than 2% of revenues during 1993,
1994 and 1995. Gaming will pursue this business only on a selected basis in the
future.
PRODUCT DEVELOPMENT. The Company believes that technological enhancements
are the key to improving the appeal of its electronic gaming machines. Most
gaming machines on casino floors today are driven by technology which was
developed over 20 years ago. The Company believes that accelerating the use of
existing computer technology will give its gaming machines and systems a
competitive advantage in the gaming industry.
Gaming develops its products for both the domestic and international market.
Gaming's product development process is divided into two areas, hardware and
software. Major areas of hardware development include cabinet style, electronic
capability, machine handle, coin hopper and bill acceptor. Hardware development
efforts are focused upon player appeal, product reliability and ease of
maintenance. Development cycles for hardware can range from a few days for
simple enhancements to more than a year for new electronics or new mechanical
packages.
The software development process for new games, which includes graphics
development, involves a continuous effort requiring relatively significant human
resource allocations. Creativity in software development is an important element
in product differentiation as the major manufacturers sometimes use similar
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hardware technology. Ideas for new models are generated both internally and from
customers. Gaming can design the software and artwork for a new model in as
little as two weeks, excluding regulatory approval. All new or modified hardware
and software is designed to satisfy all applicable testing standards and must
receive the approval of the appropriate gaming regulatory agency based
substantially on satisfying such applicable testing standards before such gaming
product can be offered for play to the public. Most gaming jurisdictions rely
upon and accept the certification of selected independent laboratories that a
gaming product meets the applicable testing standards.
Regulatory approval for new or modified hardware and software changes takes
from 30 days to three months or more. On an annual basis, Gaming expects to
introduce approximately 25 new games to the market. However, no assurance can be
made with respect to the rate of new model introductions.
During 1993, 1994 and 1995, Gaming spent $3.0 million, $3.5 million, and
$3.7 million, respectively, on product research and development.
SALES AND MARKETING. Gaming uses a direct sales force, an independent
distributor network and GmbH to sell its products. Gaming's sales staff of
approximately 20, which operates offices in Nevada, New Jersey, Mississippi,
Illinois and Florida, generated approximately 84% of new machine sales over the
past three years. Gaming currently uses distributors for sales to certain
specific markets in the United States as well as certain European jurisdictions.
Gaming's agreements with distributors do not specify minimum purchases but
generally provide that Gaming may terminate such agreements if certain
performance standards are not met. Approximately 8% of new gaming machine unit
sales over the past three years have been generated through independent
distributors (including foreign distributors) and 8% have been generated through
GmbH.
In addition to offering an expansive product line, Gaming provides
customized services in response to specific casino requests. These services
include high quality silkscreen printing of gaming machine glass, customized
game development and interior design services. Gaming also offers customized
design services that utilize computer aided design and studio software programs.
Gaming's design department can generate a casino floor layout and can create a
proposed slot mix for its customers. In many of the emerging markets, Gaming
provides assistance to customers including the selection of related equipment
such as slot stands, chairs, etc. and a recommended layout of the casino floor
as well as a mix of machine models. Sales to established casinos in Nevada
normally require completion of a successful trial period for the machines in the
casino.
Approximately 75% of Gaming's slot and video gaming machine sales are on
terms of 90 days or less. Approximately 25% of Gaming's sales, primarily in
certain emerging markets such as riverboat and Indian gaming casinos, are
financed over extended periods as long as 36 months and bear interest at rates
ranging from 8% to 14%. International sales are generally consummated on a cash
basis or financed over a period of one year or less. In addition, in certain
situations, Gaming has participated in the financing of other gaming related
equipment manufactured by third parties in the emerging markets. Management
believes that financing of customer sales has become an increasingly important
factor in certain emerging markets. See "-- Competition".
CUSTOMERS. The demand for slot machines and video gaming machines varies
depending on new construction and renovation of casinos and other facilities
with needs for new equipment. Since machines are not replaced each year, many
current customers will need only product maintenance in the near future. Growth
will depend on Gaming's ability to obtain new customers and take advantage of
the newly emerging markets. For the year ended December 31, 1995, Gaming's
largest customer accounted for approximately 5% of Gaming's sales while Gaming's
ten largest customers, excluding GmbH, accounted for approximately 25% of
Gaming's revenues. During that period, sales to GmbH accounted for approximately
9% of Gaming's revenues.
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ASSEMBLY OPERATIONS. Gaming's Las Vegas facility was built in 1990
specifically for the design, manufacture and distribution of gaming equipment.
The 150,000-square foot facility was designed to meet fluctuating product design
demands and volume requirements, and management believes the facility enables
Gaming to increase production without significant capital expenditures.
Management believes that its assembly operations allow for rapid generation
of different models to fill orders quickly and efficiently. Another major
advantage of the existing plant operation is the system by which machines can be
altered in many ways including the size, type and color of glass, sound and
payoff patterns to produce a "customized" product for each customer. Gaming
keeps an inventory of parts that allow machines to be altered quickly to conform
with a particular customer's design/feature request. Gaming designs all of the
major assemblies that are incorporated into the final machine configuration.
COMPETITION. The market for gaming machines in North America is dominated
by a single competitor, IGT. There are a number of other well established,
well-financed and well-known companies producing machines that compete with each
of Gaming's lines in each of Gaming's markets. The other major competitors are
Universal Distributing of Nevada, Inc., Sigma Games, Inc., WMS and, in the
international marketplace, companies who market gaming machines under the brand
names of Aristocrat, Atronic, Cirsa and Novomatic. In addition, certain
technology-oriented companies, including CDS and Sega Enterprises Ltd., have
recently announced their intention to enter the gaming machine business.
Management believes that some of these competitors generally have greater
capital resources than Gaming. Competition among gaming product manufacturers,
particularly with respect to sales of gaming machines into new and emerging
markets, is based on competitive customer pricing and financing terms, appeal to
the player, quality of the product and having an extensive distribution and
sales network.
The future success of the Company, to a large extent, will be dependent upon
the ability of Gaming to design, manufacture and market technologically
sophisticated products that achieve high levels of player acceptance. The
development of a successful new product or product design by a competitor could
adversely affect sales of Gaming's products and force Gaming to respond quickly
with its own competing products. In addition, management believes that customer
financing terms have become an increasingly important competitive factor in
certain emerging markets. Competitive conditions sometimes require Gaming to
grant extended payment terms on gaming machines and other gaming equipment.
While these financings are normally collateralized by such equipment, the resale
value of the collateral in the event of a default may be less than the amount
financed. Accordingly, Gaming will have greater exposure to the financial
condition of its customers in emerging markets than has historically been the
case in established markets like Nevada and Atlantic City. Also, because certain
of Gaming's competitors generally have greater financial resources than Gaming,
Gaming will need to rely on third party financing arrangements in order to
compete in providing competitive financing to customers. See "-- Sales and
Marketing".
SYSTEMS
PRODUCTS. Systems designs, assembles, and sells a computerized monitoring
system ("SDS 6000") for slot and video gaming machines which provide casino
operators with on-line real time data relative to a machine's accounting,
security, and maintenance functions. The SDS 6000 also provides data to, and
receives data from, other third party player tracking computer and software
applications allowing casinos to track their players to establish and compile
individual player profitability and other demographic information. SDS 6000 is
comprised primarily of (1) hardware consisting of microcontroller based printed
circuit boards which are installed within the slot and video machines as well as
card reader displays and keypads which provide casinos the ability to track
player gaming activity and to monitor access to slot and video machines by the
casino's employees, (2) application software developed by Systems which provides
access to the slot machine's activity data gathered by the microcontroller
hardware, and (3) third party mini-computers on which the application software
resides. Systems also provides software and hardware support services, including
maintenance, repair and training for purchasers of its monitoring systems.
PRODUCT DEVELOPMENT. Systems' product development is divided into two
areas, hardware and software. The major areas of hardware development include
microcontroller circuit board design and programming as well as user interface
devices such as card readers, keypads and displays. Hardware
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development efforts are focused upon the casino operator in terms of
functionality, product reliability and ease of maintenance and customer appeal
in terms of appearance and ease of use. Development cycles for hardware can vary
between a few months for minor revisions to more than a year for major design
changes or for changes made by various slot manufacturers with which Systems'
product must communicate and be physically integrated. Software development
results in (1) periodic product releases that include new features which extend
and enhance the SDS 6000 product, (2) periodic maintenance releases which enable
casino operators to correct problems or improve the usability of the system and
(3) documentation needed to install and use the system.
In 1995, the hardware and software groups from Systems, as well as engineers
from Gaming, coordinated efforts to develop a form of cashless wagering that
uses bar-coded coupons which can be read by the bill validators in Gaming's slot
machines which are connected to an SDS 6000 system. Testing and regulatory
approval is being pursued by Systems in anticipation of a 1996 release to casino
operators. In 1996, Systems and Gaming development groups will continue to
direct development efforts towards other forms of cashless wagering for use on
Gaming's slot machines and the SDS 6000 system.
During 1993, 1994 and 1995, Systems spent $1.4 million, $1.7 million and
$1.9 million, respectively on product research and development.
SALES AND MARKETING. Systems has a direct sales force which produces the
majority of its sales. Gaming's sales force and Gaming's independent distributor
network produce the balance of Systems' sales, primarily in situations where
customers are making slot machine and computerized slot monitoring system
purchase decisions at the same time. Worldwide, Systems has approximately 60,000
GMUs installed, or in the process of being installed, of which approximately
53,000 are in the United States. Over the past three years, Systems' own sales
force has generated approximately 78% of its sales.
Systems offers its customers the option of signing separate hardware and
software maintenance agreements at the time of sale. These agreements are for
periods of one year and automatically renew unless otherwise canceled in writing
by the customer or Systems. After an initial warranty period, typically 90 days,
the customer is invoiced a monthly hardware and software maintenance fee which
provides essentially for repair and/or replacement of malfunctioning hardware
and software, software version upgrades, and on-call support for software.
Systems offers limited financing terms, normally less than one year, for
sales to new installations. Most sales, however, are invoiced on a net 30 day
basis.
CUSTOMERS. The demand for computerized slot monitoring systems is driven
either by regulatory requirements in a given jurisdiction and/or by a casino
operator's competitive need to properly track their players' activity and
establish and compile individual player profitability and other demographic
information, all of which is of particular importance to casinos in developing
marketing strategies. Systems' revenues are derived equally from selling to new
installations as well as to existing customers who are either expanding their
casino floors or are upgrading their hardware to a new product release. For the
year ended December 31, 1995, Systems' ten largest customers (which includes
certain multi-site casino operators that have corporate agreements with Systems)
accounted for approximately 92% of Systems' revenues. Due to the high initial
costs of installing a computerized monitoring system, customers for such systems
generally have tended not to change suppliers once they have installed such a
system. Future growth will be based on further expansion in the established and
emerging markets as well as continued development efforts by Systems to provide
customers with new and innovative hardware and software product offerings.
COMPETITION. Although there are numerous companies providing computerized
slot monitoring systems to casino operators, the competition currently consists
of IGT, CDS, and to a lesser extent, Gaming Systems International and Acres
Gaming. Competition is keen in this market due to the number of providers and
the limited number of casinos and the jurisdictions in which they operate.
Pricing, product feature and function, accuracy, and reliability are all main
factors in determining a provider's success in selling its system. Systems
believes the future success of its operations will be determined by its ability
to bring new and innovative products to the market place and at the same time
maintain a base of loyal existing customers.
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GERMAN OPERATIONS
INDUSTRY OVERVIEW
Management believes that the German amusement game industry, a historically
stable market, consists of approximately 200,000 wall machine units and 50,000
token machine units. German regulations require the replacement of wall machines
after a period of up to four years, ensuring replacement sales in Germany. As a
result, the annual market sales are approximately 50,000 units with fluctuations
resulting primarily from economic conditions and regulatory changes. In May
1993, the maximum initial coin drop in wall machines was increased from 30
pfennigs to 40 pfennigs. This regulatory change caused some customers to defer
purchases prior to this regulatory proposal pending its outcome. During
mid-1994, the German government effected a tax law revision based on a European
Court ruling, whereby V.A.T. charged to the operators of wall machines was
significantly reduced. Management believes this tax law revision, offset in part
by increased leisure taxes, caused the aggregate new wall machine unit sales to
increase to approximately 47,000 units in 1994. Effective January 1, 1996, a
regulatory change took effect requiring all arcade operators to have at least 15
square meters of space for each wall machine and a maximum of 10 machines per
arcade. Starting in mid-1995, arcade operators began removing wall machines from
their arcades to meet the requirements of this new regulation. Despite this
adverse impact, the demand for new wall machines remained at approximately
47,000 units in 1995. All wall machines manufactured since 1992 have meters that
monitor the amount inserted by players and paid out by the machine; from the end
of 1996 on, all wall machines in use are required to have such meters, which
management believes should lead to an increase in demand for new, metered wall
machines in the latter half of 1996. See "-- Operations of Wulff--Products". See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- BGII Results of Operations" and "Gaming Regulation and Licensing
- -- Germany".
One of the most important markets for wall machines in Germany is the arcade
market. A significant number of arcades are owned by competitors of Wulff who
are able to introduce their own machines into the arcades and generally do not
purchase wall machines from Wulff. Wulff's two largest competitors, NSM, AG and
Gauselmann, AG, own arcades containing approximately 15% of the wall machines in
Germany. Management believes Wulff's share of the installed base of German wall
machines market was approximately one-quarter of the market for each of the last
three years. On an ongoing basis, the German legislative authorities regulate
and monitor the wall machine industry so as to ensure certain manufacturing
standards and the fairness of each machine to users. The most significant
legislation presently affecting the wall machine industry relates to prescribed
licensing procedures, the use, installation and operation of wall machines and
the taxation of wall machines. There have been no recent material changes in
these ongoing legislative regulations. See "Risk Factors -- Operating History --
Recent Losses" and "Gaming Regulation and Licensing -- Germany".
Token machines, unlike wall machines, are not designed to pay off money.
Instead, a player wins games or tokens. Therefore, the strict German licensing
requirements governing wall machines are not currently applied to token
machines, although it cannot be ruled out that this may change in the future due
to legislative changes or changes in administrative practice. Furthermore,
management believes that the token machine market has reached its potential and
that sales will decline because token machines are not subject to the four-year
operation limit set by German regulations. See "Gaming Regulation and Licensing
- -- Germany".
OPERATIONS OF WULFF
PRODUCTS. Wulff's manufacturing operations were founded in Berlin in 1950
and sold to BEC in 1972. Wulff produces and distributes a variety of models of
wall machines, under the trade name "Bally Wulff", for operation in arcades,
hotels, restaurants and taverns primarily in Germany. These wall machines are
coin-operated, armless gaming devices similar to slot machines that award
winnings for matching numbers or symbols on three to five wheels or drums and
differ primarily in appearance, graphic design, theme, pay-table and customer
appeal. Each game costs up to 40 pfennigs (approximately $0.28, assuming an
exchange rate of $1=DM 1.43 as of December 31, 1995 hereinafter) to play,
although the player may deposit larger amounts to provide continuous play but
not to increase payoffs. German regulations limit the maximum payout to ten
times the player's stake (DM 4.00 or approximately $2.80 per game). Current
models of wall
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machines provide the player the opportunity to win 100 special games on one
play, which increases the potential amount that can be won on the minimum coin
drop. German regulations require a minimum payback of 60% for wall machines,
although many machines are generally programmed to pay back at higher rates to
encourage play. Effective January 1, 1997, all wall machines in use must have
meters that monitor the amount inserted by players and paid out by the machine.
See "Gaming Regulation and Licensing -- Germany".
In addition to manufacturing wall machines, Wulff distributes wall machines
and other recreational and amusement coin-operated machines manufactured by
third parties to provide a more extensive line of products to its customers.
These machines include pool tables, dart games, pinball machines, jukeboxes and
arcade games and are distributed primarily for use in arcades, restaurants,
hotels and taverns. One of BGII's indirect subsidiaries, GmbH, distributes
traditional slot machines, manufactured primarily by Gaming, principally to
customers in Europe, Russia and, through its branch office in Johannesburg,
South Africa, the African continent. The following table sets forth the
percentage of Wulff's revenues by product line during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Wall machines manufactured by Wulff...................................... 42.8% 50.8% 37.5%
Recreational and amusement machines and third party wall machines
distributed............................................................. 36.4 20.0 22.3
Slot machines distributed................................................ 5.0 6.3 11.2
Other (primarily used machines, parts and services)...................... 15.8 22.9 29.0
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Wulff also manufactures token machines for operation in arcades, hotels,
restaurants and taverns in Germany. See "Gaming Regulation and Licensing --
Germany".
PRODUCT DEVELOPMENT. Management believes that Wulff's wall machines are
viewed as premium products because of their quality, dependability, ease of
service and proven ability to attract players and generate revenue. Wulff
designs its machines to appeal to each of the three categories of participants
in the distribution process -- Wulff's sales representatives and independent
distributors, the owner/operators of the machines, and the players. The sales
representatives and distributors require machines with broad appeal that are
easy to demonstrate and sell. The owner/operators desire reasonably priced
machines that are easy to collect from and service and that are proven revenue
generators. The players prefer entertaining machines that are simple to play and
have unique features.
Wulff's management has formed design teams which are responsible for
generating ideas for creative new machines. These teams are comprised of
representatives of each department involved in the production and distribution
of machines, such as art design, engineering, manufacturing, marketing and
sales. The design teams meet for three days each calendar quarter at a site away
from Wulff's headquarters. The teams analyze machines currently being marketed
by Wulff and its competitors to assess their strengths and weaknesses and then
suggest ideas for new machines. These ideas are reviewed to determine which
machines should be produced on a trial basis. Wulff typically pursues 15 to 20
projects at any given time, and approximately 12 to 15 machines are submitted
for licensing each year. These new machines are built in limited quantities and
then test marketed for three to six months. Generally, less than one-half of the
new machines tested are put into full scale production. Management believes this
process of generating new ideas and then turning only a limited number of the
ideas into machines which will reach the mass market is responsible for the high
quality of Wulff's machines and their continued acceptance and success in the
marketplace. Because the machines have a reputation for quality, Wulff is often
able to produce and market a particular model for up to two years, which
management believes, based upon its experience in the relevant marketplace and
feedback from customers, exceeds the industry average.
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During 1993, 1994 and 1995, Wulff spent approximately $3.3 million, $3.5
million, and $3.6 million, respectively, on product research and development.
SALES AND MARKETING. Wulff sells approximately 94% of its products through
its own sales force of 56 people located in its 23 regional sales offices.
Independent German distributors account for approximately 6% of sales.
Approximately 97% of Wulff's sales of new wall machines are in the German
market. The sales offices are operated as independent profit centers and are
assigned geographic areas for which they are responsible for sales, servicing
the machines and assisting in collecting customers' accounts receivable
balances. GmbH maintains a sales office in Hanover for the distribution of
traditional slot machines, principally in Europe, and has an office in
Johannesburg, South Africa for the sale and distribution of traditional slot
machines into the African continent.
Wulff devotes substantial time, money and effort marketing and promoting its
products. Wulff takes an active part in the annual Amusement Game Fair which is
held each January in Frankfurt, Germany, at which Wulff introduces new products.
The wall machines manufactured and sold by Wulff generally sell for prices
ranging from DM 5,000 to DM 8,000 (approximately $3,493 to $5,590). A majority
of machines distributed by Wulff are paid for in full within 90 days after the
sale. Remaining sales of machines are financed by Wulff generally over a
12-month period, with interest rates of up to 12%. For this reason, Wulff
establishes an internal credit rating and credit limit for each customer. Under
Wulff's conditions of sale, title to a machine is retained by Wulff until the
machine has been paid for in full. In addition, Wulff demands collateral as
security. Currently, Wulff provides customer financing for approximately 20% of
its sales, and management expects this practice to increase during the latter
half of 1996. In approximately 60% of its sales, Wulff accepts wall machines
and/or other recreational and amusement equipment as trade-ins toward the
purchase of new machines. To the extent possible, the used machines are then
resold.
CUSTOMERS. Each of Wulff's top ten customers in 1994 has maintained its
relationship with Wulff for over three years. For the fiscal year ended December
31, 1995, no single customer accounted for more than 3% of Wulff's sales, while
Wulff's top ten customers accounted for approximately 10% of Wulff's sales.
Wulff's customer base for wall machines may be divided into two categories
which differ based on the preferences of their clientele. Arcade operators are
generally interested in purchasing the newest products in the hopes that a new
innovation will result in a high level of public demand to play the new "hot"
product. Hotels, restaurants and taverns, on the other hand, are generally more
inclined to purchase lower-priced existing models with proven earnings records
to provide as an amenity to customers.
ASSEMBLY OPERATIONS. Wulff's manufacturing process is primarily an assembly
operation. Its manufacturing facility consists of a four-story, 100,000-square
foot building in Berlin, Germany. Wulff purchases its key raw materials,
sub-assemblies and fabricated parts from a variety of suppliers, and most parts
are purchased from multiple suppliers. While there exists no formal long-term
contract commitments to any single supplier, Wulff has placed certain standing
orders with suppliers through 1996 to help assure the availability of specific
quantities on an as-needed basis. These orders are cancelable by Wulff at any
time without penalty. Most of the component parts are standard on all models of
all Wulff's wall machines, which promotes easy conversion from the production of
one model to another in response to customer demand. Except in connection with
certain promotions, Wulff generally maintains low inventory levels of assembly
parts, and the amount of work-in-process is generally less than the number of
machines sold in one week.
Because of its manufacturing structure, Wulff is capable of substantially
increasing its wall machine output without significant capital expenditures.
Wulff continues to improve its manufacturing efficiency and productivity through
the use of computer-aided design systems, automated production equipment and
devotion of substantial resources to product quality control.
COMPETITION. Germany's wall machine manufacturing industry is dominated by
Wulff and two of its competitors, NSM, AG and Gauselmann, AG. Management
believes these three entities collectively account for more than 90% of the
entire market. Wulff competes with many companies in the distribution of coin-
operated amusement games, some of which are larger and have greater resources
than Wulff. Wulff's two
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major competitors own and operate a significant number of arcades, which may
give them a competitive advantage arising from a built-in market for their games
and the ability to test market new games in their own arcades. Increased foreign
competition in Germany may have an adverse impact on the Company's future wall
machine revenues. Management believes that the primary competitive factors in
the wall machine coin-operated amusement game market are the quality and depth
of the product line, price and customer service which includes the ability to
fill orders quickly and efficiently.
Management believes that the market for token machines has expanded rapidly,
from sales of approximately 3,900 units in 1993 to approximately 16,700 units in
1995. Management believes that token machines have in recent years competed
directly with wall machines due to the lower prices and the popularity of the
token machines. Furthermore, management believes that the token machine market
may have reached its potential and that sales may decline because token machines
are not subject to the four-year operation limit set by German regulations. See
"Gaming Regulation and Licensing -- Germany".
Increased foreign competition in Germany may have an adverse impact on the
Company's future wall machine revenues.
GAMING MACHINE MANAGEMENT OPERATIONS
NEVADA OPERATIONS
Alliance's Nevada gaming machine management operations involve the
selection, ownership, installation, operation and maintenance of video poker
devices, reel-type slot machines and other gaming machines in local
establishments such as taverns, restaurants, supermarkets, drug stores and
convenience stores operated by third parties ("local establishments").
Alliance's gaming machine management operations target local residents who
generally frequent establishments close to their homes.
The following table sets forth certain historical data concerning the
Alliance's Nevada gaming machine management operations:
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------- AT MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Number of electronic gaming machines owned..... 5,240 5,505 5,121 5,148 5,208 5,288
Number of locations............................ 527 552 508 496 516 521
</TABLE>
Alliance enters into gaming machine management agreements with local
establishments through either revenue-sharing arrangements or space lease
arrangements. In revenue-sharing arrangements, most common with taverns,
restaurants and convenience stores, Alliance does not pay rent, but rather
receives a percentage of the revenues from the electronic gaming machines. In
such arrangements, both the owner of the local establishment and Alliance must
have a gaming license. In space lease arrangements, most common with
supermarkets and drug stores, Alliance pays a fixed rental to the owner of the
local establishment and Alliance receives all of the revenues derived from the
gaming machines. In such arrangements, only Alliance (and not the establishment
owner) is required to hold a gaming license. Most of the local establishments
serviced by Alliance are restricted by law to operating no more than 15 gaming
machines.
Revenue-sharing arrangements accounted for approximately 80%, 86%, 86% and
86% of the Nevada gaming machine management revenues and 77%, 80%, 78% and 77%
of its operating Nevada gaming machines in 1993, 1994 and fiscal 1995 and the
nine-month period ended March 31, 1996, respectively. At March 31, 1996, the
weighted average remaining term of Alliance's revenue-sharing arrangements was
approximately 3.6 years. Space lease arrangements accounted for approximately
20%, 14%, 14% and 14% of the Nevada gaming machine management revenues and 23%,
20%, 22% and 23% of its operating Nevada gaming machines in 1993, 1994 and
fiscal 1995 and the nine-month period ended March 31, 1996. At March 31, 1996,
the weighted average remaining term of Alliance's space leases was 2.8 years.
Alliance has historically been able to renew or replace revenues from
expiring agreements with revenues generated by renewal or replacement contracts.
However, during the past few years, greater competitive pressures in the gaming
machine management business have increased the portion of gaming machine
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management revenues payable to the local establishment, decreasing Alliance's
gross margins from these operations. As a result, Alliance has refocused its
Nevada gaming machine management operations to emphasize return on investment
rather than increasing market share and has undertaken a systematic review
process to adjust its contract mix to emphasize higher margin contracts and,
where permissible, canceling or not renewing unprofitable contracts.
SALES AND MARKETING. As the largest Nevada gaming machine management
operator, Alliance believes that it is able to differentiate itself from its
competitors through a full-service operation providing its customers marketing
assistance and promotional allowances and using its advanced design capabilities
to provide electronic gaming machines with features customized to customers'
needs, such as Gambler's Bonus.
Alliance has developed and is currently testing a new system called
"Gambler's Bonus". Gambler's Bonus is designed as a cardless slot players' club
and player tracking system, which allows multiple route locations to be linked
together into a distributed gaming environment. Through this technology,
Alliance is able to provide its players and customers with many of the same
gaming choices currently available only in a larger scale casino environment
such as multi-location progressive jackpots, bigger jackpot payouts and
traditional players' club enhancements. Additionally, Alliance will offer a
series of new and unique games available only to members of the Gambler's Bonus
players' club. Since launching Gamblers' Bonus, the gaming machines linked to
Gambler's Bonus have experienced an increase in net win per day per machine. As
of April 1, 1996, Alliance had 360 machines linked to the Gambler's Bonus
system, and management expects to have Gambler's Bonus in approximately 88
locations, with a total of 980 machines, by June 1996. Alliance believes
Gambler's Bonus will improve both the revenues and operating efficiencies of its
Nevada gaming machine management operations and has the potential to create
additional opportunities in the gaming machine management segment of the gaming
industry. Additionally, in keeping with the trends in the Nevada market,
Alliance is updating its gaming device base with bill-acceptor equipped
electronic gaming machines which are also expected to improve revenues and
operating efficiencies.
CUSTOMERS. Alliance believes it has a diversified customer base with no one
customer accounting for more than 10% of Alliance's revenues generated from
Nevada gaming machine management operations during fiscal 1995, although
approximately 14.1% of such revenues was generated through an affiliated group
of such customers. The affiliated group consists of eight partnerships each
having one individual partner who is common to all such partnerships. For the
year ended December 31, 1995, Alliance's ten largest customers accounted for
approximately 20.7% of Alliance's revenues.
ASSEMBLY OPERATIONS. Alliance currently manufactures and distributes
electronic gaming machines in Nevada for use in its gaming machine management
operations. Alliance manufactured approximately 80% of the electronic gaming
machines currently used in its Nevada gaming machine management operations. The
manufacturing process generally involves the assembly of standard components
which are readily available from various sources. Alliance is not dependent upon
any one supplier for the material or components used in its manufacturing
operations.
COMPETITION. Alliance is subject to substantial direct competition for its
revenue-sharing and space lease gaming machine management locations from several
large gaming machine management operators and numerous small operators, located
principally in Las Vegas, Reno and the surrounding areas. Alliance and Jackpot
Enterprises, Inc. are the dominant gaming machine management operators in
Nevada. The principal method of competition for gaming machine management
operators includes the economic terms of the revenue-sharing or space lease
arrangement, the services provided and the reputation of the gaming machine
management operator. Price competition is intense and has reduced Alliance's
gross margin on such operations over the past several years as the percentage of
the gaming device revenues retained by local establishment owners has increased.
LOUISIANA OPERATIONS
In March 1992, Alliance obtained a contract to operate video poker gaming
devices in the greater New Orleans, Louisiana area through its controlled
subsidiary, VSI. Alliance entered into an operating agreement which runs through
May 2002 with Fair Grounds for Alliance to be the exclusive operator of video
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poker devices at the only racetrack and ten associated OTB parlors in the
greater New Orleans area. Alliance selects, installs, manages and services video
poker devices for each of the ten facilities owned by Fair Grounds for which it
receives a percentage of the revenue generated by the devices. Alliance
currently has installed 694 video poker devices in Louisiana.
Under the Louisiana gaming laws and regulations, the majority stockholder of
any entity operating video poker devices in Louisiana must be a domiciled
resident of the State of Louisiana. As a result, Alliance owns 49% of the
capital stock of VSI and three prominent members of the Louisiana business and
legal community own the remaining 51%. Pursuant to the terms of the VSI Loan,
VSI may not pay cash dividends or make any distribution of its property. The VSI
Loan amortizes quarterly until due in full in September 1998 and may be prepaid
at any time without penalty. Alliance, however, owns all the voting stock of VSI
and the majority of its officers and directors are Alliance employees. Alliance
has a 71% interest in dividends of VSI in the event dividends are declared.
Alliance also formed two other Louisiana subsidiaries, Southern Video Services,
Inc. ("SVS") and Video Distributing Services, Inc. ("VDSI"). Both SVS and VDSI
are structured in a manner similar to VSI except that Alliance is entitled to
receive 60% of any SVS dividends. Under the terms of its contract with Fair
Grounds, Alliance must conduct any additional video poker operations in
Louisiana other than gaming at racetracks or OTB parlors through SVS. To date,
SVS and VDSI have not engaged in business in Louisiana. In addition, Alliance
and Fair Grounds may have certain mutual rights of first refusal to participate
in certain Louisiana riverboat gaming opportunities of the other party on terms
and conditions to be specified.
Alliance is prohibited by the Louisiana Act from engaging in both the
manufacture and operation of gaming machines in Louisiana and, therefore,
Alliance does not manufacture its own gaming machines for use in Louisiana.
Further, the Louisiana legislature recently passed a bill which could have the
effect of curtailing the Company's activities in Louisiana. See "Risk Factors --
Strict Regulation by Gaming Authorities" and "Gaming Regulation and Licensing --
Louisiana".
On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race
Course in New Orleans where Alliance operated 199 gaming machines prior to the
fire, 193 of which were destroyed in the fire. Alliance was fully insured for
all equipment, leasehold improvements, other assets and business income with the
exception of immaterial deductibles. From December 17, 1993 through December 31,
1995, Alliance recorded approximately $815,000 of income from business
interruption insurance proceeds. Alliance is discussing settlement of additional
business interruption claims with the insurance carrier.
SALES AND MARKETING. VSI has developed an extensive marketing program under
the name "The Players Room" which is designed to attract primarily local
residents to its facilities. Media placement has focused on newspaper and radio
advertising with promotions including a player's club, direct mailings and
offerings of a wide range of prizes.
Alliance intends to selectively expand its operations in the greater New
Orleans area by increasing the number of video poker devices in certain of its
existing locations as demand warrants, as well as investigating the addition of
new locations under its current contract with the Fair Grounds in areas where
competitive factors are favorable. Under the Louisiana Act, racetracks and OTB
parlors are permitted to install an unlimited number of video poker devices
while truckstops and taverns may install only limited numbers of such devices.
COMPETITION. Alliance is subject to extensive competition for contracts to
operate video poker devices and Alliance's racetrack and OTB parlors compete
with various truck stops and locations with liquor licenses throughout the New
Orleans area. Each truck stop is permitted to operate up to 50 video poker
devices and each tavern is permitted to operate up to three video poker devices.
In addition, Louisiana has authorized riverboat gaming statewide and several
riverboats are operating in Orleans Parish. Riverboats are permitted
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to have live table games and an unlimited number of gaming machines, including
slot machines. Louisiana has also authorized one land-based casino, permitted to
include live table games and an unlimited number of gaming machines in New
Orleans, which opened in May 1995; however, its operator filed for bankruptcy
reorganization and ceased operations in November 1995. The operator has stated
its intention to reopen the land-based casino following reorganization.
CASINO OPERATIONS
RAINBOW CASINO. On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. The entire project consists of the
Rainbow Casino, which is a 24,000-square foot casino owned and operated by
Alliance containing approximately 589 gaming machines and 28 table games, and
also includes an 89-room Days Inn hotel and a 10-acre indoor and outdoor
entertainment complex called Funtricity Entertainment Park, which was developed
by a subsidiary of Six Flags Corporation. Both the hotel and entertainment park,
which were substantially completed in late May 1995, are operated by third
parties. The entire property, known as Vicksburg Landing, is the only
destination of its kind in Mississippi containing a casino/family entertainment
complex.
Through a wholly-owned subsidiary, Alliance originally purchased a 45%
limited partnership interest in RCVP, a Mississippi limited partnership which
owns the casino, all assets (including the gaming equipment) associated with the
casino and certain adjacent parcels of land. The 55% general partnership
interest in RCVP was held by RCC, an unaffiliated Mississippi corporation.
Pursuant to a management agreement dated October 29, 1993, which terminates on
December 31, 2010, Alliance through a wholly-owned subsidiary also serves as
manager of the casino. In connection with the completion of the casino and the
acquisition of its original 45% limited partnership interest, Alliance funded a
$3,250,000 advance to RCC on the same terms as RCC's financing from HFS (other
than the fact that such advance is subordinate to payments due to HFS, and the
HFS financing is secured). The HFS financing provided to RCC on August 3, 1993
consisted of a $7.5 million loan secured by a first priority lien on all of the
assets of the project. The terms of the HFS financing provide that, in
connection with the loan and certain marketing services provided by HFS to RCC,
RCC will pay to HFS a perpetual royalty based upon the casino's annual gross
gaming revenues of 12% on the first $40 million, 11% on the next $10 million,
and 10% thereafter.
On March 29, 1995, Alliance consummated certain transactions whereby
Alliance acquired from RCC the controlling general partnership interest in RCVP
and increased its partnership interest. In exchange for the commitments by NGM,
a subsidiary of National Gaming Corporation, and Alliance to provide additional
financing (up to a maximum of $2,000,000 each) to be used, among other things
for the completion of certain incomplete elements of the project which survived
the opening of the casino (for which RCC was to have been responsible, but
failed to satisfy) and for a $500,000 payment paid to HFS as a waiver fee, a
commitment by Alliance to fund any additional capital necessary for the
completion, upgrading or working capital of the project, the following occurred:
(i) a subsidiary of Alliance became the general partner and RCC became the
limited partner and (ii) the respective partnership interests were adjusted. As
of March 31, 1996, amounts outstanding under the HFS facility and the related
financings aggregated $9.7 million. As adjusted, RCC is entitled to receive 10%
of the net available cash flows after debt service and other items, as defined
(which amount increases to 20% of such amount if revenues exceed $35,000,000
(i.e. only on such incremental amount)), for a period of 15 years, such period
being subject to one year extensions for each year in which a minimum payment of
$50,000 is not made. In addition, if during any continuous 12-month period until
December 31, 1999 the casino achieved earnings from the project of at least
$10.5 million before deducting depreciation, amortization, royalty and income
taxes, then Alliance would be obligated to pay to certain principals of the
original partnership an amount aggregating $1 million in cash or shares of
Common Stock 180 days after the occurrence. The casino has achieved the required
earnings as adjusted, and Alliance is obligated to make the required payment or
issue the Common Stock (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 the general partner.
PLANTATION STATION. In April 1990, Alliance purchased, for an aggregate
purchase price of $9,700,000, substantially all of the assets of the Plantation
Station casino ("Plantation Station") located near the border
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of Reno and Sparks in northern Nevada. Plantation Station is a 20,000
square-foot casino which currently contains approximately 453 gaming machines,
keno and 10 table games, including blackjack, craps, roulette and poker. In
addition, Plantation Station offers a race and sports book which is leased to an
independent race and sports book operator and includes a 300-seat restaurant
owned by Alliance. Plantation Station is convenient to both Reno and Sparks and
caters to the local market.
SALES AND MARKETING. Alliance's casinos target the cost-conscious local
market. Alliance promotes its casinos primarily by providing quality food at
reasonable prices and through special promotional events. Alliance believes its
experience with operating small casinos targeted to local markets will enable it
to effectively operate casinos in emerging gaming jurisdictions that have
similar characteristics.
COMPETITION. Gaming of all types is available throughout Nevada in numerous
locations, including many locations similar to those at which Alliance operates
gaming machines. All of these gaming opportunities may compete directly or
indirectly with Alliance's casino operations. Many of Alliance's competitors
possess substantially greater financial and other resources than Alliance. Many
of such competitors include large casino-hotels which offer more variety and
amenities and may be perceived to have more favorable locations than Alliance.
The operation of casinos is a highly competitive business. The principal
competitive factors in the industry include the quality and location of the
facility, the nature and quality of the amenities and customer services offered
and the implementation and success of marketing programs. Plantation Station's
primary casino operations focus on the local market rather than the tourist
market. The Rainbow Casino generally appeals to both locals and visitors.
Accordingly, Alliance believes that the principal competition for Plantation
Station's operations comes from larger "locals" casinos. The Rainbow Casino
appeals to both locals and visitors to historic Vicksburg, Mississippi. The
Rainbow Casino is the fourth gaming facility to open in Vicksburg, Mississippi
and as such, faces substantial direct competition for gaming customers in the
region.
BUSINESS DEVELOPMENT ACTIVITY
As described in "Unaudited Pro Forma Condensed Combined Financial
Information", the Company intends to reduce Alliance development expenses, which
related to mergers, acquisitions and joint ventures, following the Transaction.
The reduction reflects the elimination of costs that were being incurred prior
to Alliance's accomplishment of its strategic plan to acquire a major electronic
gaming machine manufacturing company. To accomplish this reduction the Company
intends to reduce payroll costs and fees paid to consultants and legal costs
related to non-BGII transactions Alliance had been pursuing.
PATENTS, COPYRIGHTS AND TRADE SECRETS
Alliance has copyrighted both the source code and the video presentation of
its games and registered many of these copyrights with the U.S. Copyright Office
under the Copyright Act of 1976. Game version upgrades and new games are
currently in the process of United States patent and copyright registration.
Such copyrights expire at various dates from September 2056 to October 2065. In
addition, some of the games have Federal and/or state trademarks registered with
the U.S. Patent and Trademark Office. Some of the games (either currently used
or reserved for future development) also are covered by patents filed with the
U.S. Patent and Trademark Office. Such patents expire at various dates from May
2008 to March 2012.
BGII is obligated under several patent agreements to pay royalties ranging
from approximately $50 to $200 per game depending on the components in the
gaming machines. Additionally, based on an amendment to the trademark licensing
agreement between BGII and BEC dated March 31, 1995, BGII is obligated to pay a
royalty on new machines sold of $25 to $30 per machine beginning on March 31,
1995 with a minimum annual royalty payment of $500,000 for the initial five-year
term of the amended agreement, which is subject to annual renewals thereafter.
Royalty expense for the years ended December 31, 1993, 1994 and 1995 was $1.1
million, $2.9 million and $3.0 million, respectively.
Pursuant to a Trademark and License Agreement, as amended, between BEC and
BGII (the "License Agreement"), BGII licenses the name "Bally" from BEC for use
in the businesses of BGII. In 1992, BGII paid $3.5 million to BEC in the form of
an offset against a tax receivable which was owed by BEC to BGII for the
licensing rights. See "Notes to BGII's Consolidated Financial Statements --
Summary of Significant
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Accounting Policies -- Intangible and other assets". On March 27, 1995, BEC
filed an action in the United States District Court, District of New Jersey
seeking to revoke BGII's right to the use of the Bally trade name under the
terms of the License Agreement. On March 31, 1995, BGII and BEC entered into a
Trademark License and Settlement Agreement pursuant to which the above-described
action was settled. BGII agreed to pay BEC a per machine royalty of $25 on the
first 20,000 new machines sold annually on or after March 31,
1995 and $30 per machine for new machine unit sales in excess of 20,000 gaming
machines, with a minimum annual royalty of $500,000 per year for the initial
five year term of the amended agreement and subject to annual renewal
thereafter. In addition, BGII agreed to rebate to BEC an amount for every new
gaming machine sold to BEC or its affiliates for two years. As part of the
settlement, BGII retained its right to the use of the Bally trade name for an
initial period of five years with annual extensions thereafter at the option of
BGII. The settlement has not had a significant impact on BGII's financial
position, results of operations or cash flows. BEC has asserted that its
permission is required for the surviving company in the Merger to continue to
utilize the Bally trade name, an assertion which BGII has denied. On February
16, 1996, BGII received notice from BEC alleging that BGII had violated the
License Agreement by, among other things, granting to Marine Midland a security
interest in general intangibles. In such notice, BEC also stated that as a
result of the foregoing, it was immediately terminating the License Agreement.
BGII does not believe that it has violated the terms of the License Agreement
and BGII will defend its position against BEC's claims. See the description of
related litigation under "Risk Factors -- Certain Litigation -- Bally Trade
Name" and "-- Litigation Relating to the Merger".
In July 1992, BGII reached an agreement for an exclusive license until
December 31, 2005, subject to extension, of a patent relating to the use of
credit cards in gaming machines and acquired 1% of the stock of Scotch Twist,
Inc., the private company which granted this license, in exchange for the
issuance of 100,001 shares of BGII's common stock. The licensing agreement
requires BGII to commit $1.2 million in research and development costs related
to the patent, plus any costs related to obtaining required regulatory approvals
and licenses. As of March 31, 1996, approximately $1.0 million had been spent
relating to this commitment.
In connection with a settlement agreement entered between BEC, Gaming, BGI
Enterprises, BGII and IGT on December 16, 1992, BGII sold its interest in the
Casino Interlink Multiple Location Progressive System (the "Progressive System")
to IGT. BGII reserved certain rights in the sale, including the rights to
continue to sell the Progressive System (i) within Europe, (ii) for use in
single locations, and (iii) worldwide in lottery applications. BGII agreed to
discontinue general sales of the Progressive System or any similar system
outside of Europe for a period of five years. This agreement is binding on all
successors and assigns of BGII, including the Company, from the date of the
settlement agreement.
The Company has registered the trademark "CEI" and its design and the logos
of United Gaming, Inc. and United Coin Machine Co. with the U.S. Patent and
Trademark Office.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1995, Alliance employed approximately 683 persons in the
State of Nevada and approximately 8 persons in various states related to its
business development activities, VSI employed approximately 73 persons in the
State of Louisiana, RCVP employed 374 persons in the State of Mississippi, and
BGII and its subsidiaries employed approximately 500 persons in various states
and 440 persons in Germany. None of such employees is covered by a collective
bargaining agreement. Wulff's employees, however, are covered by German
regulations which apply industry-wide and are developed, to some extent, through
negotiations between representatives of the metal working industry employers and
the trade union representing the employees. These regulations are in the nature
of collective bargaining agreements and cover the general terms and conditions
of such items as wages, vacations and work hours. The regulations codify what
are considered the common standards of employment in the German metal working
industry. The Company believes its relationships with its employees are
satisfactory.
LITIGATION RELATING TO THE MERGER
On or about June 19, 1995, three purported class actions were filed in the
Chancery Court of Delaware by BGII stockholders against BGII and its directors
(the "Fiorella, Cignetti and Neuman Actions") in
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connection with the then-proposed merger of BGII with WMS (the "WMS Merger").
Also on or about June 19, 1995, a purported class action was filed in the
Delaware Court of Chancery by a BGII stockholder against BGII and its directors
and Alliance (the "Strougo Action") in connection with the tender offer and
consent solicitation made by Alliance (subsequently superseded by the execution
of the Merger Agreement). On or about July 6, 1995, the plaintiffs in the
Fiorella, Cignetti, Neuman and Strougo Actions (collectively, the "Stockholder
Plaintiffs") filed with the Court a motion to consolidate the four actions. On
or about July 27, 1995, certain of the Stockholder Plaintiffs filed an amended
complaint that adopted certain allegations concerning self-dealing by BGII
directors in connection with the merger agreement entered into with WMS (the
"WMS Agreement"); added a claim relating to BGII's alleged failure to hold an
annual meeting as required; and added WMS as defendant. The amended complaint
also alleged that BGII intended, in violation of Delaware law, to sell Wulff
without first seeking stockholder approval of the sale. The action sought an
order enjoining defendants from proceeding with, consummating or closing the WMS
Merger, or rescinding it if it closed; preventing the sale of Wulff without
prior stockholder approval; declaring invalid BGII's agreement to pay WMS a fee
if the WMS Agreement is terminated by BGII in certain circumstances; compelling
an auction of BGII and the provision of due diligence to Alliance; scheduling an
immediate meeting of BGII stockholders; and awarding compensatory damages.
Management believes these claims to be without merit and intends to vigorously
defend these actions.
On October 23, 1995, WMS instituted a suit in New York State Court against
BGII for BGII's failure to pay $4.8 million upon termination of the WMS
Agreement. Management intends to vigorously defend this action. On November 22,
1995, BGII answered the complaint and brought counterclaims against WMS alleging
that WMS repudiated and breached the WMS Agreement by, among other things,
failing to act in good faith toward the consummation of the WMS Merger, advising
BGII that it would not perform as agreed but would impose new conditions on the
WMS Merger, acting in excess of its authority and undermining the ability of
BGII to perform the WMS Agreement. On February 8, 1996 WMS moved for summary
judgment. On April 2, 1996, BGII opposed WMS's motion and cross-moved for
summary judgment. Pursuant to the Merger Agreement, Alliance has agreed to
indemnify BGII against such a claim under certain circumstances.
On September 14, 1995, a stockholders' class and derivative action was
commenced by Richard Iannone, an Alliance stockholder, against Alliance, the
members of its current Board of Directors and certain of its former directors in
Federal District Court in Nevada asserting, among other matters, that Alliance
has wasted corporate assets in its efforts to acquire BGII by, among other
things, agreeing to onerous and burdensome financing arrangements that threaten
Alliance's ability to continue as a going concern and that Alliance had made
false and misleading statements and omissions in connection with that effort by
failing to disclose the need to refinance an additional $53 million of existing
BGII indebtedness, by failing to disclose how Alliance would recapitalize the
indebtedness of a combined Alliance/BGII and by failing to disclose the leading
role played by Richard Rainwater in Alliance's efforts to acquire control of
BGII which, given assurances made by Alliance to gaming regulators in Nevada
that the unlicensed Mr. Rainwater would not play an active role in the
management of Alliance, could expose Alliance to suspension or revocation of its
Nevada gaming license. In addition, the stockholder action against Alliance
alleges that (i) Alliance substantially inflated its results of operations by
selling gaming machines at inflated prices in exchange for promissory notes
(without any down payment) which Alliance knew could not be paid in full but
which Alliance nevertheless recorded at full value, (ii) Alliance doctored
reports sent to its route customers and (iii) the directors of Alliance had
caused Alliance to engage in self-dealing transactions with certain directors
which resulted in the exchange of Alliance assets for assets and services of
vastly lesser value. On September 21, 1995, a United States magistrate denied
the plaintiffs' request for expedited discovery, stating that Mr. Iannone was
not an adequate representative and was not likely to succeed on the merits. On
October 4, 1995, the defendants filed a motion to dismiss the action. On
December 18, 1995, the plaintiff filed an amended shareholder derivative
complaint. The plaintiff is no longer asserting any class claims. On March 5,
1996 the defendants filed a motion to dismiss the amended complaint.
In June 1995, BEC asserted that a certain agreement between BEC and BGII
(the "Noncompete Agreement") prohibits the use by BGII of the trade name "Bally"
if it is merged with a company that is in the
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casino business within or without the United States and operates such business
prior to January 8, 1999. BGII believes such claim is entirely without merit
since the restriction referred to expired on January 8, 1996 and in any event
does not relate to the use of the "Bally" trade name, which is covered by the
License Agreement. The restriction in the Noncompete Agreement will not have any
impact on the Company since the Effective Time of the Merger contemplates a
closing of the Merger after the restriction in the Noncompete Agreement lapses.
BEC has not reasserted this position since it was informed by BGII in July 1995
that the restriction lapsed on January 8, 1996. Consequently, management
believes BEC has determined not to contest BGII's position.
BEC has also asserted that a merger between BGII and the Merger Subsidiary
would violate the terms of the License Agreement. BGII has denied these claims
and management believes that the surviving company in the Merger will be
permitted to use the "Bally" trade name in accordance with the terms of such
License Agreement. Management believes that no breach of such License Agreement
is caused by the Merger and the use of the "Bally" trade name by the surviving
corporation. In a letter dated November 9, 1995, BEC reasserted its position. On
November 20, 1995, Alliance, the Merger Subsidiary and BGII commenced an action
against BEC in Federal District Court in Delaware seeking a declaratory
judgment, among other things, that the surviving company in the Merger will be
permitted to use the "Bally" trade name in accordance with the terms of the
License Agreement, and seeking injunctive relief (the "Alliance Action"). On
November 28, 1995, BEC commenced an action against BGII, Gaming, Alliance and
the Merger Subsidiary in Federal District Court in New Jersey to enjoin the
defendants from using the "Bally" trade name (the "BEC Action"). On November 28,
1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the
Alliance Action pending resolution of the BEC Action. The BEC Action alleges
that BGII's continued use of the trade name after the Merger will (1) constitute
a prohibited assignment of BGII's rights to use the trade name and (2) exceed
the scope of the license granted to BGII because BGII will be under the control
of Alliance. On December 15, 1995, BEC filed a motion for a preliminary
injunction in the BEC Action. At a hearing on January 17, 1996, the court
declined to issue a preliminary injunction, but held BEC's motion in abeyance
pending the defendants' motion to dismiss and for summary judgment, which the
defendants had filed on December 26, 1995. Thereafter, the parties advised the
court that they are negotiating a settlement of the BEC Action. On March 29,
1996, at the court's request, the parties entered into a consent order providing
for the administrative dismissal of the BEC Action, subject to its reopening
should the settlement not be consummated. On April 24, 1996 the Delaware court
entered a similar order on consent dismissing the Alliance Action, subject to
its reopening should the settlement not be consummated. If the parties do not
agree on a settlement, BGII, Gaming, Alliance and the Merger Subsidiary intend
to vigorously defend their position in these actions. However, there can be no
assurance that BEC will not be successful in its action to prohibit the
surviving corporation in the Merger from using the "Bally" trade name. The loss
of the "Bally" trade name may have a material adverse effect on the gaming
machine operations of the Company.
On February 16, 1996, BGII received notice from BEC alleging that BGII had
violated the License Agreement by, among other things, granting to Marine
Midland a security interest in general intangibles. In such notice, BEC also
stated that as a result of the foregoing, it was immediately terminating the
License Agreement. Management does not believe that BGII has violated the terms
of the License Agreement and the Company will defend its position against BEC's
claims.
OTHER LITIGATION
In 1994, after an intensive Federal investigation of Gaming's former
Louisiana distributor, eighteen individuals were indicted on charges of
racketeering and fraud against Gaming and the Louisiana regulatory system. Among
those indicted were the former distributor's stockholders, directors, employees
and others alleged to be associated with organized crime. Fifteen entered pleas
of guilty before trial and the remaining three were convicted in October 1995.
In addition, Alan Maiss, a former director and president of BGII, pled guilty to
misprision of a felony in connection with such investigation. BGII, its
subsidiaries and its current employees were not subject to such investigation.
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Prior to the conclusion of the Federal criminal case, BGII's activities with
regard to its former VLT distributor in Louisiana were the subject of inquiries
by gaming regulators and a report by the New Jersey Division of Gaming
Enforcement dated August 24, 1995. The New Jersey Commission has indicated that
it will hold a hearing on the matter, but no date has been set at this time. The
New Jersey report made no specific recommendations for action by the New Jersey
Commission. The gaming authorities in Ontario, Canada, who have investigated the
matter, issued a gaming registration to Gaming on February 8, 1996.
On September 25, 1995, BGII was named as a defendant in a class action
lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf
of himself and all others similarly situated (the "plaintiffs"). The plaintiffs
filed suit against BGII and approximately 45 other defendants (each a
"defendant", and collectively the "defendants"). Each defendant is involved in
the gaming business as either a gaming machine manufacturer, distributor, or
casino operator. The class action lawsuit arises out of alleged fraudulent
marketing and operation of casino video poker machines and electronic slot
machines. The plaintiffs allege that the defendants have engaged in a course of
fraudulent and misleading conduct intended to induce people into playing their
gaming machines based on a false belief concerning how those machines actually
operate as well as the extent to which there is actually an opportunity to win
on any given play. The plaintiffs allege that the defendants' actions constitute
violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and
give rise to claims of common law fraud and unjust enrichment. The plaintiffs
are seeking monetary damages in excess of one billion dollars, and are asking
that any damage awards be trebled under applicable Federal law. Management
believes the plaintiffs' lawsuit to be without merit. The Company intends to
vigorously pursue all legal defenses available to it.
ENVIRONMENTAL MATTERS
The Company is subject to Federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances (together, "Environmental
Laws"). The Company uses certain substances and generates certain wastes that
are regulated or may be deemed hazardous under applicable Environmental Laws.
From time to time, the Company's operations may result in certain noncompliance
with applicable requirements under Environmental Laws. Any past noncompliance
with applicable requirements under Environmental Laws has not had a material
adverse effect on the Company's results of operations or financial condition.
Further, the Company believes that any noncompliance or cleanup liability under
current Environmental Laws would not have a material adverse effect on the
Company's results of operations or financial condition.
GAMING REGULATION AND LICENSING
The manufacture and distribution of gaming machines and the operation of
gaming facilities are subject to extensive Federal, state, local and foreign
regulation. Although the laws and regulations of the various jurisdictions in
which the Company operates and into which the Company may expand its gaming
operations vary in their technical requirements and are subject to amendment
from time to time, virtually all of these jurisdictions require licenses,
permits, documentation of qualification, including evidence of financial
stability, and other forms of approval for companies engaged in the manufacture
and distribution of gaming machines and the operation of gaming facilities, as
well as for the officers, directors, major stockholders and key personnel of
such companies.
Any person which acquires a controlling interest in the Company would have
to meet the requirements of all governmental bodies which regulate the Company's
gaming business. A change in the make-up of the Company's Board of Directors and
management would require the various Gaming Authorities to examine the
qualifications of the new board and management. The past conduct of management,
which may be re-examined in conjunction with hearings in Nevada, New Jersey and
Louisiana, would normally not be a controlling factor in passing upon the
suitability of a successor group when that prior management group
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would no longer be in control of the Company. Absent actual approval of the
successor interests controlling the Company after a merger or other acquisition,
there can be no assurance that governmental authorities would give required
approvals to any particular persons or groups.
NEVADA
The ownership and operation of casino gaming facilities in Nevada, and the
manufacture, distribution and operation of gaming machines and cashless wagering
systems for use or play in Nevada, or for distribution outside of Nevada, are
subject to (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (the "Nevada Act") and (ii) various local ordinances and regulations.
The Company's gaming, manufacturing, distributing and slot machine route
operations (herein referred to as "gaming machine management operations") are
subject to the licensing and regulatory control of the Nevada State Gaming
Control Board (the "Nevada Board"), the Nevada Gaming Commission (the "Nevada
Commission"), the County Liquor and Gaming Licensing Board (the "Clark County
Board") and various other county and city regulatory agencies, all of which are
collectively referred to as the "Nevada Gaming Authorities".
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things, (i) the prevention of unsavory or unsuitable persons
from having any direct or indirect involvement with gaming at any time in any
capacity; (ii) the strict regulation of all persons, locations, practices,
associations and activities related to the operation of licensed gaming
establishments and the manufacture and distribution of gaming machines, cashless
wagering systems and associated equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective control over the financial practices of licensees,
including establishment of minimum procedures for internal fiscal affairs and
the safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities; (v)
the prevention of cheating and fraudulent practices; and (vi) providing a source
of state and local revenues through taxation and licensing fees. Change in such
laws, regulations and procedures could have an adverse effect on the gaming
related operations conducted by the Company.
Alliance and BGII are each registered with the Nevada Commission as
publicly-traded corporations ("Registered Corporations"). Alliance's direct and
indirect subsidiaries conduct gaming operations at various locations, conduct
gaming machine management operations and manufacture and distribute electronic
gaming machines (collectively, the "Alliance Nevada Subsidiaries"). Gaming, the
operating subsidiary for BGII's domestic gaming operations, which manufactures
and distributes electronic gaming machines, is also required to be licensed by
the Nevada Gaming Authorities. The licenses held by the Alliance Nevada
Subsidiaries and Gaming require the periodic payments of fees, or fees and
taxes, and are not transferable. Alliance and BGII have been found suitable to
own the stock of the Alliance Nevada Subsidiaries and Gaming, respectively, each
of which is a corporate licensee (individually, a "Corporate Licensee" and
collectively, "Corporate Licensees") under the terms of the Nevada Act. As
Registered Corporations, Alliance and BGII are required periodically to submit
detailed financial and operating reports to the Nevada Commission and furnish
any other information which the Nevada Commission may require. No person may
become a stockholder of, or receive any percentage of the profits from, the
Corporate Licensees without first obtaining licenses and approvals from the
Nevada Gaming Authorities. Alliance, BGII and the Corporate Licensees have
obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required in order to engage in gaming
activities, gaming machine management operations, and in the manufacture and
distribution of gaming machines for use or play in Nevada or for distribution
outside of Nevada, as the case may be.
The Merger must be approved in advance by the Nevada Board and the Nevada
Commission. Hearings are currently scheduled before the Nevada Board on May 8,
1996 and before the Nevada Commission on May 23, 1996 to obtain the necessary
approvals.
All gaming machines and cashless wagering systems that are manufactured,
sold or distributed for use or play in Nevada, or for distribution outside of
Nevada, must be manufactured by licensed manufacturers and distributed or sold
by licensed distributors. All gaming machines manufactured for use or play in
Nevada
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must be approved by the Nevada Commission before distribution or exposure for
play. The approval process for gaming machines and cashless wagering systems
includes rigorous testing by the Nevada Board, a field trial and a determination
as to whether the gaming machines or cashless wagering system meets strict
technical standards that are set forth in the regulations of the Nevada
Commission. Associated equipment must be administratively approved by the
Chairman of the Nevada Board before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or the
Corporate Licensees in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and key employees of the Company who are actively and directly
involved in the licensed activities of the Corporate Licensees may be required
to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities who, in addition to
their authority to deny an application for a finding of suitability or
licensure, have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or the Corporate Licensees, the companies involved
would have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company or the Corporate Licensees to terminate the
employment of any person who refuses to file appropriate applications.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
The Company and the Corporate Licensees that hold nonrestricted licenses are
required to submit detailed financial and operating reports to the Nevada
Commission. A nonrestricted license is a license for an operation consisting of
16 or more slot machines, or a license for any number of slot machines together
with any other game, gaming device, race book or sports pool at one
establishment. Substantially all material loans, leases, sales of securities and
similar financing transactions by the Corporate Licensees that hold a
nonrestricted license must be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by a Corporate
Licensee, the licenses it holds could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company and the Corporate Licensees and the persons involved
could be subject to substantial fines for each separate violation of the Nevada
Act at the discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate any nonrestricted gaming
establishment operated by a Corporate Licensee and, under certain circumstances,
earnings generated during the supervisor's appointment (except for reasonable
rental of the casino) could be forfeited to the State of Nevada. Limitation,
conditioning or suspension of the gaming licenses of the Corporate Licensees or
the appointment of a supervisor could (and revocation of any gaming license
would) materially adversely affect the gaming related operations of the Company.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his or her suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a Registered
Corporation's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10% of a
Registered Corporation's voting securities apply to the Nevada Commission for a
finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor" as defined in the Nevada Act,
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which acquires more than 10%, but not more than 15%, of a Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor holds the
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock beyond such period
of time as may be prescribed by the Nevada Commission may be guilty of a
criminal offense. The Company is subject to disciplinary action if, after it
receives notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or the Corporate Licensees, the Company (i)
pays that person any dividend or interest upon voting securities of the Company,
(ii) allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays remuneration in any
form to that person for services rendered or otherwise, or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities, including, if necessary, the immediate purchase of said voting
securities for cash at fair market value. Additionally, the Clark County Board
has the authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any debt
securities of a Registered Corporation, such as the Senior Notes, Old
Convertible Debentures or New Convertible Debentures, to file applications, be
investigated and be found suitable to own the debt security if the Nevada
Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if, without the prior approval of the
Nevada Commission, it (i) pays the unsuitable person any dividend, interest or
any distribution whatsoever, (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation or similar
transaction.
The Company is required to maintain current stock ledgers in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to impose a requirement that a Registered Corporation's
stock certificates bear a legend indicating that the securities are subject to
the Nevada Act. The Nevada Commission has imposed this requirement on the
Company.
The Company may not make a public offering of its securities such as the
Preferred Stock, Senior Notes, New Convertible Debentures, Common Stock and
Series E Special Stock without the prior approval of the
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Nevada Commission if the securities or proceeds therefrom are intended to be
used to construct, acquire or finance gaming facilities in Nevada, or to retire
or extend obligations incurred for such purposes. The Company has filed an
application for approval of the Offerings, the Exchange Offer and related
transactions, including stock pledges, negative pledges and security interests
in connection with the Note Offering. However, there can be no assurance that
the Offerings or the Exchange Offer or related transactions will be approved or
that if approved they will be approved on a timely basis. Any such approval, if
granted, does not constitute a finding, recommendation or approval by the Nevada
Commission or the Nevada Board as to the accuracy or adequacy of the prospectus
or the investment merits of the securities offered. Any representation to the
contrary is unlawful. The Nevada Commission has also imposed a requirement on
Alliance and BGII that it must receive the prior administrative approval of the
Nevada Board Chairman for any offer for the sale of an equity security in a
private transaction such as the Private Placement. The Company filed a request
for administrative approval of the Private Placement and the Nevada Board
Chairman has approved the Private Placement.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control to be investigated and
licensed as a part of the approval process relating to the transaction. The
Merger and certain related transactions require the prior approval of the Nevada
Commission.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices on
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before a Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada, and to the
counties and cities in which the Licensees' respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based upon either (i) a
percentage of the gross revenues received, (ii) the number of gaming machines
operated, or (iii) the number of games operated. A casino entertainment tax is
also paid by casino operations where entertainment is furnished in connection
with the selling of food or refreshments. The Corporate Licensees that hold a
license as an operator of a gaming device route or a manufacturer's or
distributor's license also pay certain fees to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of its participation in such foreign gaming. The revolving fund
is subject to increase or decrease in the discretion of the Nevada Commission.
Thereafter, Licensees are required to comply with certain reporting requirements
imposed by the Nevada Act. Licensees are also subject to disciplinary action by
the Nevada Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to
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conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees or employ a person in the foreign operations who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at establishments operated by a Corporate
Licensee are subject to licensing, control and regulation by applicable local
regulatory agencies. All licenses are revocable and are not transferable. The
agencies involved have full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action could (and revocation would) have
a material adverse affect upon the operations of the Corporate Licensees.
LOUISIANA
The manufacture, distribution, servicing and operation of video draw poker
devices ("Devices") in Louisiana is subject to the Louisiana Video Draw Poker
Devices Control Law and the Rules and Regulations promulgated thereunder (the
"Louisiana Act"). Licensing and regulatory control is provided by the Video
Gaming Division of the Gaming Enforcement Section of the Office of State Police
within the Department of Public Safety and Corrections (the "Division"). The
Louisiana Legislature recently passed a bill which enacts a single gaming
control board for the regulation of gaming in Louisiana. This Board is called
the Louisiana Gaming Control Board (The "Louisiana Board") who will issue all
licensing after May 1, 1996 for video draw poker devices. The Division will
continue to perform investigatory functions for the Louisiana Board. The laws
and regulations of Louisiana are based upon a primary consideration of
maintaining the health, welfare and safety of the general public and upon a
policy which is concerned with protecting the video gaming industry from
elements of organized crime, illegal gambling activities and other harmful
elements as well as protecting the public from illegal and unscrupulous gaming
to ensure the fair play of Devices. The Louisiana legislature recently passed a
bill which would allow each parish to decide whether to disallow video poker
devices, riverboat casinos and, in Orleans Parish, land-based casinos. If any
parish in which the Company operates elects to disallow video poker devices, the
Company would have to cease its video poker operations there by June 30, 1999.
The Company cannot predict which parishes will so elect; however, if all of the
parishes in which the Company operates so elect, the cessation of the Company's
video poker operations would have a material adverse effect on the operations of
the Company. See "Risk Factors -- Strict Regulation by Gaming Authorities".
Each of the indirect operating subsidiaries for the Company's gaming
operations in Louisiana, VSI and SVS, has been granted a license as a Device
owner by the Division. Another indirect subsidiary of the Company, VDSI, has
been granted a license as a distributor by the Division. Gaming has been granted
a license as a manufacturer by the Division. These gaming subsidiaries are
"Louisiana Licensees" under the terms of the Louisiana Act. The licenses held by
such Louisiana Licensees expire at midnight on June 30 of each year and must be
renewed annually through payment of fees. All license fees must be paid on or
before May 15 in each year licenses are renewable.
The Louisiana Board may deny, impose a condition on or suspend or revoke a
license, renewal or application for a license for violations of any rules and
regulations of the Louisiana Board Division or any violations of the Louisiana
Act. In addition, fines for violations of gaming laws or regulations may be
levied against the Louisiana Licensees and the persons involved for each
violation of the gaming laws. The issuance, condition, denial, suspension or
revocation is a pure and absolute privilege and is at the discretion of the
Board in accordance with the provisions of the Louisiana Act. A license is not
property or a protected interest under the constitution of either the United
States or the State of Louisiana.
The Division has the authority to conduct overt and covert investigations of
any person involved directly or indirectly in the video gaming industry in
Louisiana. This investigation may extend to information regarding a person's
immediate family and relatives and their affiliations with certain organizations
or other business entities. The investigation may also extend to any person who
has or controls more than a 5% ownership, income or profits interest in an
applicant for or holder of a license or who is a key employee, or who has the
ability to exercise significant influence over the licensee. All persons or
entities investigated
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must meet all suitability requirements and qualifications for a licensee. The
Board may deny an application for licensing for any cause which it may deem
reasonable. The applicant for licensing must pay a filing fee which also covers
the cost of the investigation.
In order for a corporation to be licensed as a distributor by the Board, a
majority of the stock of the corporation must be owned by persons who have been
domiciled in Louisiana for a period of at least two years prior to the date of
the application.
In addition to licensure as a manufacturer of Devices under the Louisiana
Act, Gaming has been licensed by the Division as a manufacturer under the
Louisiana Riverboat Economic Development and Gaming Control Act (the "Louisiana
Riverboat Act"). Gaming's application for a permanent manufacturer's license as
it relates to the land-based casino was pending before LEDGC at the time the
operator of the land-based casino filed for bankruptcy reorganization and ceased
operations, resulting in the termination of funding for the LEDGC regulatory
operations and the effective closure of the LEDGC's operations. See "Risk
Factors -- Ongoing BGII Regulatory Investigations" and "Business -- Other
Litigation".
The Division notified Alliance that it would be necessary to obtain approval
from it prior to the Effective Time which approval will now have to be issued by
the Board. To that effect, the Company has made all requests necessary to obtain
any such licenses, permits or approvals required to be obtained prior to the
Effective Time.
MISSISSIPPI
The manufacture, distribution, ownership and operation of gaming machines in
Mississippi is subject to extensive state and local laws and regulations,
including the Mississippi Gaming Control Act (the "Mississippi Act") and the
regulations (the "Mississippi Regulations") promulgated thereunder. The
Mississippi Gaming Commission (the "Mississippi Commission") oversees licensing
and regulatory compliance. Gaming in Mississippi can be legally conducted only
on vessels of a certain minimum size in navigable waters of the Mississippi
River or in waters of the State of Mississippi which lie adjacent and to the
south (principally in the Gulf of Mexico) of the counties of Hancock, Harrison
and Jackson, and only in counties in Mississippi in which the registered voters
have not voted to prohibit such activities. The voters in Jackson County, the
southeastern-most county of Mississippi, have voted to prohibit gaming in that
county. However, gaming could be authorized in Jackson County should the voters
fail to disapprove of gaming in that county in any referendum, which could be
held annually. The underlying policy of the Mississippi Act is to ensure that
gaming operations in Mississippi are conducted (i) honestly and competitively,
(ii) free of criminal and corruptive influences and (iii) in a manner which
protects the rights of the creditors of gaming operations.
The Mississippi Act requires that a person (including any corporation or
other entity) must be licensed to conduct gaming activities in Mississippi. A
license to own and operate gaming machines will be issued only for a specified
location which has been approved as a gaming site by the Mississippi Commission.
Alliance through its interest in RCVP must apply for renewal of such licenses
every two years, which renewal cannot be assured. Gaming holds a license to
manufacture and distribute gaming machines. The current license at the Rainbow
Casino will expire on June 1, 1996 unless renewed in advance of that date.
Alliance knows of no reason why such license will not be renewed. The
Mississippi Act also requires that each officer or director of a gaming
licensee, or other person who exercises a significant influence over the
licensee, either directly or indirectly, must be found suitable by the
Mississippi Commission. In addition, any employee of the licensee who is
directly involved in gaming must obtain a work permit from the Mississippi
Commission. The Mississippi Commission will not issue a license or make a
finding of suitability unless it is satisfied, only after an extensive
investigation paid for by the applicant, that the persons associated with the
gaming licensee or applicant for a license are of good character, honesty and
integrity, with no relevant or material criminal record. In addition, the
Mississippi Commission will not issue a license unless it is satisfied that the
licensee is adequately financed or has a reasonable plan to finance its proposed
operations from acceptable sources, and that persons associated with the
applicant have sufficient business probity, competence and experience to engage
in the proposed gaming enterprise. The Mississippi Commission may refuse to
issue a work permit to a gaming employee (i) if the employee has committed
larceny, embezzlement or any crime of moral turpitude, or knowingly violated the
Mississippi Act or Mississippi Regulations, or (ii) for any other reasonable
cause. If an employee is denied a license, the Company must terminate his or her
employment.
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The Merger must be approved in advance by the Mississippi Commission. A
hearing is scheduled before the Mississippi Commission on May 16, 1996 to obtain
the necessary approval.
The Mississippi Commission has the power to deny, limit, condition, revoke
and suspend any license, finding of suitability or registration, or fine any
person, as it deems reasonable and in the public interest, subject to an
opportunity for a hearing. The Mississippi Commission may fine any licensee or
person who was found suitable up to $100,000 for each violation of the
Mississippi Act or the Mississippi Regulations which is the subject of an
initial complaint, and up to $250,000 for each such violation which is the
subject of any subsequent complaint. The Mississippi Act provides for judicial
review of any final decision of the Mississippi Commission by petition to a
Mississippi Circuit Court, but filing of such petition does not necessarily stay
any action by the Mississippi Commission pending a decision by the Circuit
Court.
Each gaming licensee must pay a license fee to the State of Mississippi
based upon "gaming receipts" (generally defined as gross receipts less payouts
to customers as winnings). The license fee equals 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and up to $134,000
per month and 8% of gaming receipts over $134,000 per month. The foregoing
license fees are allowed as a credit against any Mississippi State income tax
liability for the year paid. An additional license fee, equal to $100 for each
table game conducted or planned to be conducted on the gaming premises, is
payable to the State of Mississippi annually in advance. Municipal and county
fees may also be assessed and vary from jurisdiction to jurisdiction. All taxes
and fees must be paid timely in order to retain a gaming license. The
Mississippi Act also imposes certain audit and record keeping laws and
regulations, primarily to ensure compliance with the Mississippi Act, including
compliance with the provisions relating to the payment of license fees.
Under the Mississippi Regulations, a gaming licensee cannot be publicly
held, although an affiliated corporation, such as the Company, may be publicly
held so long as the Company registers with and gets the approval of the
Mississippi Commission. In addition, approval of any subsequent public offerings
of the securities of the Company must be obtained from the Mississippi
Commission if any part of the proceeds from that offering are intended to be
used to pay for or reduce debt used to pay for the construction, acquisition or
operation of any gaming facility in Mississippi.
Under the Mississippi Regulations, a person is prohibited from acquiring
control of a licensee without the prior approval of the Mississippi Commission.
Any person who, directly or indirectly, or in association with others, acquires
beneficial ownership of more than five percent of a licensee must notify the
Mississippi Commission of this acquisition. The Mississippi Commission may
require that a person be found suitable if that person holds between a five
percent and ten percent ownership position and must require that a person be
found suitable if that person owns more than ten percent of a licensee.
Furthermore, regardless of the amount of ownership, any person who acquires
beneficial ownership may be required to be found suitable if the Mississippi
Commission has reason to believe that the acquisition of such ownership would be
inconsistent with the declared policy of Mississippi. Any person who is required
to be found suitable must apply for a finding of suitability from the
Mississippi Commission within 30 days after being requested to do so, and must
deposit with the State Tax Commission a sum of money which is adequate to pay
the anticipated investigatory costs associated with such finding. Any person who
is found not to be suitable by the Mississippi Commission will not be permitted
to have any direct or indirect ownership in the licensee. Any person who is
required to apply for a finding of suitability and fails to do so, or who fails
to dispose of his or her interest in the licensee if found unsuitable, is guilty
of a misdemeanor. If a finding of suitability with respect to any person is not
applied for where required, or if it is denied or revoked by the Mississippi
Commission, the licensee is not permitted to pay such person of services
rendered, or to employ or enter into any contract with such person.
Dockside casinos may be required to be moved to a "safe harbor" in the event
of a threatened hurricane. The appropriate county civil defense director will
determine when such movement is required. In general, it is anticipated that
casino vessels will have to be moved in the event of a Class III or more severe
hurricane warning, where there is the possibility of 125 miles per hour wind
speeds. The movement of a casino barge will not necessarily insure protection
against damage or destruction by a hurricane. Furthermore, the removal of a
casino barge will generally require several days, and as a consequence, the
casino barge will be out of business during that movement, even if no hurricane
strikes the casino site.
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Any permanently moored vessel used for casino operations must meet the fire
safety standard of the Mississippi Fire Prevention Code, the Life Safety Code
and the Standards for the Construction and Fire Protection of Marine Terminals,
Piers and Wharfs of the National Fire Protection Association. Additionally, any
establishment to be constructed for dockside gaming must meet the Southern
Standard Building Code or the local building code, if such a local building code
has been implemented at the casino's site.
While unpowered and permanently moored vessels do not require certification
by the United States Coast Guard, the Mississippi Commission has engaged the
American Bureau of Shipping, an independent consulting agency, which will
inspect and certify all casino barges with respect to stability and single
compartment flooding integrity, in accordance with the Mississippi Regulations.
The law and regulations permitting and governing Mississippi casino gaming
were adopted during 1990 and 1991, and the first casinos opened in August 1992.
Consequently, the interpretation and application of Mississippi law and
regulations may evolve over time, and any such changes may have an adverse
effect on Mississippi licensees.
NEW JERSEY
BGII's subsidiary, Gaming, is licensed by the New Jersey Commission as a
gaming-related casino service industry ("CSI") in accordance with the New Jersey
Casino Control Act (the "Casino Control Act").
Prior to expiration of the initial license period, Gaming filed an
application for renewal of its license, which application has been deemed
complete by the New Jersey Commission. Consequently, pending formal renewal of
the license, Gaming is permitted to continue doing business with New Jersey
casino licenses.
Due to the change of control of BGII as a result of the Merger, BGII's
license as a CSI will be terminated. The Company will apply for a new CSI
license following the Merger; however, the Company's operations in New Jersey
are expected to continue uninterrupted pursuant to transactional waivers granted
by the New Jersey Commission on a sale-by-sale basis, as the New Jersey
Commission has indicated its willingness to provide such waivers to the Company.
In considering the qualifications of an applicant for a CSI license, the New
Jersey Commission may require that the officers, directors, key personnel,
financial sources and stockholders (in particular those with holdings in excess
of 5%) of the applicant and its holding and intermediary companies demonstrate
their qualifications. In this regard, such persons and entities may be
investigated and may be required to make certain regulatory filings and to
disclose and/or to provide consents to disclose personal and financial data. The
costs associated with such investigation are typically borne by the applicant.
ADDITIONAL DOMESTIC JURISDICTIONS
The Company, in the ordinary course of its business, routinely considers
business opportunities to expand its gaming operations into additional
jurisdictions.
Although the laws and regulations of the various jurisdictions in which the
Company operates or into which the Company may expand its gaming operations vary
in their technical requirements and are subject to amendment from time to time,
virtually all of those jurisdictions require licenses, permits, documentation of
qualification, including evidence of financial stability, and other forms of
approval for companies engaged in the manufacture and distribution of gaming
machines as well as for the officers, directors, major stockholders and key
personnel of such companies.
Alliance and BGII and their key personnel have obtained, or applied for, all
government licenses, registrations, findings of suitability, permits and
approvals necessary for the manufacture and distribution, and operation where
permitted, of their gaming machines in the jurisdictions in which Alliance and
BGII currently do business. The Company and the holders of its securities may be
subject to the provisions of the gaming laws of each jurisdiction where BGII or
its subsidiaries are licensed and/or conduct business, including, without
limitation, the States of Arizona, Colorado, Connecticut, Illinois, Indiana,
Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada,
New Jersey, New Mexico, South Dakota, Wisconsin, and the local regulatory
authority within each such state as well as Australian, Canadian and other
foreign gaming jurisdictions in which BGII and its subsidiaries are licensed or
conduct business.
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Following the consummation of the Merger, the Company and its officers and
directors will be required to apply for any government licenses, permits and
approvals necessary or required by each of these jurisdictions.
Holders of common stock of an entity licensed to manufacture and sell gaming
machines, and in particular those with holdings in excess of 5%, should note
that local laws and regulations may affect their rights regarding the purchase
of such common stock and may require such persons or entities to make certain
regulatory filings, or seek licensure, findings of qualification or other
approvals. In some cases this process may require the holder or prospective
holder to disclose and/or provide consents to disclose personal and financial
data in connection with necessary investigations, the costs of which are
typically borne by the applicant. The investigatory and approval process can
take three to six months to complete under normal circumstances. See "Risk
Factors -- Strict Regulation by Gaming Authorities".
FEDERAL REGISTRATION. The operating subsidiaries of the Company that are
involved in gaming activities are required to file annually with the Attorney
General of the United States in connection with the sale, distribution or
operation of gaming machines. All currently required filings have been made.
GERMANY
German legislative authorities regulate and monitor the wall machine
industry so as to ensure certain manufacturing standards and the fairness of
each machine to users. The most significant legislation presently affecting the
wall machine industry relates to prescribed licensing procedures, the use,
installation and operation of machines and the taxation of same. No approval of
the Merger is required to be obtained from German legislative or regulatory
authorities.
Wall machine manufacturers are dependent upon the successful introduction of
new products each year and currently are required to receive prior government
approval for each new product introduction. Manufacturers are required to apply
for licenses through an agency of the German federal Ministry of Economics. Such
agency maintains a policy of accepting only two licensing applications from an
individual applicant at any given time. Wulff, through affiliates and
subsidiaries, is in a position to file up to six concurrent applications. After
receiving a prototype of a machine for which the applicant seeks government
licensing approval, the federal agency deliberates for periods that range from
approximately 6 to 24 months. If that product is approved, the wall machine
manufacturer is permitted to reproduce the sample machine initially submitted
for government approval. Every wall machine carries with it a small license card
that permits the machine to be operated for up to four years from the initial
date of sale, after which it may not be used in Germany. In Germany, wall
machines sold via the secondary market may be operated by a new owner but only
for the residual time remaining on each machine's four-year life. In addition to
licensing requirements for manufacturers, any person or entity which intends to
operate a licensed wall machine must apply to local regulatory authorities for a
license, which will not be granted by the authorities if facts justify the
assumption that the applicant does not possess the requisite reliability. In
this proceeding, the applicant must furnish a police certificate of conduct.
German legislation prohibits the public play of wall machines by individuals
under age 18. Voluntary agreements among manufacturers and certain amusement
game trade associations, among other things, restrict wall machine advertising
and the ability of a player to play more than two machines at once, require all
machines to carry visible warning notices and provide that every wall machine is
automatically switched off for three minutes after one hour of continuous play.
In April 1993, the German government increased the maximum coin drop per
game effective May 7, 1993 from 30 pfennigs (approximately $0.21) to 40 pfennigs
(approximately $0.28) although 30-pfennig machines are still permitted to be
manufactured and sold.
The Spielverordnung (gaming ordinance) specifically governs wall machines.
These regulations limit game payouts to DM 4.00 (approximately $2.80 per game),
require a minimum payout percentage, detail where the machines may be installed,
how many may be installed and by whom, which games are prohibited, the technical
requirements of the machines and technical review and approval. Operators must
comply with regulations which stipulate how many machines may operate within
defined square foot areas (15 square
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meters per machine, with a maximum of ten machines per location). The
Spielverordnung was modified in 1985 to achieve a significant reduction of
gaming machines. Gaming halls which through December 19, 1985 had more gaming
machines than permitted under the revised regulations, had a transition period
through December 31, 1995 to comply with the revised regulations. Such
facilities were allowed to keep the 1985 number of wall machines until December
31, 1990. During the period January 1, 1991 to December 31, 1995 they were
entitled to two-thirds of such total number, but had to be in compliance with
the new limits by January 1, 1996. In taverns, restaurants, hotels and certain
other establishments, no more than two gaming machines are permitted. See "Risk
Factors -- Operating History -- Recent Losses".
The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate)
governs the zoning classification of land and the type and density of
development within the various zoning classifications. Effective January 27,
1990, the Baunutzungsverordnung was amended essentially to restrict the
development of larger gaming halls to core commercial areas, limit the
permissibility of smaller gaming halls in various types of mixed use zones and
to ban gaming halls in most types of residential and all types of industrial use
areas. Prior to such amendment, gaming halls, regardless of size, were generally
allowed in core, business, mixed and industrial zones. In addition, on a case by
case basis, each local zoning agency is authorized to exclude certain types of
otherwise permissible uses, including gaming halls.
Subject to certain exceptions, V.A.T. of 15% is generally assessed on the
sale or supply of any goods and services in Germany. Since the total amount paid
for particular goods or services is considered to be the gross price in
calculating such tax, the actual rate is 13.04%. With respect to operators of
gaming machines, prior to January 1, 1994, V.A.T. was to have been assessed at a
rate of 0.1304 times a multiplier of, with respect to the period from January 1,
1991 through December 31, 1992, 2.0 times the amount remaining in the cash box
after payoffs to players and, with respect to the period from January 1, 1993
through December 31, 1993, 2.5 times the amount remaining in the cash box after
payouts to players. Commencing January 1, 1994 the tax rate was changed to
0.1304 times the cash handled by a machine. During mid-1994, the German
government effected a tax law revision based on a European Court ruling whereby
V.A.T. charged to the operators of wall machines was significantly reduced. See
"Business -- German Operations -- Industry Overview". In accordance with the
ruling, for all cases arising on or after, or that were pending on, July 5,
1994, the basis for taxation has been the cash remaining in the machines. The
rule requiring a minimum payout percentage is applied to the amount remaining in
the cash box net of such V.A.T. Depending on the municipality in which a machine
is located, operators may also have to pay a monthly leisure tax on each machine
of up to DM 600 (approximately $419).
The business conducted by Wulff had benefitted from the Berlin Promotion
Act, a special tax statute which was intended to support the economy of West
Berlin in various ways. With the reunification of Germany, the need for benefits
provided by the law is perceived to have decreased. Consequently, the German
government has enacted amendments to the Berlin Promotion Act which are designed
to phase out, over a number of years, most of the tax benefits and incentives
provided by the law. These tax benefits and incentives have been changed in five
ways: (i) the V.A.T. rebates of up to 10% to enterprises located in West Berlin
for sales to German customers outside West Berlin were eliminated by January 1,
1994, which began with an initial 30% decrease on January 1, 1992, and continued
with further decreases of 20% on July 1, 1992, 25% on January 1, 1993 and 25% on
January 1, 1994; (ii) the V.A.T. rebates of 4.2% for German (other than West
Berlin) enterprises which purchase goods from West Berlin taxpayers' enterprises
were abolished effective July 1, 1991; (iii) special accelerated depreciation
allowances which permitted West Berlin taxpayers to pay to write off 75% of the
cost of qualifying fixed assets at any time during the first three years after
acquisition have been modified to limit the write off to 50%; (iv) certain
special investment subsidies have been restricted and were completely eliminated
by the end of 1994; and (v) tax credits on German federal income taxes were
reduced from 22.5% in 1990 to 20% in 1991, 13.5% in 1992, 9.0% in 1993 and 4.5%
in 1994, and were phased out completely by December 31, 1994.
During 1995, Wulff increased the amount of V.A.T. reserves by $1.0 million
as a result of developments to date in an ongoing quadrennial audit of Wulff's
tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million.
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MANAGEMENT
The name, age, present principal occupation or employment and five-year
employment history of each of the directors and executive officers of Alliance
as of May 9, 1996 is set forth below. No director or executive officer is
related by blood, marriage or adoption to any other director or executive
officer.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Steve Greathouse 45 Chairman of the Board, President and Chief Executive Officer
Anthony DiCesare 33 Director and Executive Vice President -- Development
Craig Fields 49 Vice Chairman of the Board
Joel Kirschbaum 45 Director and Consultant
David Robbins 36 Director
Alfred H. Wilms 51 Director
Christopher Baj 36 Director
Shannon L. Bybee 56 Executive Vice President -- Government Affairs and Special Advisor to
the Board of Directors
John W. Alderfer 51 Senior Vice President -- Finance and Administration; Chief Financial
Officer and Treasurer
David D. Johnson 44 Senior Vice President, General Counsel and Secretary
Robert L. Miodunski 45 Senior Vice President -- Nevada Route Group
Robert M. Hester 40 Vice President -- Human Resources and Administration
Johnann F. McIlwain 49 Vice President -- Marketing
Robert L. Saxton 42 Vice President -- Casino Group
Robert A. Woodson 46 Vice President -- Regulatory Compliance
</TABLE>
Steve Greathouse joined Alliance as President and Chief Executive Officer in
August 1994, was appointed a director in October 1994, and became Chairman of
the Board in March 1995. Mr. Greathouse, who has held various positions in the
gaming industry since 1974, most recently served as the President of the
Harrah's Casino Hotels Division of The Promus Companies Incorporated from
September 1993 to July 1994. In this position, Mr. Greathouse had responsibility
for Harrah's resorts in Las Vegas, Laughlin, Reno, Lake Tahoe and Atlantic City.
From July 1991 to September 1993, Mr. Greathouse served as President and (from
1990) Chief Operating Officer of Harrah's Southern Nevada, overseeing the
operations of Harrah's Las Vegas and Harrah's Laughlin. From 1990 to July 1991,
Mr. Greathouse served as Executive Vice President of Harrah's Southern Nevada.
Mr. Greathouse is an active member and has served as the Chairman of the Board
of the Nevada Resort Association and is on the Executive Committee of United Way
of Southern Nevada. He has also served as a member of the Board of Directors of
the Las Vegas Convention and Visitors Authority and on the Executive Committee
of the Nevada Development Authority.
Anthony L. DiCesare was employed by KIC from April 1991 to July 1994 and
joined Alliance as Executive Vice President -- Development and as a director in
July 1994. Prior to that time and following his graduation from business school
in 1989 he was employed as an associate at Wasserstein, Perella & Co., Inc. from
September 1989 to April 1991, where he worked in the Mergers and Acquisitions
group.
Dr. Craig Fields was appointed a director in October 1994 and became Vice
Chairman of the Board in March 1995. Dr. Fields was employed by the U.S.
Department of Defense Advanced Research Projects Agency ("ARPA") from 1974 to
1990. He joined the Microelectronics and Computer Technology Corporation ("MCC")
in 1990 as President and later became Chairman and CEO. He left MCC in 1994, and
serves as director of two publicly-traded corporations in addition to Alliance,
Ensco, Inc. and Projectavision, Inc.
Joel Kirschbaum was appointed a director in July 1994 and served as Chairman
of the Board from July 1994 to March 1995. Mr. Kirschbaum is the sole
stockholder, director and officer of KIC, which is the sole general partner in
Kirkland, and of GSA, Inc. ("GSI"), the sole general partner in GSA. He has been
engaged in operating the businesses of KIC and Kirkland since January 1991 when
KIC and Kirkland were
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established, and GSI and GSA since June 1993. Prior to that time, he worked at
Goldman, Sachs & Co. for 13 years, during the last six of which he was a General
Partner. When he established KIC and Kirkland, Mr. Kirschbaum resigned his
general partnership interest in Goldman, Sachs & Co. and became a limited
partner. Mr. Kirschbaum resigned his limited partnership interest in Goldman,
Sachs & Co. in November 1993.
David Robbins was appointed a director in July 1994. Mr. Robbins has been an
attorney with O'Sullivan, Graev & Karabell from September 1995 to the present.
From May 1993 to September 1995, Mr. Robbins was an attorney with Kramer, Levin,
Naftalis, Kamin & Frankel. From September 1984 to May 1993, Mr. Robbins was an
attorney with Cahill Gordon & Reindel.
Alfred H. Wilms has served as a director of Alliance since November 1983. He
served as Chief Executive Officer of Alliance from December 1984 to July 1994
and as Chairman of the Board of Alliance from August 1986 to July 1994. From
1976 through 1989, Mr. Wilms served as President of Wilms Distributing Company,
Inc. and Wilms Export Company, N.V., a Belgian company engaged in the
distribution of amusement and gaming equipment. From 1971 through 1976, Mr.
Wilms held various positions with Bally Continental, including positions in
research and development, marketing, sales, gaming operation and management,
and, from 1974 through 1979, he served as a director of Bally Manufacturing
Corp. Mr. Wilms is currently President and a director of Aqualandia, the largest
waterpark in Europe; President and a director of Gibsa, a real estate company
located in Spain; and a director of Jardin Parks, a real estate company located
in Spain. Mr. Wilms is a citizen and resident of Belgium.
Christopher Baj has provided financial and operational consulting services
to various clients since April 1987. From January 1993 to December 1995, Mr. Baj
was also employed as the senior manager of Stanley L. Levin, CPA. From April
1987 to December 1992, Mr. Baj was employed as the senior consultant at Levin,
Callaghan & Nawrocki, CPA's. Mr. Baj is a Certified Public Accountant.
Shannon L. Bybee joined Alliance in July 1993 and served as President and
Chief Operating Officer until July 1994. In July 1994, Mr. Bybee assumed the
roles of Executive Vice President--Government Affairs and Special Advisor to the
Board of Directors and also took a position as Associate Professor with the
William F. Harrah College of Hotel Administration and the UNLV International
Gaming Institute at the University of Nevada, Las Vegas. Mr. Bybee currently
serves as a member of the board of directors of The Claridge Hotel and Casino
Corporation, a position he has held since August 1988. Prior to his association
with Alliance, Mr. Bybee had served as Chief Executive Officer of The Claridge
Hotel and Casino Corporation from August 1989 to July 1993. From 1983 to 1987
Mr. Bybee served as Senior Vice President and from 1978 to 1981 as Vice
President of Golden Nugget, Inc. (now Mirage Resorts, Inc.).
John W. Alderfer joined Alliance in September 1990 as Vice President, Chief
Financial Officer and Treasurer. Mr. Alderfer was subsequently promoted to
Senior Vice President -- Finance and Administration, in December 1993. Prior to
joining Alliance, Mr. Alderfer was the Chief Financial Officer of The Bicycle
Club, a Los Angeles-based card casino, from February 1989 to September 1990.
David D. Johnson joined Alliance as Senior Vice President, General Counsel
and Secretary in March 1995. Previously, Mr. Johnson developed extensive gaming
industry experience representing a diverse group of casino clients as a Senior
Partner at Schreck, Jones, Bernhard, Woloson & Godfrey, a Nevada law firm where
he was employed from January 1987 to April 1995. Prior to joining Schreck,
Jones, Bernhard, Woloson & Godfrey, Mr. Johnson served as Chief Deputy Attorney
General for the gaming division of the Nevada Attorney General's Office. Mr.
Johnson serves as Vice Chairman of the Executive Committee of the Nevada State
Bar's Gaming Law Section and is an officer and founding member of the Nevada
Gaming Attorneys Association.
Robert L. Miodunski joined Alliance as Senior Vice President -- Nevada Route
Group in March 1994. From January 1991 to March 1994, Mr. Miondunski was
President of Mulholland-Harper Company, a sign manufacturing and service
company. From 1984 through 1990, Mr. Miodunski held various positions with
Federal Signal Company, the most recent being Vice President and General Manager
of the Midwest Region of the Sign Group.
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Robert M. Hester joined Alliance in October 1993 as Director of Human
Resources and was promoted to Vice President -- Human Resources and
Administration in December 1993. From 1989 to 1993, Mr. Hester was Director of
Human Resources for Sam's Town Hotel and Casino in Las Vegas.
Johnann F. McIlwain joined Alliance in June 1994 as Vice President --
Marketing. From 1991 to 1992, Ms. McIlwain was Vice President of Marketing of
Greenwood, Inc. a Philadelphia-based gaming and entertainment company. From 1989
to 1991, she was Director of Marketing Services for Hospitality Franchise
Systems, Inc. in Parsippany, New Jersey. Prior to joining Hospitality Franchise
Systems, Inc. Ms. McIlwain served as Director of Advertising for the Resorts
International Casino Hotel and the Trump Taj Mahal Casino Hotel.
Robert L. Saxton joined the Company in 1982 as Corporate Controller and was
elected Vice President -- Casino Group in December 1993. Since joining Alliance,
Mr. Saxton has held various management positions with the Nevada Route Group and
is currently responsible for casino operations. He also serves as President of
Alliance's Louisiana subsidiaries.
Robert A. Woodson joined Alliance in 1988 as Director of Gaming Compliance
and was promoted to Vice President -- Regulatory Compliance in September 1993.
Prior to joining Alliance, Mr. Woodson was with the Investigation Division of
the State of Nevada Gaming Control Board for 10 years.
Following consummation of the Merger, the Company intends to evaluate the
composition of its Board of Directors to insure that the Board includes
individuals having appropriate skills and experience in light of the expanded
scope of the Company's operations following the Merger. With the exception of
Hans Kloss, who subject to regulatory approval will continue as President of
BGII and Managing Director of Wulff, and Robert Conover, who will continue as
President of Systems, and Richard Gillman and Neil Jenkins, who will not
continue with the Company, the current executive officers of BGII, if any, who
will be employed by the Company after the Merger have not yet been determined.
The Company expects that a substantial number of BGII officers will remain
employed by the Company following consummation of the Merger.
Hans Kloss has been a Director of BGII since August 1991 and President and
Chief Operating Officer of BGII since May 1993. Mr. Kloss has been the Managing
Director of BGII's German subsidiaries, Bally Wulff Automaten GmbH and Bally
Wulff Vertriebs GmbH, since 1981 and has been employed by those companies since
1970.
Robert Conover is the President of Systems and has held that position since
November 1990. Mr. Conover also serves as Vice-President and Chief Information
Officer of BEC and has served as such since December 1992. Mr. Conover is also
Senior Vice-President in charge of Management Information Systems Operations at
the BEC subsidiaries that operate casino hotels, and has held that position
since 1983.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
HOLDERS AND MANAGEMENT
The following table sets forth certain information as of May 9, 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 the Company, (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 in connection with the Kirkland Investment, (ii)
1,250,000 shares subject to warrants to GSA pursuant to the GSA Advisory
Agreement on September 21, 1993 and 2,500,000 shares subject to additional
warrants issuable to GSA upon consummation of the Merger, both of which
become exercisable in equal amounts only when the stock price reaches $11,
$13 and $15, and (iii) 750,000, 250,000 and 30,000 shares subject to
warrants issued to Donaldson, Lufkin & Jenrette Securities Corporation,
Oppenheimer & Co. Inc. ("Oppenheimer") and L.H. Friend, Weinress &
Frankson, Inc. ("Friend"), respectively, in connection with the issuance of
the 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.
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(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 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 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.
(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.
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(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.
OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES
Immediately following the Transaction (and assuming that $50.0 million
principal amount of New Convertible Debentures are exchanged and converted to
Common Stock and none into Series E Preferred Stock pursuant to the Automatic
Conversion and that $35.0 million in Old Convertible Debentures remain
outstanding), the Company will have outstanding options, warrants and
convertible securities which will be exercisable in the aggregate for
approximately 15,900,000 shares of Common Stock, as described below.
ALLIANCE
OPTIONS. Alliance has two stock option plans currently in effect: the United
Gaming, Inc. 1991 Long-Term Incentive Plan (previously defined as the Alliance
1991 Stock Option Plan) and the Gaming and Technology, Inc. 1984 Employee Stock
Option Plan (previously defined as the Alliance 1984 Stock Option Plan).
Pursuant to these two plans, an aggregate of 5,000,000 shares of Common Stock
are issuable, as to which options covering 2,162,834 shares were outstanding and
options covering 1,088,644 shares were exercisable as of March 31, 1996. In
addition, Alliance has agreed to issue to Dr. Fields options exercisable for
150,000 shares within 30 days of the consummation of the Merger.
WARRANTS. Alliance has issued warrants to purchase shares of Common Stock to
the following persons in the amounts set forth below:
(1) Mr. Wilms: warrants to purchase 2,000,000 shares at a purchase price of
$2.50 per share (and in certain circumstances in a "cashless" transaction), and
which expire on September 1, 1998, issued in connection with the VSI Loan;
(2) Kirkland: warrants to purchase 2,750,000 shares at a purchase price of
$1.50 per share, divided equally among warrants which become exercisable when
the price of the Common Stock reaches $11, $13 and $15 per share and which
expire on September 21, 1999, issued in connection with the Kirkland Investment;
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(3) GSA: warrants to purchase 1,250,000 shares at a purchase price of $1.50
per share, divided equally among warrants which become exercisable when the
price of the Common Stock reaches $11, $13 and $15 per share and which expire on
September 21, 1999, issued pursuant to the GSA Advisory Agreement, and
additional warrants to purchase 2,500,000 shares issuable on the same terms
(other than their respective expiration dates) upon consummation of the Merger;
(4) Donaldson, Lufkin & Jenrette Securities Corporation: warrants to
purchase 500,000 shares at a purchase price of $8.25 per share, issued in
connection with the issuance of the Old Convertible Debentures, and additional
warrants to purchase 250,000 shares at a purchase price of $8.25 per share which
will vest when the price of the Common Stock reaches $13 per share following
consummation of the Merger or any similar transaction, all of which expire on
September 21, 1999;
(5) Oppenheimer & Co. Inc.: warrants to purchase 250,000 shares of Common
Stock at a purchase price of $8.25 per share and which expire on September 21,
1999, issued in connection with the issuance of the Old Convertible Debentures;
(6) Cerberus Partners, L.P. and Canyon Partners, Inc.: warrants expiring in
2002 to purchase 250,000 shares of Common Stock at a purchase price of $3.75 per
share, issued in connection with a firm commitment by Cerberus Partners, L.P.
and affiliates of Canyon Partners, Inc. to Alliance in September 1995 relating
to financing for Alliance's tender offer and consent solicitation;
(7) Mr. Greathouse: warrants to purchase 250,000 shares on terms
substantially the same as the warrants issued to GSA described in clause (3)
above and which expire on August 15, 2000, issued in connection with his
employment;
(8) Dr. Fields: warrants to purchase 250,000 shares on terms substantially
the same as the warrants issued to GSA described in clause (3) above and which
expire on September 21, 2000, issued in connection with an agreement between Dr.
Fields and Alliance upon his becoming a director; and
(9) Friend: warrants to purchase 30,000 shares at a purchase price of $1.50
per share divided equally among warrants which become exercisable when the price
of Common Stock reaches $11, $13 and $15 per share and which expire on September
21, 1999, issued in connection with the issuance of the Old Convertible
Debentures.
BGII
OPTIONS. BGII has three stock option plans currently in effect: the 1991
Incentive Plan (previously defined as the BGII 1991 Incentive Plan), the 1991
Non-employee Directors' Option Plan (previously defined as the BGII 1991
Directors' Plan) and the 1994 Stock Option Plan for Non-Employee Directors
(previously defined as the BGII 1994 Plan). Under the BGII 1991 Incentive Plan,
852,500 options were issued to employees of BGII, including 365,000 options held
by executive officers. Under the BGII 1991 Directors' Plan, 100,000 options were
issued to non-employee directors of BGII. Under the BGII 1994 Plan, 100,000
options were issued to non-employee directors of BGII.
Pursuant to the Merger Agreement, Alliance will assume BGII's obligations
with respect to each outstanding option, and such options will be exercisable
for the Merger consideration per share of BGII common stock subject to such
options, except that at the election of any employee of BGII (other than Messrs.
Gillman, Jenkins and Kloss) immediately prior to the effective time, any such
options held (not more than 552,500 in the aggregate) will be instead
exercisable for a number of shares of Common Stock equal to the number of shares
of BGII common stock subject thereto at an exercise price equal to the Alliance
Average Trading Price. See "The Merger and Related Financings".
WARRANTS. BGII issued warrants to purchase 1.2 million shares of BGII
common stock at a purchase price of $12.50 per share, exercisable after the BGII
common stock has traded at or above a price of $20 per share for 20 consecutive
trading days and under certain other circumstances, expiring on July 29, 1998,
in connection with the private placement of its 10 3/8% Senior Secured Notes due
July 1998. In addition, BGII issued warrants to purchase 300,000 shares of BGII
common stock at a purchase price of $15 per share, exercisable during a
four-year period ending November 11, 1996, to the underwriters of the initial
public offering of BGII's common stock, of which 2,000 warrants have been
exercised.
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Pursuant to the Merger Agreement, Alliance will assume BGII's obligation
with respect to each outstanding warrant, and such warrants will be exercisable
for the Merger consideration per share of BGII common stock subject to such
warrants. See "The Merger and Related Financings".
PERFORMANCE UNITS. Under the BGII 1992 Restricted Stock Performance Plan,
BGII granted awards of performance units comprised of stock and cash to certain
members of its senior management based upon specific performance objectives.
Such performance units vest under certain circumstances following a change in
control, including as a result of the Merger. Alliance has agreed to make
payments to certain executive officers in connection with their employment
agreements and performance unit awards. See "The Merger and Related Financings".
DESCRIPTION OF CAPITAL STOCK
Alliance's Articles of Incorporation, as amended (the "Articles of
Incorporation"), authorize the issuance of 185,000,000 shares of capital stock,
of which 175,000,000 shares are designated as Common Stock, par value $0.10 per
share, and 10,000,000 shares are designated as Special Stock, par value $0.10
per share. As of March 31, 1996, approximately 12,988,000 shares of Common Stock
were issued and outstanding and no shares of Special Stock were issued and
outstanding. See "Security Ownership of Certain Beneficial Holders and
Management". Alliance expects to issue approximately 735,000 shares of Common
Stock to BGII stockholders and 933,000 shares of Common Stock in partial
satisfaction of BGII employee contract termination costs and performance unit
awards, and 350,000 shares of 15% Preferred Stock pursuant to the Merger
Agreement (in each case, based on 10,799,501 shares of BGII common stock
outstanding, less 1,000,000 shares owned by Alliance and a Common Stock price of
$4.00 per share) and expects to issue approximately 9,450,000 shares of Common
Stock and no shares of Series E Preferred Stock upon Automatic Conversion of the
New Convertible Debentures and as a financial advisory fee assuming the exchange
of $50.0 million principal amount of New Convertible Debentures and no election
by the holders of New Convertible Debentures to receive Series E Preferred Stock
in the conversion and 1,250,000 shares of Common Stock in the Private Placement
(based on a Common Stock price of $4.00 per share) and 150,000 shares of 15%
Preferred Stock in the 15% Preferred Stock Offering.
COMMON STOCK
Holders of Common Stock are entitled to cast one vote per share on all
matters on which Alliance's stockholders are entitled to vote. The number of
votes required to take any action by Alliance's stockholders are as provided in
Title 7 of the Nevada Revised Statutes (the "Nevada Revised Statutes") or the
Articles of Incorporation. Holders of Common Stock are not entitled to cumulate
their votes. Holders of Common Stock are entitled to receive dividends when and
as declared by the Alliance Board out of funds legally available for the payment
thereof. The Articles of Incorporation provide that once the subscription price
or par value of any share of Common Stock has been paid in, such share shall be
non-assessable and shall not be subject to assessment to pay the debts of
Alliance. Subject to any preferential rights which may be granted to holders of
certain series of Special Stock, holders of Common Stock are entitled to share
ratably in all assets of Alliance that are legally available for distribution to
its stockholders in the event of its liquidation or dissolution. Holders of
Common Stock have no preemptive rights nor are there any subscription,
redemption or conversion privileges associated with the Common Stock.
The Common Stock is quoted on the NASDAQ under the symbol "ALLY".
SPECIAL STOCK
The Articles of Incorporation provide that the Special Stock may be issued
from time to time upon such terms and conditions and for such consideration as
may be provided by the Board. The Special Stock may be issued in one or more
series, each series having such designations, rights, preferences and privileges
as may be determined by the Board at the time of issuance. Alliance has no
current intention to issue any series of Special Stock with the exception of the
15% Preferred Stock and the Series E Preferred Stock described herein.
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15% NON-VOTING PAY-IN-KIND SPECIAL STOCK, SERIES B
Alliance's Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions thereof (the "15% Preferred Stock
Certificate of Designations") of the 15% Non-Voting Pay-in-Kind Special Stock,
Series B (previously defined as the "15% Preferred Stock") provides that holders
of shares of 15% Preferred Stock are entitled to receive quarterly dividends, as
and when declared by the Alliance Board, in an amount per share equal to $3.75
payable in cash, except that Alliance may at its option pay any such dividend
accruing through and including the Series B Dividend Payment Date (as defined
below) occurring next after the seventh anniversary of the effective time of the
Merger in whole or in part in additional shares of 15% Preferred Stock (or
fractions thereof) in an amount equal to such dividend, with each share of 15%
Preferred Stock valued at $100, provided that after the first Series B Dividend
Payment Date occurring next after the fifth anniversary of the effective time of
the Merger the portion of any such dividend that may be so paid is limited to
$2.00. Dividends are payable on the first day of the first, fourth, seventh and
tenth months of each year following the date of initial issuance beginning on
the first day of the fourth month following the date of initial issuance or such
other dates as set by the Alliance Board (each a "Series B 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 May 3, 1996 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 15% Preferred Stock, no
dividend or other distribution can be paid to holders of any equity security
ranking junior to or pari passu with the 15% Preferred Stock (including 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 15%
Preferred Stock remains outstanding, it will, subject to the terms thereof, pay
dividends accruing through the first dividend payment date occurring after the
seventh anniversary of the effective time of the Merger on the 15% Preferred
Stock in additional shares of such stock.
Upon liquidation, the holders of shares of 15% Preferred Stock are entitled
(subject to prior preferences and other rights of any senior securities 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. Alliance may not
issue equity securities ranking senior in right of payment to the 15% Preferred
Stock. Therefore, immediately following the Merger, no equity security will be
senior to or pari passu with the 15% Preferred Stock and only the Common Stock
and Series E Preferred Stock will be junior to the 15% Preferred Stock.
The 15% Preferred Stock has no voting rights except as required by law and
except in the case where dividends payable on shares of the 15% Preferred Stock
have been in arrears for six consecutive Series B 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 15% Preferred Stock 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 15% 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. Alliance is required to redeem
at the above-mentioned price all of the outstanding shares of 15% Preferred
Stock by the eighth anniversary of original issuance. If Alliance fails to
redeem such shares on that date, then the number of directors constituting the
Alliance Board will be increased by two and the holders of the shares of 15%
Preferred Stock will have the right to elect two directors to the Alliance
Board. The total number of directors which the holders of 15% Preferred Stock
shall have the right to elect may not exceed two. Holders of the 15% Preferred
Stock have no remedy other than those described above if Alliance fails to
redeem all the outstanding shares of 15% Preferred Stock on such date. The terms
of the Senior Notes (which are expected
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to mature in seven years) will restrict Alliance's ability to effect any such
redemption so long as any Senior Notes remain outstanding. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources of the Company (Pro Forma)".
Fractional shares of 15% Preferred Stock will entitle the holder to receive
dividends and distributions and to exercise voting rights in proportion to the
fractional holding.
Alliance has applied for NASDAQ NMS quotation for the 15% Preferred Stock
under the symbol "ALLYP".
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 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.
157
<PAGE>
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 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, 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.
PROVISIONS APPLICABLE TO CERTAIN HOLDERS
The Nevada Revised Statutes contains a control share provision with respect
to the acquisition of more than 20% of the voting shares of a Nevada
corporation. Alliance, however, has opted out of this provision in accordance
with the Nevada Revised Statutes by adopting an amendment to its by-laws to such
effect.
INTEREST IN OLD CONVERTIBLE DEBENTURES
Based upon Alliance's records and upon information provided to Alliance by
its directors, executive officers and affiliates, neither Alliance nor any
associate or subsidiary of Alliance nor any of the directors or executive
officers of Alliance, or any of its affiliates or its subsidiaries, has effected
any transactions in the Old Convertible Debentures during the 40 business days
preceding the date of this filing.
CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS
WITH RESPECT TO THE OLD CONVERTIBLE DEBENTURES
Neither Alliance nor any of its affiliates, directors or executive officers,
or any of the executive officers or directors of its subsidiaries, is a party to
any contract, arrangement, understanding or relationship with any other person
relating, directly or indirectly, to the Exchange Offer with respect to any
securities of Alliance
158
<PAGE>
(including, but not limited to, any contract, arrangement, understanding or
relationship concerning the transfer or the voting of any such securities, joint
ventures, loan or option arrangements, puts or calls, guaranties of loans,
guaranties against loss or the giving or withholding of proxies, consents or
authorizations), except as described in "The Exchange Offer -- Exchange Agent
and Information Agent" and "-- Dealer Managers".
LEGAL MATTERS
Certain legal matters related to the Series E Preferred Stock and Common
Stock to be issued upon the conversion of the New Convertible Debentures are
being passed upon for Alliance by Schreck, Jones, Bernhard, Woloson & Godfrey,
Las Vegas, Nevada. Certain legal matters relating to the New Convertible
Debentures are being passed upon for Alliance by Milbank, Tweed, Hadley &
McCloy, New York, New York.
EXPERTS
The consolidated financial statements of Alliance Gaming Corporation and
subsidiaries as of June 30, 1994 and 1995, and for each of the years in the
three-year period ended June 30, 1995 included herein have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP
refers to a change in the method of accounting for income taxes, effective July
1, 1993. As noted under "Forecast of Operations", KPMG Peat Marwick LLP has not
examined the Forecast presented under "Forecast of Operations" and, accordingly,
does not express an opinion or any other form of assurance with respect thereto.
The consolidated balance sheets of BGII as of December 31, 1994 and 1995,
and the consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995 included
herein have been included herein in reliance upon the report of Coopers &
Lybrand L.L.P., independent accountants, appearing elsewhere herein, given on
the authority of that firm as experts in accounting and auditing. As noted under
"Forecast of Operations", Coopers & Lybrand L.L.P. neither examined nor compiled
nor had any other involvement with the preparation of the Forecast presented
under "Forecast of Operations" and accordingly does not express an opinion or
any other form of assurance with respect thereto, nor do they assume any
responsibility for the Forecast.
159
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ALLIANCE GAMING CORPORATION
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ F-2
Consolidated Balance Sheets as of June 30, 1994 and 1995............................................ F-3
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-5
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 1993, 1994 and
1995............................................................................................... F-6
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-7
Notes to Consolidated Financial Statements.......................................................... F-8-F-21
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1995 (audited) and March 31, 1996
(unaudited)........................................................................................ F-22
Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 1995
and 1996........................................................................................... F-23
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1995
and 1996........................................................................................... F-24
Notes to Unaudited Condensed Consolidated Financial Statements...................................... F-25-F-29
BALLY GAMING INTERNATIONAL, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants................................................................... F-30
Consolidated Balance Sheets, December 31, 1994 and 1995............................................. F-31
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995.......... F-32
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and
1995............................................................................................... F-33
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995.......... F-34
Notes to Consolidated Financial Statements.......................................................... F-35-F-63
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 1995 (audited) and March 31, 1996
(unaudited)........................................................................................ F-64
Consolidated Statements of Operations (unaudited) -- for the Three Months Ended March 31, 1995 and
1996............................................................................................... F-65
Consolidated Statement of Stockholders' Equity (unaudited) -- for the Three Months Ended March 31,
1996............................................................................................... F-66
Condensed Consolidated Statements of Cash Flows (unaudited) -- for the Three Months Ended March 31,
1995 and 1996...................................................................................... F-67
Notes to Condensed Consolidated Financial Statements (unaudited).................................... F-68-F-81
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Alliance Gaming Corporation
We have audited the consolidated balance sheets of Alliance Gaming
Corporation and subsidiaries as of June 30, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alliance
Gaming Corporation and subsidiaries as of June 30, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 6 to the consolidated financial statements, effective
July 1, 1993 Alliance Gaming Corporation adopted the provisions of Financial
Accounting Standards Board's Statement of Financial Accounting Standard No. 109,
ACCOUNTING FOR INCOME TAXES.
KPMG Peat Marwick LLP
Las Vegas, Nevada
September 1, 1995
F-2
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 37,085 $ 13,734
Securities available for sale........................................................... 12,489 23,680
Receivables, net........................................................................ 5,924 3,316
Inventories............................................................................. 661 714
Prepaid expenses........................................................................ 4,420 4,148
Refundable income taxes................................................................. 361 361
Other................................................................................... 30 156
---------- ----------
Total current assets.................................................................. 60,970 46,109
---------- ----------
Property and equipment:
Land and improvements................................................................... 3,229 17,296
Building and improvements............................................................... 4,286 8,822
Gaming equipment........................................................................ 30,395 36,396
Furniture, fixtures and equipment....................................................... 9,632 11,582
Leasehold improvements.................................................................. 5,222 5,372
Construction in progress................................................................ 212 30
---------- ----------
52,976 79,498
Less accumulated depreciation and amortization.......................................... 24,293 29,146
---------- ----------
Property and equipment, net........................................................... 28,683 50,352
---------- ----------
Other assets:
Receivables, net........................................................................ 4,609 5,309
Excess of costs over net assets of an acquired business, net of accumulated amortization
of $295 (1994) and $585 (1995)......................................................... 3,789 3,842
Intangible assets, net of accumulated amortization of $4,145 (1994) and $5,516 (1995)... 13,527 12,405
Deferred tax assets..................................................................... 1,081 1,399
Investment in minority owned subsidiary................................................. 2,000 1,585
Other................................................................................... 4,757 5,347
---------- ----------
Total other assets.................................................................... 29,763 29,887
---------- ----------
$ 119,416 $ 126,348
---------- ----------
---------- ----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
JUNE 30, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................... $ 1,504 $ 3,995
Accounts payable........................................................................ 1,661 1,758
Accrued expenses, including related parties of $312 (1994) and $931 (1995).............. 6,879 8,610
---------- ----------
Total current liabilities............................................................. 10,044 14,363
---------- ----------
Long-term debt, less current maturities................................................... 89,222 97,402
Deferred tax liabilities.................................................................. 1,218 1,205
Other liabilities......................................................................... 3,587 2,750
---------- ----------
Total liabilities..................................................................... 104,071 115,720
---------- ----------
Commitments and contingencies
Minority interest......................................................................... 246 643
Stockholders' equity:
Common stock, $.10 par value; authorized 175,000,000 shares; issued 10,505,928 shares
(1994) and 11,654,150 shares (1995).................................................... 1,051 1,165
Special stock, $.10 par value; authorized 10,000,000 shares; issued 1,333,333 (1994 and
1995).................................................................................. 133 133
Paid-in capital......................................................................... 26,716 32,134
Unrealized loss on securities available for sale, net................................... (421) (316)
Accumulated deficit..................................................................... (12,380) (23,131)
---------- ----------
Total stockholders' equity............................................................ 15,099 9,985
---------- ----------
$ 119,416 $ 126,348
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Gaming:
Routes................................................................... $ 96,282 $ 102,830 $ 106,827
Casinos and taverns...................................................... 12,526 15,679 21,287
Food and beverage sales.................................................... 4,184 4,480 3,847
Net equipment sales........................................................ 99 65 27
---------- ---------- ----------
113,091 123,054 131,988
---------- ---------- ----------
Costs and expenses:
Cost of gaming:
Routes................................................................... 72,614 76,332 79,875
Casinos and taverns...................................................... 8,667 11,871 11,436
Cost of food and beverage.................................................. 2,876 3,084 2,795
Cost of equipment sales.................................................... 49 20 12
Selling, general & administrative.......................................... 12,667 13,555 14,633
Business development expenses.............................................. 900 1,192 7,843
Corporate expenses......................................................... 6,191 7,882 9,735
Bad debt expense........................................................... 461 705 400
Loss on abandoned small casinos............................................ -- 3,713 --
Loss on abandoned taverns.................................................. -- 2,638 --
Depreciation and amortization.............................................. 8,718 9,530 9,520
---------- ---------- ----------
113,143 130,522 136,249
---------- ---------- ----------
Operating loss............................................................... (52) (7,468) (4,261)
Other income (expense):
Interest income............................................................ 998 2,084 2,798
Interest expense........................................................... (5,046) (6,830) (8,133)
Minority share of income................................................... -- (506) (397)
Equity in income of affiliate.............................................. -- -- 31
Other, net................................................................. 450 (167) (524)
---------- ---------- ----------
Loss before income taxes..................................................... (3,650) (12,887) (10,486)
Income tax expense........................................................... -- (241) (265)
---------- ---------- ----------
Net loss..................................................................... $ (3,650) $ (13,128) $ (10,751)
---------- ---------- ----------
---------- ---------- ----------
Net loss per common share.................................................... $(0.38) $(1.28) $(0.95)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding................................... 9,696 10,251 11,300
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
RETAINED LOSS ON
TOTAL COMMON STOCK SPECIAL STOCK EARNINGS SECURITIES
STOCKHOLDERS' --------------- ---------------- PAID-IN (ACCUMULATED AVAILABLE
EQUITY SHARES DOLLARS SHARES DOLLARS CAPITAL DEFICIT) FOR SALE
------------ ------ ------- ------ ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1992............ $23,661 9,409 $ 942 -- $ -- $18,321 $4,398 $--
Net loss......................... (3,650) -- -- -- -- -- (3,650 ) --
Common stock warrants issued..... 559 -- -- -- -- 559 -- --
Shares issued upon exercise of
options......................... 2,096 591 59 -- -- 2,037 -- --
------------ ------ ------- ------ ------- ------- -------- -----
Balances, June 30, 1993............ 22,666 10,000 1,001 -- -- 20,917 748 --
Net loss......................... (13,128) -- -- -- -- -- (13,128 ) --
Shares issued for acquisitions... 249 112 11 -- -- 238 -- --
Common stock warrants issued..... 116 -- -- -- -- 116 -- --
Cost of private placement........ (201) -- -- -- -- (201) -- --
Net change in unrealized loss on
securities available for sale... (421) -- -- -- -- -- -- (421)
Shares issued for capital
infusion........................ 4,999 -- -- 1,333 133 4,866 -- --
Shares issued upon exercise of
options......................... 819 394 39 -- -- 780 -- --
------------ ------ ------- ------ ------- ------- -------- -----
Balances, June 30, 1994............ 15,099 10,506 1,051 1,333 133 26,716 (12,380 ) (421)
Net loss......................... (10,751) -- -- -- -- -- (10,751 ) --
Shares issued for acquisitions... 3,754 712 71 -- -- 3,683 -- --
Compensatory stock issued........ 1,313 250 25 -- -- 1,288 -- --
Net change in unrealized loss on
securities available for sale... 105 -- -- -- -- -- -- 105
Shares issued upon exercise of
options......................... 465 186 18 -- -- 447 -- --
------------ ------ ------- ------ ------- ------- -------- -----
Balances, June 30, 1995............ $ 9,985 11,654 $1,165 1,333 $133 $32,134 $(23,131) $(316)
------------ ------ ------- ------ ------- ------- -------- -----
------------ ------ ------- ------ ------- ------- -------- -----
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................................................... $ (3,650) $ (13,128) $ (10,751)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................... 8,718 9,530 9,520
Loss on abandoned casinos....................................................... -- 3,713 --
Loss on abandoned taverns....................................................... -- 2,638 --
Write-off of other assets....................................................... 149 1,817 2,796
Provision for losses on receivables............................................. 461 705 400
Amortization of debt discounts.................................................. 265 292 297
Undistributed earnings of affiliate............................................. -- -- (31)
Non-cash stock compensation expense............................................. -- -- 1,313
Net change in operating assets and liabilities:
(Increase) decrease in:
Inventories..................................................................... (233) 78 (40)
Prepaid expenses................................................................ 1,475 (519) 381
Refundable income taxes......................................................... 766 (361) --
Other........................................................................... 305 254 (126)
Increase (decrease) in:
Accounts and slot contracts payable............................................. (2,378) 269 (447)
Accrued and deferred income taxes............................................... -- 137 (137)
Other liabilities, including minority interest.................................. (153) 511 397
Accrued expenses................................................................ 184 3,126 (2,615)
--------- --------- ---------
Net cash provided by operating activities..................................... 5,909 9,062 957
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment............................................... (5,092) (5,385) (8,887)
Proceeds from sale of property and equipment...................................... 257 1,466 351
Additions to receivables.......................................................... (8,715) (18,801) (8,970)
Cash collections on receivables................................................... 7,925 17,541 10,315
Net cash provided by acquisition of business...................................... -- -- 2,481
Acquisition of securities available for sale...................................... -- (12,910) (11,086)
Acquisition of partnership interests.............................................. -- (2,000) (1,585)
Additions to intangible assets.................................................... (77) (5,179) (390)
Additions to other long-term assets............................................... (3,296) (2,031) (3,877)
--------- --------- ---------
Net cash (used in) investing activities....................................... (8,998) (27,299) (21,648)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of expenses..................................... 1,941 81,984 --
Issuance of common stock warrants................................................. 559 116 --
Reduction of long-term debt....................................................... (2,167) (41,776) (3,125)
Issuance of special stock, net of costs........................................... -- 4,799 --
Issuance of common stock.......................................................... 2,097 619 465
--------- --------- ---------
Net cash (used in) provided by financing activities........................... 2,430 45,742 (2,660)
--------- --------- ---------
Cash and cash equivalents:
Increase (decrease) for year...................................................... (659) 27,505 (23,351)
Balance, beginning of year........................................................ 10,239 9,580 37,085
--------- --------- ---------
Balance, end of year.......................................................... $ 9,580 $ 37,085 $ 13,734
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
Alliance Gaming Corporation and its subsidiaries (collectively, the
"Company") are presently engaged in gaming device route operations in Nevada and
in the greater New Orleans, Louisiana area; casino operations in Nevada and
Mississippi; and the design, manufacture and refurbishment of gaming devices.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Alliance Gaming Corporation, its wholly-owned subsidiaries and indirect
subsidiaries and its partially owned, controlled subsidiaries. In the case of
Video Services, Inc. ("VSI"), the Company owns 490 shares of Class B voting
stock, which constitutes 100% of the voting stock, of VSI. The Company is
entitled to receive 71% of dividends declared by VSI, if any, at such time that
such dividends are declared. In July 1994, the Company acquired a 45% limited
partnership interest in the Rainbow Casino-Vicksburg Partnership. Accordingly,
the Company accounted for its investment in this partnership under the equity
method until March 29, 1995 at which time the Company increased its partnership
interest and assumed the general partnership position (see Note 11). Effective
March 29, 1995, the results of operations of the Rainbow Casino have been
included in the accompanying consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
In accordance with industry practice, the Company recognizes gaming revenues
as the net win from route, casino and tavern operations, which is, for gaming
devices, the difference between coins and currency deposited into the devices
and payments to customers and, for other games, the difference between gaming
wins and losses. The Company recognizes total net win from gaming devices as
revenues for gaming routes which operate under revenue-sharing arrangements and
revenue-sharing payments as a cost of gaming routes. The Company recognizes
revenue from parts and equipment sales to outside purchasers when the products
are shipped.
LOCATION RENT EXPENSE
For financial statement purposes, the Company recognizes expenses for fixed
periodic rental payments (including scheduled increases) made in connection with
route operation space lease arrangements or sublease agreements on a straight
line basis over the term of the agreement including any extension periods which
are expected to be exercised. Contingent periodic rental payments are expensed
in the period incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Such
investments of $29,799,000 (1994) and $5,238,000 (1995) are included in cash and
cash equivalents and are carried at cost, which approximates market value.
SECURITIES AVAILABLE FOR SALE
Effective January 1, 1994, the Company adopted Financial Accounting Standard
No. 115. For fiscal years beginning after December 15, 1993, Statement 115
requires that, except for debt securities classified as "held-to-maturity"
securities, investments in debt and equity securities should be reported at fair
market value. The Company has designated certain securities as being available
for sale. Securities are designated as available for sale at the time of their
purchase. The Company determines which securities are available for sale by
evaluating whether such securities would be sold in response to liquidity needs,
asset/liability management and other factors. Securities available for sale are
recorded at market value with the resulting unrealized gains and losses being
recorded, net of tax, as a component of stockholders' equity. Gains or losses on
these securities are determined using the specific identification method.
F-8
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
(CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market and are determined by
the first-in, first out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated and amortized
over their estimated useful lives or lease terms, if less, using the straight
line method as follows:
<TABLE>
<S> <C>
31-39
Building and improvements....................................... years
Gaming equipment................................................ 5-7 years
Furniture, fixtures and equipment............................... 3-10 years
Leasehold improvements.......................................... 5-20 years
</TABLE>
EXCESS OF COSTS OVER NET ASSETS OF AN ACQUIRED BUSINESS
Excess of costs over net assets of an acquired business is the excess of the
cost over the value of net tangible assets of an acquired business and is
generally amortized on the straight-line method over a period of 40 years. In
the case of the Company's majority-owned subsidiary, Native American
Investments, Inc., where the assets acquired are largely intangible, the Company
has elected a 10-year amortization period representing the estimated life of the
rights acquired, consisting principally of contracts to conduct gaming
operations on Indian lands.
At each balance sheet date, management evaluates the realizability of
goodwill based on expectations of non-discounted cash flows and operating income
for each subsidiary having a material goodwill balance. Based upon its most
recent analysis, management believes that no material impairment of goodwill
exists at June 30, 1995.
INTANGIBLE ASSETS
Intangible assets consist primarily of costs associated with the acquisition
of location leases which are capitalized and amortized using the straight-line
method over the terms of the leases, ranging from one to 40 years, with an
average life of approximately 11 years. Intangible assets for fiscal 1995
includes approximately $4,547,000 of commissions, discounts and other
capitalized costs related to the issuance of the Company's 7.5% Convertible
Subordinated Debentures due 2003, net of approximately $957,000 of accumulated
amortization. At June 30, 1994, intangible assets includes $4,993,000 of such
costs, net of $405,000 of accumulated amortization. Such amounts are being
amortized over the term of the debentures.
The carrying value of intangible assets is periodically reviewed by
management and impairment losses are recognized when the expected non-discounted
future operating cash flows derived from such intangible assets are less than
their carrying value.
OTHER ASSETS
Other assets includes assets held for sale, long-term deposits and other
non-current assets. In fiscal 1993, the Company paid to certain property owners
a $2,500,000 refundable deposit to operate gaming devices at their location.
Additionally, other assets are presented net of valuation allowances of
$1,763,000 and $631,000 at June 30, 1994 and 1995, respectively.
LOSS PER SHARE OF COMMON STOCK
Loss per share of common stock has been computed based on the weighted
average number of shares of common stock outstanding. Fully diluted earnings per
share is not presented because the effect would be anti-dilutive.
F-9
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
(CONTINUED)
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 109 ACCOUNTING FOR INCOME TAXES. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years which those
temporary differences are expected to be recovered or settled. Under Statement
109, the effect on deferred assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Effective
July 1, 1993, the Company adopted Statement 109. The Company previously used the
asset and liability method under Statement 96.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform with the current year presentation.
2. RECEIVABLES
The Company's gaming route operations from time to time involve making loans
to location operators in order to participate in revenues over extended periods
of time. The loans, made for build-outs, tenant improvements and initial
operating expenses are generally secured by the personal guarantees of the
operators and the locations' assets. The majority of the loans are interest
bearing and are expected to be repaid over a period of time not to exceed the
life of the revenue sharing arrangement. The loans have varying payment terms,
with weekly payment amounts ranging from $200 to $1,440 and monthly payment
amounts ranging from $200 to $18,780. Interest rates on the loans range from
prime plus 1.50% to stated rates of 12% with various due dates ranging from July
1995 to April 2007. The loans are expected to be repaid from the locations' cash
flows or proceeds from the sale of the leaseholds.
Receivables at June 30 consist of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes receivable-location operators...................................... $ 8,319 $ 7,760
Other receivables........................................................ 2,214 865
--------- ---------
10,533 8,625
Less current amounts..................................................... 5,924 3,316
--------- ---------
Long-term receivables, excluding current amounts......................... $ 4,609 $ 5,309
--------- ---------
--------- ---------
</TABLE>
Receivables are presented net of an allowance for doubtful accounts of
$1,389,000 and $1,659,000 as of June 30, 1994 and 1995, respectively. The
allowance is allocated between current and long-term receivables on a pro rata
basis related to notes receivable from location operators.
During fiscal 1994, the Company cancelled certain sublease agreements as a
result of defaults by payors in making payments and acquired title to the assets
and operating rights to the tavern locations in exchange for releases of the
customers' debt owed to the Company. During fiscal 1994, interest income of
approximately $48,000 was recognized on these receivables. Total interest income
of $130,000 would have been recognized if the receivables had been current in
accordance with their original terms. The total initial investment in these
tavern locations of approximately $2,011,000 includes the net receivables of
approximately $1,362,000 and other assets of $649,000. No such transactions were
completed in fiscal 1995. Management of the Company has determined the fair
value of the locations' assets from knowledge of sales
F-10
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
2. RECEIVABLES (CONTINUED)
of comparable establishments and expertise acquired from operating its gaming
devices at similar locations. Due to the Company's decision to dispose of the
currently operated small independent tavern operations, certain reserves and
write downs were recognized in fiscal 1994 results of operations.
Management believes properly managing the disposal of these operations will
protect the Company's existing contractual arrangements from the tavern
locations as well as assure their continued operation while preserving the
Company's investment. Management cannot estimate when or how many of these
locations will be obtained and subsequently disposed.
3. LOSS ON ABANDONMENT OF SMALL CASINOS AND TAVERNS
In fiscal 1994, due to continuing losses from operations, negative cash
flows and incompatibility with the Company's long-term growth strategy, the
Company's Board of Directors resolved to 1) exit the downtown Las Vegas gaming
market and 2) dispose of the currently operated small independent taverns on
commercially reasonable terms as market conditions warrant.
As a result of the decision to exit the downtown Las Vegas gaming market,
the Company substantially reduced operations at both the Trolley Stop Casino and
Miss Lucy's Gambling Hall & Saloon. Included in the 1994 statements of
operations are total expenses of approximately $3,246,000 related to these
actions. The total charge included approximately $488,000 related to the
write-down of assets and approximately $2,758,000 representing primarily the
present value of the future lease payments net of estimated future sublease
income.
The decision to withdraw from the tavern business resulted in expenses of
approximately $2,638,000 being recognized in fiscal 1994. Approximately
$1,813,000 of the total amount was related to the write down of assets while
approximately $825,000 represented primarily the present value of the future
lease payments net of estimated future sublease income. The Company has entered
into an agreement to sell all of its tavern locations to an unaffiliated third
party. The sale is contingent upon, among other conditions, approval by Nevada
gaming authorities.
In addition to the items noted above, the Company's lease on the Mizpah
Hotel and Casino has a remaining term of approximately 7.5 years with an option
on the Company's behalf to terminate the lease arrangement with 120 days written
notice at any time after December 31, 1995. The Company has notified the
landlord of the Mizpah of its intention to exercise the termination clause of
the lease at that time. As a result of this decision, the Company recognized an
expense of $467,500 in fiscal 1994.
4. DEBT
Long-term debt at June 30 consists of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
7.5% Convertible subordinated debentures due 2003, unsecured.................... $ 85,000 $ 85,000
Due to stockholder, net of discount of $983,709 (1994) and $747,619 (1995),
secured by the assets of VSI................................................... 4,390 3,309
Hospitality Franchise Systems, secured by the assets of Rainbow Vicksburg....... -- 9,065
Other, secured by related equipment............................................. 1,336 4,023
---------- ----------
90,726 101,397
Less current maturities......................................................... 1,504 3,995
---------- ----------
Long-term debt, less current maturities......................................... $ 89,222 $ 97,402
---------- ----------
---------- ----------
</TABLE>
F-11
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
4. DEBT (CONTINUED)
Accrued interest of approximately $1,893,000 (1994) and $1,991,000 (1995) is
included in accrued expenses in the Consolidated Balance Sheets. Included in
these amounts are $30,343 (1994) and $27,813 (1995) due to affiliates of Alfred
H. Wilms, principal stockholder and member of the Board of Directors of the
Company, related to funding of VSI's gaming device route operations.
In September 1993, the Company completed the private placement of
$85,000,000 aggregate principal amount of its 7.5% Convertible Subordinated
Debentures due 2003. The debentures pay interest semi-annually on March 15 and
September 15. These debentures are convertible at any time into shares of the
Company's common stock at a conversion price of $10 per share (equivalent to a
conversion rate of 100 shares per $1,000 principal amount of debentures),
subject to adjustment. Upon certain defined events, including a change of
control, holders of the debentures have the right to require the Company to
redeem the debentures for cash at the rate of 101% of principal amount plus
accrued interest. The debentures are redeemable at predetermined redemption
prices, in whole or in part, at the option of the Company for cash at any time
on and after September 15, 1995 if the market price of the common stock exceeds
250% of the conversion price for 20 out of any 30 consecutive trading days or at
any time on and after September 15, 1996.
In March 1992, Alfred H. Wilms, director and principal stockholder (and then
Chairman of the Board of Directors and Chief Executive Officer) of the Company,
committed to provide or cause others to provide a $6,500,000 five year
subordinated loan to VSI, the Company's controlled subsidiary which loan has
been funded in full and is secured by a subordinated interest in all of VSI's
present and future personal property. Until August 1993, the loan required
quarterly payments of interest. In August 1993, the loan agreement was amended
to extend the maturity of the loan to September 1, 1998 and to require quarterly
payments of principal and interest. Interest on the loan accrues at the rate of
200 basis points above the 90-day London Inter Bank Offered Rate, adjusted
quarterly. At June 30, 1995 the interest rate for the note was 8.2275%.
During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to loan
$7,750,000 to the Company's majority controlled subsidiary RCVP in connection
with the construction of the Rainbow Casino. The loan amount was subsequently
increased to $10,000,000. The note bears interest at 7.5% per annum and requires
monthly payments of principal and interest over an 24 month period. In exchange
for funding this loan, HFS is also entitled to receive a monthly royalty fee
equal to 12% of the casino's gaming revenues. Included in the consolidated
results of operations for fiscal 1995 are approximately $810,000 of such
royalties.
Maturities of long-term debt for each of the five years ending subsequent to
June 30, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $3,995,000
1997........................................................... 3,927,000
1998........................................................... 2,825,000
1999........................................................... 1,670,000
2000........................................................... 1,723,000
Thereafter..................................................... 87,257,000
</TABLE>
5. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of special stock, par value $.10 per share ("Special Stock").
Special Stock consists of non-voting stock where no holder of the Special Stock
shall be entitled to vote at any meeting of stockholders or otherwise, except as
otherwise may be specifically provided by law or as approved by the Board of
Directors in certain limited circumstances at the time of the stock issuance.
The Special Stock may be issued from time to time in one or more series, each
series having such designations, preferences and relative, participating,
optional or other special rights,
F-12
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
5. STOCKHOLDERS' EQUITY (CONTINUED)
qualifications, limitations or restrictions as shall be stated and expressed in
the resolution providing for the issuance of Special Stock or any series thereof
adopted by the Board of Directors. The Board has designated an initial series of
Special Stock as "Non-voting Junior Convertible Special Stock" which consists of
1,333,333 shares (the "Initial Series"). The Company's Articles of Incorporation
provide that the Initial Series is intended to have the same rights as the
Common Stock except that the Initial Series has no voting rights and a $.01 per
share liquidation preference. At June 30, 1995, only the Initial Series of
Special Stock was outstanding. The Initial Series is convertible on a share for
share basis into shares of Common Stock of the Company.
In 1984, the Company created an Employee Stock Option Plan (the "1984 Plan")
that provides for the issuance of up to 2,000,000 shares of common stock to
Company employees and directors. At June 30, 1995, there were incentive stock
options covering 207,000 shares and non-qualified stock options covering 10,000
shares outstanding under the 1984 Plan.
At June 30, 1994 there were incentive stock options covering 376,000 shares
and non-qualified stock options covering 15,000 shares outstanding under the
1984 Plan. Generally, options are granted at the fair market value of the
Company's Common Stock at the date of the grant and become exercisable over five
years.
In 1992, the Company created the 1991 Long Term Incentive Plan (the
"Incentive Plan") that, as amended, provides for the issuance of up to 3,000,000
shares of common stock to Company employees and directors. At June 30, 1995
there were incentive stock options covering 2,400,834 shares outstanding under
the Incentive Plan. At June 30, 1994 there were incentive stock options covering
1,099,500 shares outstanding under the Incentive Plan. Generally, options are
granted at the fair market value of the Company's Common Stock at the date of
the grant and become exercisable over five years.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
SHARES EXERCISE PRICE
<S> <C> <C>
Balance, June 30, 1992..................................................... 1,546,150 1.375- 8.750
Granted.................................................................. 300,000 5.875- 8.750
Exercised................................................................ (590,700) 1.375- 4.875
Cancelled................................................................ (3,600) 3.875
----------
Balance, June 30, 1993..................................................... 1,251,850 1.375- 8.750
Granted.................................................................. 690,500 6.500-10.125
Exercised................................................................ (393,850) 1.625- 4.000
Cancelled................................................................ (58,000) 2.125- 4.000
----------
Balance, June 30, 1994..................................................... 1,490,500 1.375-10.125
Granted.................................................................. 1,598,334 5.750- 8.000
Exercised................................................................ (186,000) 1.375- 4.000
Cancelled................................................................ (285,000) 3.500-10.000
----------
Balance, June 30, 1995..................................................... 2,617,834 1.625- 9.250
----------
----------
Exercisable at June 30, 1995............................................... 825,600 1.625- 9.250
----------
----------
</TABLE>
Also at June 30, 1995, Mr. Wilms held warrants to purchase 2,000,000 shares
of Common Stock at $2.50 per share, subject to adjustment. These warrants were
issued in connection with the funding of the $6,500,000 five year subordinated
loan for VSI.
F-13
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
5. STOCKHOLDERS' EQUITY (CONTINUED)
Upon closing of the private placement of the Company's 7.5% Convertible
Subordinated Debentures and the $5 million equity investment by Kirkland-Ft.
Worth Investment Partners, L.P. ("Kirkland") on September 21, 1993, the Company
issued warrants to purchase up to 2,750,000 shares of Common Stock at $1.50 per
share to Kirkland. These warrants are exercisable one year after the grant date
and only after the market price of the Common Stock reaches certain
predetermined levels. Under the same terms, the Company issued warrants to
purchase 1,250,000 and 30,000 shares of Common Stock to Gaming Systems Advisors,
L.P. ("GSA") and L.H. Friend, Weinress & Frankson, Inc. ("Friend"),
respectively. The Company also issued warrants to purchase 500,000 and 250,000
shares of Common Stock at $8.25 per share to the initial purchasers of the
Debentures, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
Oppenheimer & Co., Inc. ("Oppenheimer"), respectively. Under the same general
terms and conditions, DLJ may earn warrants to purchase an additional 250,000
shares of the Company's Common Stock. In fiscal 1995, in connection with the
commencement of their employment with the Company, Steve Greathouse, the
Company's Chairman of the Board, President and Chief Executive Officer and Dr.
Craig Fields, Vice Chairman of the Board were each granted warrants to purchase
250,000 shares of common stock on the same terms as the Kirkland warrants
described above.
As of June 30, 1995, none of the warrants granted to Kirkland, GSA, Friend,
Greathouse or Fields are exercisable.
F-14
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
6. INCOME TAXES
The Company generally accounts for income taxes and files its income tax
returns on a consolidated basis. However, VSI, in which the Company holds 100%
of the voting interests, has previously filed its income tax returns on a
separate basis and was not consolidated for tax purposes. During the quarter
ended December 31, 1994, the Company determined that VSI can be consolidated for
tax purposes. As a result, the Company filed for and has received a refund of
estimated income taxes paid for fiscal year 1994.
Effective July 1, 1993, the Company adopted Financial Accounting Standard
No. 109 ACCOUNTING FOR INCOME TAXES, prospectively. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
The federal and state income tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and liabilities at June
30, 1995 and 1994 are presented below.
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net Operating Loss Carryforwards.............................................. $ 8,495 $ 12,470
Inventory Obsolescence Reserve................................................ 578 179
Receivables, Bad Debt Allowance............................................... 472 564
Organization and Start-up Costs............................................... 267 172
Reserves for abandoned projects............................................... 1,577 1,356
Other......................................................................... 307 566
---------- ----------
Total gross deferred tax assets................................................. 11,696 15,307
Less valuation allowance........................................................ 10,615 13,908
---------- ----------
Net deferred tax assets......................................................... $ 1,081 $ 1,399
---------- ----------
Deferred tax liabilities:
Property and equipment, principally due to depreciation differences........... 1,218 1,399
---------- ----------
Total gross deferred tax liabilities (in 1995, $194 is included in accrued
expenses)...................................................................... 1,218 1,399
---------- ----------
Net deferred tax assets (liabilities)........................................... $ (137) $ --
---------- ----------
---------- ----------
</TABLE>
The valuation allowance for deferred tax assets as of June 30, 1994 was
$10,615,000. The net change in the total valuation allowance for the twelve
months ended June 30, 1995 was an increase of $3,293,000.
At June 30, 1995, the Company has estimated net operating loss carryforwards
for federal income tax purposes of approximately $36,678,000 which are available
to offset future federal taxable income, if any, expiring in the years 2007
through 2010.
F-15
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
6. INCOME TAXES (CONTINUED)
A reconciliation of the Company's provision for income tax expense as
compared to the tax benefit calculated by applying the statutory federal tax
rate to the loss before income taxes follows.
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Statutory Rate..................................................................... $ (4,202) $ (3,565)
Meals, entertainment............................................................... 3 27
State Income Taxes................................................................. 33 67
Tax losses for which no current benefit is recognized.............................. 4,385 3,736
Alternative Minimum Tax............................................................ 22 --
--------- ---------
$ 241 $ 265
--------- ---------
--------- ---------
</TABLE>
The components of the Company's income tax expense for the year ended June
30, 1995 are:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Federal--current................................................................... $ 73 $ --
State--current..................................................................... 31 102
Federal--deferred.................................................................. 118 163
State--deferred.................................................................... 19 --
--------- ---------
Total.......................................................................... $ 241 $ 265
--------- ---------
--------- ---------
</TABLE>
7. STATEMENTS OF CASH FLOWS
The following supplemental information is related to the Consolidated
Statements of Cash Flows. In fiscal 1995, the Company reclassified approximately
$212,000 from receivables to intangible assets and reclassified other assets of
approximately $1,099,000 to property and equipment ($1,074,000) and receivables
($25,000). Additionally, numerous non-cash items related to the Company's
acquisition of the general partnership interest in RCVP impacted the statement
of cash flows. The most significant of these non-cash items included non-cash
additions to property, plant and equipment of approximately $23,400,000 and
additions to total debt of approximately $13,839,000. See also Note 11.
In fiscal 1994, the Company reclassified approximately $1,445,000 of
accounts receivable to intangible assets ($1,393,000) and property and equipment
($52,000) on a net basis.
Payments for interest expense in 1993, 1994 and 1995 were approximately
$4,408,000, $4,690,000 and $7,102,000 respectively.
F-16
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
8. INTERIM FINANCIAL INFORMATION (UNAUDITED)
Following is the unaudited quarterly results of the Company for the years
ended June 30, 1994 and 1995. This information is not covered by the Independent
Auditors' Report.
<TABLE>
<CAPTION>
PRIMARY
INCOME
TOTAL NET (LOSS) (LOSS) PER
REVENUES INCOME SHARE
--------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
1994
First Quarter........................................................ $ 28,419 $ (1,376) $ (.14)
Second Quarter....................................................... 30,566 (1,221) (.12)
Third Quarter........................................................ 31,807 847 .08
Fourth Quarter....................................................... 32,262 (11,378) (1.09)
1995
First Quarter........................................................ $ 30,824 $ (1,926) $ (.18)
Second Quarter....................................................... 31,514 (3,090) (.28)
Third Quarter........................................................ 31,439 (1,775) (.16)
Fourth Quarter....................................................... 38,211 (3,960) (.34)
</TABLE>
The sum of the income (loss) per share for the four quarters, which are
based on average shares outstanding during each quarter, does not equal income
(loss) per share for the year, which is based on average shares outstanding
during the year.
9. RELATED PARTY TRANSACTIONS
The Company sold products to Seeben N.V., a company in which Alfred H. Wilms
is the brother of a member of the company's board of directors. Sales to this
company were approximately $2,000 (1993), $6,000 (1994) and $0 (1995). No
accounts receivable were due from this company at June 30, 1994 or June 30,
1995. Sales prices and terms were similar to those of non-affiliated persons.
In March 1992, Alfred H. Wilms, a director and principal stockholder (and
then Chairman and Chief Executive Officer of the Company), committed to provide
or cause others to provide a $6,500,000 five year, unsecured, subordinated loan
to VSI, a majority-controlled subsidiary of the Company engaged in the Company's
Louisiana gaming device route operations. As consideration for this commitment,
the Company issued to Mr. Wilms five year warrants to purchase 200,000 shares of
Common Stock at $2.50 per share subject to certain adjustments, and agreed to
issue an additional warrant to purchase 1,800,000 shares of Common Stock at
$2.50 per share subject to certain adjustments upon complete funding of the
loan. At June 30, 1993 approximately $6,000,000 of the loan had been funded. The
remaining $500,000 was funded in October 1993 at which time the Company issued
to Mr. Wilms the additional warrant for 1,800,000 shares of common stock.
David Robbins, a director appointed to the Board in July 1994, as a designee
of Kirkland Investment Corporation ("KIC"), is employed by the law firm of
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel which has represented the
Company in various matters related to the Company's growth strategy and its
transactions with Kirkland and KIC. The Company paid fees of approximately
$1,046,000 and $493,000 to such firm in fiscal 1994 and fiscal 1995,
respectively.
In connection with the agreements with KIC (100% owned by Joel Kirschbaum)
and its affiliates and related transactions, the Company has paid to or on
behalf of Kirkland and its affiliates a total of approximately $346,000 in
fiscal 1994 and $597,000 in fiscal 1995 primarily for reimbursement of expenses
incurred on behalf of the Company.
F-17
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
9. RELATED PARTY TRANSACTIONS (CONTINUED)
In 1993 and 1994 the Company entered into employment agreements with certain
key employees. These agreements range from one to three years in length and
cover certain other terms of employment including compensation. As a condition
of his employment, in April 1995 the Company issued 250,000 shares of common
stock to Steve Greathouse, the Company's Chairman, President and Chief Executive
Officer and recognized a non-cash charge of $1,313,000 related to this
transaction.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment, warehouse and repair facilities,
gaming route locations, casino and other locations under non-cancelable
operating leases.
Future minimum rentals under non-cancelable operating leases at June 30,
1995 are:
<TABLE>
<CAPTION>
TOTAL
MINIMUM SUBLEASE NET MINIMUM
YEAR ENDED JUNE 30 RENTALS INCOME RENTALS
- ----------------------------------------------------------------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1996................................................................... $ 8,828 $ 921 $ 7,907
1997................................................................... 6,462 842 5,620
1998................................................................... 6,173 809 5,364
1999................................................................... 5,623 758 4,865
2000................................................................... 3,737 598 3,139
Thereafter............................................................. 34,349 2,757 31,592
----------- ----------- -----------
$ 65,172 $ 6,685 $ 58,487
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Certain gaming route location leases provide only for contingent rentals
based upon a percentage of gaming revenue and are cancelable at any time by
either party.
Operating lease rental expense, including contingent lease rentals, for
years ended June 30 was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals........................................................ $ 11,727 $ 13,743 $ 9,704
Contingent rentals..................................................... 49,621 55,910 58,113
--------- --------- ---------
61,348 69,653 67,817
Sublease rental income................................................. (850) (1,004) (1,192)
--------- --------- ---------
$ 60,498 $ 68,649 $ 66,625
--------- --------- ---------
--------- --------- ---------
</TABLE>
These amounts are included in the cost of gaming revenues on the
accompanying Consolidated Statements of Operations.
In April, 1990, the Company entered into a ten year lease to operate a
non-restricted gaming location in Las Vegas, Nevada. The lease commencement date
was scheduled to begin no later than 90 days after the construction had been
finalized. In January, 1991, the Company received notice that the construction
was complete; however, upon review of the property, the Company did not believe
that construction had been completed. In August, 1992, the lessor filed a suit
against the Company seeking compensatory and exemplary damages totalling
$18,700,000. In fiscal 1992, the Company had accrued a $480,000 liability
representing back rent owed to the lessor. In February, 1993 the lawsuit was
settled and the Company paid the lessor $425,000 in return for resolution of all
prior and current disputes regarding the lease terms. The lease calls for
monthly rentals of approximately $31,000 and provides for annual increases based
on certain indices. At
F-18
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
June 30, 1992, the Company sublet the property to a location operator in
exchange for the right to operate gaming devices at the property under a space
lease arrangement for a period of 10 years beginning December, 1992.
The Company and Casino Magic Corporation, through wholly owned subsidiaries,
are members in Kansas Gaming Partners, LLC ("KGP") and Kansas Financial
Partners, LLC ("KFP"), both Kansas limited liability companies. Under an option
agreement granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown"), KGP
has been granted the exclusive right to operate gaming devices and/or
casino-type gaming at Camptown's facility if and when such gaming is permitted
in Kansas. In September 1994, the Kansas Racing Commission approved a revised
financing proposal submitted by Camptown that would facilitate completion of
construction of a greyhound racing facility on the 320 acre site in Frontenac,
Kansas. Camptown has received a $3,205,000 loan commitment which has been
guaranteed by KFP. In December 1994, the Company invested $1,580,000 in KFP for
its portion of the loan guarantee which was made in the form of a certificate of
deposit. The Company owns 50% of the equity of KFP which is accounted for under
the equity method. The Company has not guaranteed the obligations of KFP.
Construction of Camptown's racing facility has been completed and the facility
opened for business in May 1995. Camptown's obligation to begin to repay the
loan guaranteed by KFP commenced in June 1995 with interest only payments.
Principal repayment is scheduled to commence in June 1996. There can be no
assurance as to the successful completion or operation of any part of this
project.
The Company is also involved in various claims and legal actions arising in
the ordinary course of business. Management of the Company believes that the
ultimate outcome of these matters will not have a material adverse effect on the
Company's consolidated financial statements taken as a whole.
11. ACQUISITIONS
On July 12, 1994, the Rainbow Casino located in Vicksburg, Mississippi
permanently opened for business. Through a wholly-owned subsidiary, the Company
originally purchased a 45% limited partnership interest in RCVP, a Mississippi
limited partnership which owns the casino, all assets (including the gaming
equipment) associated with the casino and certain adjacent parcels of land. As
consideration for its 45% limited partnership interest, the Company paid
$2,000,000 in cash and issued 600,000 shares of its common stock to RCC and its
two shareholders. The 55% general partnership interest in RCVP was held by RCC.
In connection with the completion of the casino, the Company funded a $3,250,000
advance to RCC on the same terms as RCC's financing from Hospitality Franchise
Systems, Inc. ("HFS") (other than the fact that such advance is subordinate to
payments due to HFS). On March 29, 1995, the Company consummated certain
transactions whereby the Company acquired from RCC the controlling general
partnership interest in RCVP and increased its partnership interest. In exchange
for the assumption by National Gaming Mississippi, Inc. ("NGM"), a subsidiary of
National Gaming Corporation, of approximately $1,140,000 of liabilities (plus a
financing fee payable to HFS) related to the completion of certain incomplete
elements of the project which survived the opening of the casino (for which RCC
was to have been responsible, but failed to satisfy), a related $652,000 cash
payment by the Company to NGM and commitments by the Company and NGM to fund
additional financing required to complete the project (i) a subsidiary of the
Company became the general partner and RCC became the limited partner and (ii)
the respective partnership interests were adjusted. As a result of these
transactions, RCVP assumed $1,304,000 of new debt of which 50% was payable to
the Company. Under the adjusted partnership interests, RCC is entitled to
receive 10% of the net available cash flows after debt service and other items,
as defined, (which amount shall increase to 20% of cash above $35,000,000 (i.e.,
only on such incremental amount)), for a period of 15 years, such period being
subject to one year extensions for each year in which a minimum payment of
$50,000 is not made. This transaction was accounted for as an acquisition using
the purchase method. Accordingly, the purchase price
F-19
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
11. ACQUISITIONS (CONTINUED)
was allocated to assets acquired based on their estimated fair values. This
treatment resulted in no cost in excess of net assets acquired (goodwill) being
recognized. The Rainbow Casino's results of operations have been included in the
consolidated results of operations since the date of acquisition.
The following summarized, unaudited pro forma results of operations for the
fiscal year ended June 30, 1995, assume the complete acquisition of RCVP
occurred on the date the casino permanently opened for business:
<TABLE>
<CAPTION>
1995
-------------------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNT)
<S> <C>
Revenues........................................................................... $ 142,051
Net loss........................................................................... (10,862)
Net loss per common share.......................................................... (0.96)
</TABLE>
12. RECENT DEVELOPMENTS (UNAUDITED)
On June 19, 1995, the Company publicly proposed a negotiated acquisition of
Bally Gaming International, Inc. ("BGII") for $12.50 per share of BGII common
stock. Prior to making this offer, the Company had acquired 500,000 shares of
BGII stock on the open market and at June 30, 1995 held 1,000,000 shares
(approximately 9.3% of BGII's total outstanding shares, based on BGII's most
recent public filings) which it acquired at an average cost of approximately
$10.41 per share. Under the proposed terms of the offer, approximately 60% of
BGII shares not held by the Company would be acquired for cash with the
remainder exchanged for shares of the Company's common stock. The offer was
contingent upon satisfactory due diligence, regulatory and stockholder approval
and reasonable financing. At the time the offer was made public, the Company
requested expedited due diligence, subject to a confidentiality agreement. BGII
had previously announced a planned merger with WMS Industries, Inc. ("WMS")
which included an exclusive period for WMS to negotiate the terms of that
proposed merger. WMS's exclusive negotiating period had expired several weeks
before the Company's proposal was made without announcement or action on the
part of BGII or WMS. On July 25, 1995, after being refused due diligence access
and the announcement by BGII that a definitive agreement had been reached to
merge with WMS, the Company announced its intent to make a tender offer for
BGII. The tender offer was on largely the same terms as the originally proposed
acquisition. On the same date, the Company announced it had filed litigation in
Delaware Chancery Court requesting that the court require BGII to grant the
Company due diligence access, enjoin BGII from proceeding with the WMS merger
(including a provision therein requiring the sale of BGII's German operations)
and declare the breakup fee provided for in the WMS merger to be invalid. The
Company indicated that it would increase the price per share of BGII stock to
$13.00 per share if the breakup fee was declared invalid. The tender offer was
conditioned upon the Company being validly tendered a number of shares of BGII
stock, which combined with its own holdings of such stock, would give the
Company a majority of BGII's outstanding shares. The tender offer commenced on
July 28, 1995. Subsequently, the Company announced its intention to proceed with
a consent solicitation to elect a majority of independent directors to the BGII
Board of Directors. On August 14, 1995, the Company, BGII and WMS jointly
announced an agreement whereby the parties would hold in abeyance all activities
related to pending litigation until September 1, 1995, refrain from commencing
new litigation until that same date, BGII would schedule its annual shareholder
meeting for consideration of the proposed WMS merger and the election of
directors on October 30, 1995, and the Company would extend the expiration date
of the tender offer until September 12, 1995 and refrain from soliciting proxies
until September 1, 1995. On September 1, 1995, the Company disclosed that it had
obtained firm financing commitments to fund the tender offer and that such
commitments were not conditioned on due diligence of BGII. Accordingly, the
Company extended the expiration date of its tender offer to September 29, 1995.
BGII and WMS filed lawsuits against the Company alleging numerous public
misrepresentations had been made by the Company with regards to the WMS-
F-20
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
12. RECENT DEVELOPMENTS (UNAUDITED) (CONTINUED)
BGII agreement, the Company's tender offer and the level of cooperation of
BGII's board of directors. Subsequent to filing its lawsuit against the Company,
BGII adopted a poison pill provision designed to discourage the Company's
acquisition efforts. In response to the poison pill adoption, the Company
announced it had increased its tender offer to $13.00 per share of BGII common
stock and increased to 5,400,000 the number of BGII common shares being sought
in the tender offer.
F-21
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bally Gaming International, Inc.
We have audited the accompanying consolidated balance sheets of Bally Gaming
International, Inc. as of December 31, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bally Gaming
International, Inc. as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Las Vegas, Nevada
February 13, 1996
F-30
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 9,204 $ 5,526
Accounts and notes receivable, net of allowance for doubtful accounts of $12,282 and
$16,281................................................................................ 84,632 87,176
Inventories, net:
Raw materials and work-in-process..................................................... 21,082 16,066
Finished goods........................................................................ 28,377 35,525
---------- ----------
49,459 51,591
Other current assets.................................................................... 5,074 3,983
---------- ----------
Total current assets................................................................ 148,369 148,276
Long-term notes receivable, net of allowance for doubtful accounts
of $8,198 and $7,869.................................................................... 5,558 9,981
Property, plant and equipment, at cost:
Land.................................................................................... 1,357 1,357
Buildings and leasehold improvements.................................................... 19,262 19,871
Machinery and equipment................................................................. 26,636 30,328
Furniture, fixtures and equipment....................................................... 6,075 6,162
Less accumulated depreciation........................................................... (28,972) (34,474)
---------- ----------
Property, plant and equipment, net.................................................... 24,358 23,244
Intangible assets, less accumulated amortization of $12,609 and $13,720................... 11,410 10,814
Other assets.............................................................................. 2,547 2,001
---------- ----------
$ 192,242 $ 194,316
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 19,272 $ 18,556
Accrued liabilities and other payables:
Compensation and benefit related liabilities............................................ 5,962 5,608
Other................................................................................... 11,363 11,798
---------- ----------
17,325 17,406
Current maturities of long-term debt.................................................... 16,000 14,957
---------- ----------
Total current liabilities........................................................... 52,597 50,919
10 3/8% Senior Secured Notes due 1998, net of unamortized discount
of $458 and $344........................................................................ 39,542 39,656
Other long-term debt, less current maturities............................................. 14,220 15,331
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; 5,000,000 shares authorized, none issued............... -- --
Common stock; $.01 par value; 30,000,000 shares authorized, 10,749,501
and 10,799,501 issued and outstanding.................................................. 107 108
Additional paid-in-capital.............................................................. 67,758 68,345
Retained earnings....................................................................... 5,235 1,842
Cumulative translation adjustments...................................................... 13,560 18,662
Unearned compensation................................................................... (777) (547)
---------- ----------
Total stockholders' equity.......................................................... 85,883 88,410
---------- ----------
$ 192,242 $ 194,316
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-31
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS,)EXCEPT PER SHARE
DATA
Revenues:
Sales...................................................................... $ 164,571 $ 231,318 $ 244,471
Other...................................................................... 4,136 4,874 4,841
---------- ---------- ----------
168,707 236,192 249,312
---------- ---------- ----------
Costs and expenses:
Cost of sales.............................................................. 121,710 157,059 163,131
Selling, general and administrative........................................ 57,357 59,989 65,289
Provision for doubtful receivables......................................... 8,176 5,763 6,712
Unusual charges............................................................ -- -- 5,816
---------- ---------- ----------
187,243 222,811 240,948
---------- ---------- ----------
Operating income (loss)...................................................... (18,536) 13,381 8,364
Interest expense............................................................. 4,424 6,768 6,853
---------- ---------- ----------
Income (loss) before income taxes and extraordinary gain..................... (22,960) 6,613 1,511
Provision for income taxes................................................... 4,242 2,820 4,904
---------- ---------- ----------
Income (loss) before extraordinary gain...................................... (27,202) 3,793 (3,393)
Extraordinary gain on early extinguishment of debt........................... 3,759 -- --
---------- ---------- ----------
Net income (loss)............................................................ $ (23,443) $ 3,793 $ (3,393)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common share:
Income (loss) before extraordinary gain.................................... $ (2.54) $ 0.35 $ (0.31)
Extraordinary gain on early extinguishment of debt......................... 0.35 -- --
---------- ---------- ----------
Net income (loss).......................................................... $ (2.19) $ 0.35 $ (0.31)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares and common stock equivalents
outstanding................................................................. 10,685 10,727 10,776
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-32
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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-33
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ (23,443) $ 3,793 $ (3,393)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Extraordinary gain on early extinguishment of debt.......................... (3,759) -- --
Depreciation and amortization............................................... 8,103 8,271 8,953
Deferred income taxes....................................................... 163 (296) (778)
Provision for doubtful receivables.......................................... 8,176 5,763 6,712
Provision for writedown of building to be sold.............................. -- -- 812
Provision for inventory valuation........................................... 6,156 2,230 1,955
(Gain) loss on disposals of property, plant and equipment................... 64 (83) 48
Changes in operating assets and liabilities:
Accounts and notes receivable............................................. (17,648) (15,823) (10,304)
Inventories............................................................... (15,077) (3,889) (2,167)
Other current assets...................................................... (1,534) (713) 1,279
Accounts payable and accrued liabilities.................................. 9,717 2,730 578
Other, net.................................................................. (466) (759) 100
---------- ---------- ----------
Cash provided by (used in) operating activities........................... (29,548) 1,224 3,795
---------- ---------- ----------
Cash flows from investing activities:
Net assets of distribution business acquired.................................. (8,382) -- --
Purchases of property, plant and equipment.................................... (6,467) (9,537) (8,240)
Proceeds from disposals of property, plant and equipment...................... 1,091 1,749 1,757
Other......................................................................... 351 1,397 250
---------- ---------- ----------
Cash used in investing activities......................................... (13,407) (6,391) (6,233)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured Notes and Common Stock Warrants...... 40,000 -- --
Net change in lines of credit................................................. 28,711 21,423 359
Repayments of long-term debt.................................................. (29,761) (13,192) (2,908)
Exercise of stock warrants and stock options.................................. 30 -- 588
---------- ---------- ----------
Cash provided by financing activities....................................... 38,980 8,231 (1,961)
Effect of exchange rate changes on cash....................................... (389) 704 721
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.............................. (4,364) 3,768 (3,678)
Cash and cash equivalents, beginning of year.................................. 9,800 5,436 9,204
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 5,436 $ 9,204 $ 5,526
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flows information:
Operating activities include cash payments for interest and income taxes as
follows:
Interest paid............................................................... $ 2,910 $ 5,972 $ 6,888
Income taxes paid, net of refunds........................................... 6,454 4,020 1,801
Investing activities exclude the following non-cash activities:
Exchange of income tax receivable for intangible assets and equipment....... 1,969 -- --
Long-term note received from sale of assets................................. -- 517 --
Financing activities exclude the following non-cash activities:
Issuance of restricted stock awards......................................... 1,150 -- --
Issuance of Company common stock under compensation agreement............... -- 222 --
Issuance of note payable for license agreement.............................. -- 1,465 --
</TABLE>
See accompanying notes.
F-34
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Bally Gaming International, Inc. (the "Company") was formed in August 1991
by Bally Entertainment Corporation ("BEC") to consolidate the gaming machine
manufacturing and distribution operations of BEC. These operations are conducted
in Germany under the name Bally Wulff ("Wulff") and in the United States under
the name Bally Gaming ("Gaming") and Bally Systems ("Systems"). Wulff designs,
manufactures (through the Company's wholly-owned subsidiary "Automaten") and
distributes (through the Company's wholly-owned subsidiary "Vertriebs")
wall-mounted, coin-operated, armless gaming devices similar to slot machines
known as wall machines and also distributes recreational and amusement machines
manufactured by third parties. Gaming designs, manufactures and distributes
electronic slot machines and video gaming machines. Systems designs, assembles
and sells computerized monitoring systems for slot and video gaming machines. In
three transactions dated November 1991, July 1992 and September 1993, BEC
divested substantially all its interests in the Company.
Certain reclassifications have been made to prior years' financial
statements to conform with the 1995 presentation.
Hereafter, references to the Company are to the consolidated operations of
Wulff, Gaming and Systems including the predecessor operations.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less which are readily convertible into cash.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Cost elements included for work-in-process and
finished goods include raw materials, freight, direct labor and manufacturing
overhead.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided by using the straight-line method over the
estimated economic lives of the related assets and the terms of the applicable
leases for leasehold improvements, which range from 3 to 30 years.
Significant replacements and improvements are capitalized; other maintenance
and repairs are expensed. The cost and accumulated depreciation of assets
retired or otherwise disposed of are eliminated from the accounts and any
resulting gain or loss is credited or charged to income as appropriate.
INTANGIBLE AND OTHER ASSETS
Intangible assets include the cost in excess of net assets of acquired
businesses, which are being amortized using the straight-line method over
periods ranging up to 40 years from dates of acquisition.
In July 1992, the Company reached an agreement for an exclusive license
until December 31, 2005, subject to extension, of a patent relating to the use
of credit cards in gaming machines, and acquired 1% of the stock of Scotch
Twist, Inc., a private company which granted this license, in exchange for the
issuance of 100,001 shares of the Company's Common Stock. The licensing
agreement requires the Company to commit
F-35
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
$1.2 million in research and development costs related to the patent, plus any
costs related to obtaining required regulatory approvals and licenses. As of
December 31, 1995 approximately $1 million has been spent relative to this
commitment.
In July 1992 and again in March 1995, the Company and BEC amended a
trademark license agreement ("License Agreement") pursuant to which the Company
licensed the use of the name "Bally" for its use in the gaming machine business
worldwide. Prior to 1995, the trademark licensing rights were being amortized
using the straight-line method over a 20 year period. Pursuant to the terms of
the March 1995 amendment, the Company reduced the remaining amortization period
to five years effective March 31, 1995, resulting in an increase in amortization
expense of approximately $315,000 for the year ended December 31, 1995.
In January 1993, as part of an amendment to an intercorporate agreement
between the Company and BEC, a long-term income tax receivable from BEC of
$1,971,000 was exchanged for certain assets owned by BEC but managed by the
Company, a reduction in the period from six years to three years of certain non-
competition restrictions previously imposed on the Company by BEC and the
settlement of certain other intercompany service arrangements with BEC. This
transaction resulted in an increase to intangible assets of approximately
$1,515,000 which is being amortized over a 6 year period.
In June 1994, the Company acquired a paid up license for use of a patent on
slot machines manufactured or sold during the life of the patent. The owner of
the patent had recently filed an infringement action against various casinos in
Atlantic City alleging infringement of a certain patent by these casino
companies. As a result of the agreement, the casino operator defendants will be
released from any claims relating to the past and future use of certain gaming
machines manufactured by the Company. The Company agreed to pay $2 million over
a 5 year period, without interest, for the paid up license. The asset is fully
amortized as of December 31, 1995.
The carrying value of intangible assets is periodically reviewed by
management and impairment losses, if any, are recognized when the expected
non-discounted future operating cash flows derived from such intangible assets
is less than their carrying value. In 1995, Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121") was issued which will be
effective for the Company's year ended December 31, 1996. This statement
requires that long-lived assets and certain identifiable intangible assets to be
held and used be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. Management believes that if SFAS No. 121 had been early adopted at
December 31, 1995, it would not have had a material effect on the financial
position, results of operations or cash flows of the Company.
INCOME TAXES
Taxes on income of Wulff are provided at the tax rates applicable to the tax
jurisdictions in Germany, as Wulff files separate foreign income tax returns.
German withholding taxes and related United States federal income taxes are
provided on Wulff earnings.
REVENUE RECOGNITION
The Company sells products on normal credit terms (90 days or less), over
longer term installments of up to 36 months or more or through payments from the
net winnings of the machines until the purchase price is paid.
Revenue from sales of gaming machines and recreational and amusement
equipment is normally recognized at the time products are shipped and title has
passed to the customer. Revenue from sales of software included in computerized
management systems is recognized at the time the systems are accepted by the
customer, which normally coincides with installation of the equipment. Revenue
from sales of hardware included in computerized management systems is recognized
at the time the product is shipped.
F-36
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency of Wulff is the Deutsche Mark. Assets and
liabilities of Wulff are translated at the rate of exchange at the end of the
period, and the statements of operations are translated at the average rate of
exchange for the period. Translation adjustments are reflected as a separate
component of stockholder's equity. Gains and losses on foreign currency
transactions are included in net income.
RESEARCH AND DEVELOPMENT
The Company expenses product research and development costs as incurred.
Research and development costs for the years ended December 31, 1993, 1994 and
1995 were $7.8 million, $8.7 million and $9.2 million, respectively.
STOCK-BASED EMPLOYEE COMPENSATION AWARDS
The Company accounts for its stock-based employee compensation awards in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price
of the Company's employee stock options and stock performance rights equals the
market price on date of grant, no compensation expense is recognized.
In 1995, Statement of Financial Accounting Standards No. 123, "Accounting
for Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") was issued
which will be effective for the Company's year ended December 31, 1996. SFAS No.
123 provides alternative accounting treatment to APB No. 25 with respect to
stock-based compensation and requires certain additional disclosures, including
disclosures if the Company elects not to adopt the accounting requirements of
SFAS No. 123. At this point, the Company does not anticipate adopting the
accounting requirements of SFAS No. 123 and therefore in future years would
expect to provide the required additional disclosures in the footnotes to the
consolidated financial statements.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding totaling 10,685,054, 10,726,556 and 10,775,699 for the
years ended December 31, 1993, 1994 and 1995.
Common stock equivalents were not included in the computation of earnings
(loss) per common share as their effect would have been antidilutive or
immaterial.
MERGER AGREEMENT, TENDER OFFER AND RELATED LITIGATION
On October 17, 1995, the Board of Directors of the Company approved an
Agreement and Plan of Merger with Alliance Gaming Corporation ("Alliance") which
was subsequently amended as of January 23, 1996 ("Merger Agreement"). Pursuant
to the Merger Agreement, the Company will merge with a subsidiary of Alliance
("Alliance Merger Subsidiary") with the Company being the surviving corporation
and becoming a wholly-owned subsidiary of Alliance ("Alliance Merger"). The
Merger Agreement provides that the Company's stockholders will have the right to
receive, in exchange for each of their issued and outstanding shares of the
Company's common stock (i) an amount of cash determined by dividing $76,700,000
by the number of shares of the Company's common stock outstanding immediately
prior to the effective time of the Merger (other than shares which are held by
the Company, Alliance or their respective subsidiaries) ("Converted Shares"),
(ii) a fraction of a share of common stock, $.10 par value, of Alliance
("Alliance
F-37
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Common Stock") having a value determined in accordance with the Merger Agreement
of $.30 (the "Common Stock Consideration") and (iii) that number of shares (or
fractions thereof) of 15% Non-Voting Junior Special Stock, Series B, $.10 par
value, of Alliance (the "Series B Special Stock") having a value determined in
accordance with the Merger Agreement equal to $11.40 less the cash consideration
described in clause (i) above. The obligations of Alliance and the Company to
consummate the Alliance Merger are subject to various conditions, including
obtaining requisite stockholder and regulatory approvals and Alliance's
obtaining $150 million in financing on commercially reasonable terms, at least
two-thirds of which must be in the form of bank debt, other debt having a term
of at least four years or equity. In conjunction with the Merger Agreement,
Alliance terminated its unsolicited tender offer and consent solicitation and
withdrew its litigation against the Company and the Company withdrew its
litigation against Alliance.
BUSINESS SEGMENT
The business of the Company is conducted in one industry segment: the
design, manufacture and distribution of gaming machines, computerized monitoring
systems and recreational and amusement equipment. All of Wulff's sales are to
customers outside the United States while Gaming and Systems sell to domestic
and foreign customers. See "Commitments and Contingencies."
The Company has operations based in Germany and the United States. The table
below presents information as to the Company's operations by geographic region.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Germany................................................ $ 112,601 $ 111,068 $ 130,655
United States.......................................... 60,533 131,228 129,140
Eliminations........................................... (4,427) (6,104) (10,483)
---------- ---------- ----------
Consolidated........................................... $ 168,707 $ 236,192 $ 249,312
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS):
Germany................................................ $ 9,702 $ 9,232 $ 5,581
United States.......................................... (27,658) 4,184 2,982
Eliminations........................................... (580) (35) (199)
---------- ---------- ----------
Consolidated........................................... $ (18,536) $ 13,381 $ 8,364
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS:
Germany................................................ $ 81,899 $ 97,537 $ 100,207
United States.......................................... 90,613 99,478 100,643
Eliminations........................................... (1,682) (4,773) (6,534)
---------- ---------- ----------
Consolidated........................................... $ 170,830 $ 192,242 $ 194,316
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Wulff's customers are a diverse group of operators of arcades, hotels,
restaurants and taverns, primarily in Germany. Gaming's and Systems' customers
are primarily casinos and gaming machine distributors in the United States and
abroad. Receivables of Wulff, Gaming and Systems are generally collateralized by
the related equipment. See "Concentration of Credit Risk."
F-38
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Export sales (including sales to Wulff) from Gaming's and Systems'
operations for the years ended December 31, 1993, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Europe....................................................... $ 8,651 $ 10,889 $ 12,890
Far East..................................................... 223 860 998
Latin America................................................ 2,030 4,015 5,392
Canada....................................................... 1,589 3,254 6,185
Other........................................................ -- 556 1,824
--------- --------- ---------
$ 12,493 $ 19,574 $ 27,289
--------- --------- ---------
--------- --------- ---------
</TABLE>
ACCOUNTS AND NOTES RECEIVABLE
The Company grants certain customers extended payment terms under contracts
of sale. These contracts are generally for terms of one to three years, with
interest at prevailing rates, and are generally collateralized by the related
equipment sold although the value of such equipment, if repossessed, may be less
than the receivable balance outstanding. See "Concentration of Credit Risk."
The following table represents, at December 31, 1995, scheduled collections
of accounts and notes receivable (net of allowances for doubtful accounts) by
year:
<TABLE>
<S> <C>
1996............................................................... $ 87,176
1997............................................................... 8,250
1998............................................................... 1,731
---------
$ 97,157
---------
---------
</TABLE>
LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt and lines of credit consist of the following at December 31,
1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
10 3/8% Senior Secured Notes due 1998, net of unamortized discount of
$458 and $344........................................................ $ 39,542 $ 39,656
OTHER LONG-TERM DEBT:
Wulff revolving lines of credit....................................... 15,853 15,905
Bally Gaming, Inc. revolving line of credit........................... 7,768 9,400
Notes payable, 5% to 12%.............................................. 6,599 4,983
Less current maturities............................................... (16,000) (14,957)
---------- ----------
$ 14,220 $ 15,331
---------- ----------
---------- ----------
</TABLE>
In July 1993, the Company completed a private placement of $40 million
principal amount of 10 3/8% Senior Secured Notes due July 1998 and Common Stock
Purchase Warrants to purchase 1.2 million shares of Common Stock exercisable at
$12.50 per share after the Common Stock has traded at an average of $20 per
share for a twenty consecutive trading day period and under certain other
circumstances. The warrants became exercisable during November 1993. The Company
allocated $600,000 of the $40 million gross proceeds to the warrants and
accordingly recorded the Senior Secured Notes at $39.4 million with unamortized
discount of $600,000 (the effective yield of the Senior Secured Notes is
10.77%). The Company used $21.6 million of the gross proceeds of $40 million
from the sale of the notes and warrants to redeem all of its outstanding 6%
Senior Convertible Debentures due 2002. The Company realized an extraordinary
gain of approximately $3.8 million from the redemption of the Convertible
Debentures in 1993. The gain represents the difference between the carrying
amount of the debt retired and related deferred financing costs ($25.4
F-39
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
million) and the redemption price of $21.6 million. The Senior Secured Notes are
collateralized by a pledge of the outstanding capital stock of Automaten and
Vertriebs and a guarantee by Bally Gaming, Inc. The Notes are subject to
redemption, at the option of the Company, at a redemption price equal to 103%
and 101.5% of the principal amount of the Notes if redeemed during the twelve
month period beginning on the anniversary of the issue date in the years 1996
and 1997, respectively.
During March 1993, Vertriebs obtained two bank lines of credit for the
purpose of financing the acquisition of assets acquired from an independent
distributor. The agreements provide for borrowings of DM2,250,000 and
DM16,000,000 (approximately $1,600,000 and $11,200,000) at December 31, 1995,
respectively. Availability of the DM2,250,000 line of credit is reduced by
DM250,000 per quarter and expires on March 31, 1998. Borrowings under this line
of credit bear interest at 6.95%. The working capital revolving credit line of
DM16,000,000 bears interest at a rate tied to an international borrowing rate
plus 1% (5.3% at December 31, 1995) and is due on demand. These lines are
collateralized by a pledge of the assets acquired. Approximately $12,751,000 was
outstanding under these lines at December 31, 1995. In May 1993, Vertriebs
obtained a DM16,300,000 (approximately $11,400,000 at December 31, 1995)
revolving line of credit for general working capital purposes. This agreement
bears interest at a rate tied to an international borrowing rate plus 1% (4.8%
at December 31, 1995) and is due on demand. This line is collateralized by the
receivables of Vertriebs. Approximately $3,144,000 was outstanding under this
line at December 31, 1995. Vertriebs and Automaten are jointly and severally
liable under these lines of credit.
In March 1993, Bally Gaming, Inc. obtained a bank revolving line of credit
which, as amended, provides for borrowings tied to a percentage of Bally Gaming,
Inc.'s eligible (as defined in the credit agreement) inventory and accounts
receivable with a maximum borrowing capacity of $15,000,000. Borrowings under
this agreement, which expires March 31, 1997, bear interest at one and one-half
percent above the bank's prime rate (10% at December 31, 1995). The Company must
pay an annual facility fee of one-half of one percent of the maximum borrowing
capacity and a monthly unused line fee of one-quarter of one percent of the
difference between the maximum borrowing capacity and the average daily
outstanding balance during any month. This line of credit is collateralized by
property, plant and equipment and the eligible inventory and accounts
receivable. The agreement and subsequent amendments also contain certain
financial and other restrictive covenants, including the maintenance by Bally
Gaming, Inc. of specified levels of minimum net working capital, working capital
ratio, tangible net worth, net worth ratio, and minimum net income after taxes,
all as defined in the credit agreement. Eligible borrowing capacity under this
agreement at December 31, 1995 was approximately $15,000,000. Approximately
$9,400,000 was outstanding at December 31, 1995.
Aggregate annual maturities of long-term debt for the five years after
December 31, 1995 are $14.9 million, $11.5 million, $43.6 million, $.3 million
and none.
STOCK PLANS, AWARDS AND RIGHTS
1991 INCENTIVE PLAN
On November 6, 1991, the Company adopted the 1991 Incentive Plan of Bally
Gaming International, Inc. (the "Plan") for directors (employee directors that
are not members of the Compensation and Stock Option Committee of the Board of
Directors), officers, key employees and consultants (collectively
"Participants"). The Plan provides for the grant of stock options, stock
appreciation rights ("SARs") and restricted stock (collectively "Awards"). The
aggregate number of shares of common stock which may be delivered under the Plan
and the 1991 Non-Employee Directors' Option Plan described below may not exceed
1,250,000 shares. No awards may be granted after November 6, 2001.
The Plan provides for granting incentive as well as nonqualified stock
options. Unless the Compensation and Stock Option Committee of the Board of
Directors, in its discretion, determines otherwise,
F-40
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
nonqualified stock options will be granted with an option price equal to the
fair market value of the shares of common stock at the date of grant. Incentive
stock options must be granted at not less than the fair market value of the
shares of common stock at the date of grant.
SARs are rights granted to Participants to receive shares of common stock
and/or cash in an amount equal to the excess of (i) the fair market value of the
shares of common stock on the date the SARs are exercised over (ii) the fair
market value of the shares of common stock on the date the SARs were granted or,
at the discretion of the Compensation and Stock Option Committee of the Board of
Directors, the date the option was granted, if granted in tandem with an option
granted on a different date.
Restricted stock awards are rights granted to an employee to receive shares
of common stock without payment but subject to forfeiture and other restrictions
as set forth in the Plan. Generally, the restricted stock awarded, and the right
to vote such stock or to receive dividends thereon, may not be sold, exchanged
or otherwise disposed of during the restricted period. The Compensation and
Stock Option Committee of the Board of Directors, in its discretion, will
determine the restrictions and the forfeiture provisions applicable to
restricted stock awards. The Plan provides that, at the discretion of the
Compensation and Stock Option Committee of the Board of Directors, the Company
may pay cash to Participants to insure that the Participant will receive the
common stock net of all taxes imposed on such Participant related to the receipt
of common stock and cash payments under the Plan. During 1991, restricted stock
awards for 72,500 shares of common stock were granted under the Plan to key
employees effective January 1, 1992. These awards are fully vested at December
31, 1995. In 1993, 100,000 shares of restricted common stock were granted to an
officer of the Company. This award vests ratably over a five-year period. As of
December 31, 1995, 40,000 shares of this award were vested.
The Plan is administered by the Compensation and Stock Option Committee
which will determine the participants to whom awards will be granted, the
provisions applicable to each award and the time periods
during which the awards may be exercised. Each option and SAR granted under the
Plan may be exercisable for a term of not more than ten years after the date of
grant. Incentive stock options and SARs granted in tandem with incentive stock
options may only be exercised when the fair market value of common stock is
greater than the option price. Certain other restrictions apply in connection
with the timing of exercise. In the event of a change of control (as defined in
the Plan), the date on which all SARs and options outstanding under the Plan may
first be exercised is accelerated, and restrictions on restricted stock awards
lapse. Generally, all SARs and options terminate 90 days after a change of
control.
1991 NON-EMPLOYEE DIRECTORS' OPTION PLAN
The 1991 Non-Employee Directors' Option Plan of the Company (the "Directors'
Plan") was also adopted in November 1991. The Directors' Plan provides for the
granting of stock options at the Company's initial public offering price to
persons who, on the consummation of the Company's initial public offering, were
members of the Board of Directors and who are not employees of the Company or
its subsidiaries ("Non-Employee Directors"), and thereafter, options are granted
at fair market value to persons who become members of the Board of Directors
after the Company's initial public offering and who are not employees of the
Company or its subsidiaries at the time they become members of the Board of
Directors. Each of the Non-Employee Directors received, or will receive, an
option, for ten years, to purchase 25,000 shares of common stock that vests over
three years. Administration, the term of the Directors' Plan and change of
control features for the Directors' Plan are consistent with the above described
Plan.
F-41
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
At December 31, 1995, 35,000 shares were reserved for future grant under the
Plan and the Directors' Plan. A summary of shares granted, canceled and
exercisable (excluding restricted stock grants of 172,500) are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------- -----------------
<S> <C> <C>
Outstanding at December 31, 1992.............................. 845,000 $11.75 - $14.50
Granted..................................................... 188,000 $12.38 - $12.75
Canceled.................................................... (9,000) $14.50
----------
Outstanding at December 31, 1993.............................. 1,024,000 $11.75 - $14.50
Granted..................................................... 58,000 $ 8.06 - $12.88
Canceled.................................................... (53,000) $12.00 - $14.50
----------
Outstanding at December 31, 1994.............................. 1,029,000 $ 8.06 - $14.50
Granted..................................................... 30,000 $7.88
Canceled.................................................... (16,500) $12.00 - $14.50
Exercised................................................... (50,000) $11.75
----------
Outstanding at December 31, 1995.............................. 992,500 $ 7.88 - $14.50
---------- -----------------
---------- -----------------
Exercisable at December 31, 1995.............................. 871,320 $ 8.06 - $14.50
---------- -----------------
---------- -----------------
</TABLE>
1992 RESTRICTED STOCK PERFORMANCE PLAN
On November 3, 1992, the Company's Board of Directors adopted the Bally
Gaming International, Inc. 1992 Restricted Stock Performance Plan (the
"Performance Plan"). The purpose of the Performance Plan is to benefit the
Company through increased incentive on the part of key employees, officers,
directors and consultants of the Company and its subsidiaries by permitting the
Company to make awards of Restricted Stock and/or Performance Units comprised of
stock and cash to such persons based upon specific performance objectives. Up to
600,000 shares of the Company's common stock have been reserved under this plan.
In February 1993, 200,000 Performance Units were granted in connection with an
employment agreement entered into by the Company with its Chairman of the Board
and Chief Executive Officer. In May 1993, 200,000 Performance Units were granted
in connection with an employment agreement entered into by the Company and Bally
Gaming, Inc. with its new President. In December 1993, an additional 120,000
Performance Units were granted to other members of senior management of the
Company, of which 40,000 units were canceled during the year ended December 31,
1994.
Under the terms of the award agreements as amended June 8, 1994, the
Performance Units will vest if either (i) the cumulative annual growth rate for
any three consecutive years during the Performance Period (as defined in the
Performance Plan) is at least 35% (the "EPS Growth Target") or (ii) the fair
market value of the Common Stock (as determined based on the market price of the
Common Stock) equals or exceeds $40 per share for at least twenty of thirty
consecutive trading days (the "Market Price Target") or (iii) under certain
circumstances following a change in control or (iv) the Company enters into a
business combination or (v) the Company obtains a capital infusion of at least
$30,000,000 provided however if (i) the Company's earnings per share growth in
any consecutive three years during the Performance Period (as defined in the
Performance Plan) is at least 85% of the EPS Growth Target, at least 70% of the
Performance Units will vest, or (ii) the Company's stock price at any time in
the Performance Period (as defined in the Performance Plan) is at least 85% of
the Market Price Target, at least 70% of the Performance Units will vest. Each
Performance Unit is equal in value to one share of the Company's Common Stock,
plus an additional amount in cash equal to fifty percent (50%) of the value of
one share of Common Stock, based on the fair market value of the Common Stock at
the date the award vests. Payments are to be made in common stock and/or cash as
determined by the Compensation Committee. No accruals have been recorded in the
Company's financial statements as of December 31, 1995 as such performance
objectives have not yet begun to be met.
F-42
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1994 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The 1994 Stock Option Plan for Non-Employee Directors (the "1994 Directors'
Plan") was adopted in April 1994 and provides for the granting of stock options
of the Company's Common Stock exercisable at fair market value to Non-Employee
Directors. Each of the Non-Employee Directors received an option, for ten years,
to purchase 25,000 shares of Common Stock that vests over three years. The
option price was $12.875. The 1994 Directors' Plan has change in control
features similar to those contained in the 1991 Directors' Plan. 250,000 shares
of the Company's Common Stock were reserved for future issuance under the 1994
Directors' Plan. At December 31, 1995, 125,000 shares had been granted of which
33,333 shares were exercisable, 25,000 had been canceled and none had previously
been exercised.
STOCK PERFORMANCE RIGHTS ("SPRS")
Stock Performance Rights ("SPRs") are rights granted to individuals to
receive cash in an amount equal to the excess of (i) the fair market value of
the shares of common stock on the date the SPRs are exercised over (ii) the fair
market value of the shares of common stock on the date the SPRs were granted.
In 1993, 100,000 SPRs were granted to an officer of the Company at a fair
market value on date of grant of $11.625 in connection with the signing of a
five-year employment agreement. These SPRs vest ratably over the term of the
employment agreement and become exercisable at the end of each vesting period.
As of December 31, 1995, 40,000 of the SPRs were exercisable, and none had been
previously exercised.
WARRANTS
The Company issued warrants to the underwriters of the initial public
offering of the Company's common stock to purchase an aggregate of 300,000
shares of its common stock. The warrants are exercisable during a four-year
period ending November 11, 1996 at an exercise price of $15 per share. For the
year ended December 31, 1993, 2,000 warrants were exercised and no other
warrants have since been exercised.
In 1993, the Company issued warrants to purchase 1.2 million shares of its
common stock at $12.50 per share in connection with the private placement of the
Senior Secured Notes. These warrants are currently exercisable and expire on
July 29, 1998. At December 31, 1995 none of these warrants were exercised. See
"Long-term Debt and Lines of Credit."
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1995 shares of the Company's Common Stock were reserved for
future issuance as follows:
<TABLE>
<S> <C>
Warrants related to the 10 3/8% Senior Secured Notes............. 1,200,000
1991 Incentive Plan and Directors' Plan.......................... 1,200,000
1992 Restricted Stock Performance Plan........................... 600,000
1994 Stock Option Plan for Non-Employee Directors................ 250,000
Warrants to underwriters......................................... 298,000
---------
3,548,000
---------
---------
</TABLE>
OTHER REVENUES
Other revenues for the years ended December 31, 1993, 1994 and 1995 were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest......................................................... $ 3,795 $ 3,538 $ 3,615
Currency transaction gain (loss)................................. (245) (30) (53)
Other............................................................ 586 1,366 1,279
--------- --------- ---------
$ 4,136 $ 4,874 $ 4,841
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-43
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
UNUSUAL CHARGES
During the year ended December 31, 1995, the Company incurred approximately
$4.0 million in legal, accounting, investment banking, public and investor
relations and printing costs in connection with a merger agreement with WMS
Industries, Inc., which has been terminated, Alliance's tender offer and consent
solicitation and the pending Alliance Merger. All of these costs have been
expensed as incurred. Such costs will continue to be incurred in 1996.
During the fourth quarter of 1995, Vertriebs recorded a non-recurring charge
of $.8 million to writedown to net realizable value a building to be sold. The
provision was based on a strategic decision to sell the building as Wulff's
other distribution offices adequately covered the geographic region that would
have been served by this facility.
During 1995, Wulff increased the amount of value added tax reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million. The Company has accrued the liability as, based on current
developments, the Company's estimate of the ultimate outcome and its experience
in contesting these matters, it is probable that a liability has been incurred
and a range of costs can be reasonably estimated. As the scope of the liability
is better determined, there could be changes in the estimate of the ultimate
liability. Management believes that the preliminary proposed adjustments are
without merit and the ultimate results of the audit will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes" which requires recognition of deferred tax
assets and liabilities for temporary differences and net operating loss ("NOL")
and tax credit carryforwards. Under SFAS No. 109, deferred income taxes are
established based on enacted tax rates expected to be in effect when temporary
differences are scheduled to reverse and NOL and tax credit carryforwards are
expected to be utilized. The cumulative effect of the adoption of SFAS No. 109
had an immaterial effect on net income for the year ended December 31, 1993.
The provision (credit) for foreign and domestic income taxes for the years
ended December 31, 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
FEDERAL:
Current........................................................ $ 476 $ 220 $ 260
Deferred....................................................... -- -- --
--------- --------- ---------
476 220 260
--------- --------- ---------
--------- --------- ---------
FOREIGN:
Current........................................................ 3,603 2,896 4,586
Deferred....................................................... 163 (296) 58
--------- --------- ---------
3,766 2,600 4,644
--------- --------- ---------
Total provisions for income taxes................................ $ 4,242 $ 2,820 $ 4,904
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-44
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The major components of the net deferred tax asset as of December 31, 1994,
and 1995 were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Property, plant and equipment......................................... $ 1,075 $ 1,193
Other................................................................. 131 --
---------- ----------
Total deferred tax liabilities.................................... 1,206 1,193
---------- ----------
Bad debt reserves..................................................... 4,933 5,876
Inventory reserves.................................................... 5,527 4,736
Wulff corporate reorganization........................................ 235 366
Net operating loss carryforwards...................................... -- 391
Foreign tax credit carryforwards...................................... 8,382 12,955
AMT tax credit carryforwards.......................................... 384 570
Intangibles........................................................... 2,432 909
Accrued liabilities................................................... 1,201 562
Deferred compensation................................................. 696 476
Other................................................................. 31 500
---------- ----------
Total deferred tax assets......................................... 23,821 27,341
---------- ----------
Valuation allowance................................................... (21,460) (24,667)
---------- ----------
Net deferred tax assets........................................... $ 1,155 $ 1,481
---------- ----------
---------- ----------
</TABLE>
At December 31, 1994 and 1995, net deferred tax assets resulted from German
net operating loss carryforwards and, inventory and intangible assets book/tax
basis differences. At December 31, 1995 the Company has foreign tax credit
carryforwards of approximately $13.0 million and alternative minimum tax ("AMT")
credit carryforwards of approximately $.6 million. Foreign tax credits are
available to offset future taxes due in the U.S. on future foreign taxable
income and expire between 1997 and 2001 unless utilized prior to such time. AMT
credits are available to be carried forward indefinitely and may be utilized
against regular U.S. corporate income tax to the extent it does not exceed tax
computed under AMT calculations.
The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Taxes at federal statutory rate................................. $ (7,806) $ 2,248 $ 529
Losses with no current tax benefit.............................. 11,528 -- --
Federal alternative minimum tax................................. 143 200 200
Foreign earnings at other than U.S. statutory rate.............. 238 (2) 3,529
Foreign withholding on dividends................................ 333 353 450
Other........................................................... 34 21 196
Impact of SFAS 109 adoption..................................... (228) -- --
--------- --------- ---------
$ 4,242 $ 2,820 $ 4,904
--------- --------- ---------
--------- --------- ---------
</TABLE>
RELATED PARTY TRANSACTIONS
In connection with the Company's initial public offering, BEC granted
restricted stock awards for shares of the Company's common stock owned by BEC to
certain senior executives of the Company. These restricted stock awards
represent compensation from the Company equal to the fair market value of the
F-45
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
shares on the date of the awards and are recorded as unearned compensation and a
capital contribution in the accompanying financial statements. Unearned
compensation is charged to operations over the vesting periods of the awards.
In connection with the Company's initial public offering, the Company and
BEC entered into an intercorporate agreement which was amended in July 1992, and
again in January 1993, which provided, among other things, that BEC would
perform certain accounting, tax, treasury, legal, data processing, employee
benefits and other services which the Company reasonably requests, and that the
Company would reimburse BEC for the reasonable cost of all services rendered,
including salaries and expenses of BEC's employees while they are rendering such
services. Charges by BEC to the Company under the intercorporate agreement for
the years ended December 31, 1993, 1994 and 1995 were $295,000, $90,000 and
none, respectively.
The Company participated in BEC's insurance program for general liability
and directors' and officers' liability coverage through June 1993. Under these
programs, insurance expenses were charged to the Company based on claims
experience and for reimbursements of premium payments made by BEC. Insurance
expense charged to the Company was $281,000, none, and none for the years ended
December 31, 1993, 1994 and 1995, respectively.
The Company had a long-term income tax receivable from BEC totaling
$1,971,000 at December 31, 1992. As part of an amendment to the intercorporate
agreement between the Company and BEC, which was entered into in January 1993,
the income tax receivable of $1,971,000 was exchanged for certain assets
previously owned by BEC but managed by the Company, a reduction in the period
from six years to three years of certain non-competition restrictions previously
imposed on the Company by BEC and settlement of certain other intercompany
service arrangements with BEC. This transaction resulted in an increase to
intangible assets of approximately $1,515,000 which is being amortized over a
six-year period.
Waters, McPherson, McNeill, P.C., a law firm of which Mr. McPherson, a
director of the Company, is Senior Lawyer and Chairman, provides legal services
to the Company, primarily relating to litigation involving the Company's former
distributor in Louisiana. As of December 31, 1994 and 1995, the Company was
indebted to the firm for approximately $200,000 and $480,000, respectively, for
legal services rendered. During the years ended December 31, 1993, 1994 and
1995, Waters, McPherson, McNeill, P.C. billed the Company approximately $1.0
million, $1.3 million and $1.5 million, respectively, for legal services
provided to the Company.
EMPLOYEE BENEFIT PLANS
Until February 28, 1994 the Company participated in BEC's defined
contribution plans which covered certain full-time employees and which were
considered part of the Company's overall retirement program. Effective March 1,
1994, the Company ceased its participation in BEC's defined contribution plans
and formed its own plan. This program consists of a savings plan to which
employees may contribute a percentage of their compensation. Employee
contributions to the savings plan, up to certain limits, may be matched by the
Company. The Company's contribution accrued for the savings plan for the years
ended December 31, 1993, 1994 and 1995 was approximately $91,000, $120,000 and
$140,000, respectively.
COMMITMENTS AND CONTINGENCIES
The Company is obligated under several patent agreements to pay royalties
ranging from approximately $50 to $200 per game depending on the components in
the gaming machines. Additionally, based on an amendment to the trademark
licensing agreement between the Company and BEC dated March 31, 1995, the
Company is obligated to pay a royalty on new machines sold of $25 to $30 per
machine beginning on March 31, 1995 with a minimum annual royalty payment of
$500,000 for the initial five-year term of the amended agreement, which is
subject to annual renewals thereafter. Royalty expense for the years ended
December 31, 1993, 1994 and 1995 was $1.1 million, $2.9 million and $3.0
million, respectively.
F-46
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum lease
payments at December 31, 1995 under operating leases that have initial or
remaining lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1996............................................................... $ 3,136
1997............................................................... 2,753
1998............................................................... 1,754
1999............................................................... 1,361
2000............................................................... 1,121
Thereafter......................................................... 1,844
---------
$ 11,969
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 was $2.6
million, $2.7 million and $3.6 million, respectively.
The Company has entered into employment contracts with several of its
executives. These contracts are for periods ranging from one to five years and
require certain minimum annual payments. Future minimum annual payments under
these contracts are as follows:
<TABLE>
<S> <C>
1996................................................................ $ 3,573
1997................................................................ 2,299
1998................................................................ 1,700
---------
$ 7,572
---------
---------
</TABLE>
In conjunction with sales by Gaming, with recourse to Gaming and/or the
Company, of certain trade receivables to third parties, Gaming and/or the
Company have guaranteed amounts due from various customers of approximately
$18.2 million at December 31, 1995. A charge was recognized as a result of these
sales of receivables which aggregated approximately $.5 million, $1.0 million
and $.1 million during 1993, 1994 and 1995, respectively. It is possible that
one or more of Gaming's customers whose obligation has been guaranteed by Gaming
may be unable to make payments as such become due. In this case Gaming may
become responsible for repayment of at least a portion of such amounts over the
term of the receivables. At December 31, 1995, amounts due from one customer
under three contracts totaling $3.5 million were past due and these amounts and
subsequent installments have not been paid. In general, under the terms of these
contracts, the Company may be responsible for monthly payments of the
outstanding obligations. The third party holder of these contracts has not yet
asserted demands under these contracts although such demands may be imminent.
The Company intends to pursue a restructuring of the contracts although no
assurance can be given that such a restructuring would be successfully
negotiated. The outcome of this issue is not anticipated to have a material
effect on the financial position, results of operations or cash flows of the
Company. A provision for doubtful accounts of approximately $3.5 million and
$6.3 million on all receivables with recourse is included in the Company's
allowance for doubtful accounts at December 31, 1994 and 1995, respectively.
On or about June 19, 1995, three purported class actions were filed in the
Chancery Court of Delaware by Company's stockholders against the Company and its
directors (the "Fiorella, Cignetti and Neuman Actions"). The Fiorella and Neuman
Actions, in identical complaints alleged that the Company's directors had
breached their fiduciary duties of good faith, fair dealing, loyalty and candor
by approving the Merger Agreement with WMS ("WMS Merger") instead of the
unsolicited tender offer transaction proposed by Alliance ("Alliance Proposal"),
by not properly exposing the Company for sale, and by failing to take all
reasonable steps to maximize stockholder value. These actions sought injunctions
to prevent the Company from proceeding with, consummating or closing the WMS
Merger, and to rescind it should it be consummated, as well as compensatory
damages. The Cignetti Action made similar allegations, and also alleged that
F-47
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
the Company had in place a shareholders' right plan, commonly know as a "poison
pill." The Cignetti Action sought an injunction requiring the Company to
negotiate with all bona fide parties or other potential acquirees or to conduct
an unencumbered market check in a manner designed to maximize shareholder value,
and preventing the Company from implementing any unlawful barriers to the
acquisition of the Company by any third party or taking other actions that would
lessen its attractiveness as an acquisition candidate. The Cignetti Action also
specifically requested an injunction barring triggering of the Company's alleged
"poison pill" until full consideration was given to the Alliance Proposal
(subsequently superseded by the execution of the Merger Agreement with
Alliance), and sought compensatory damages.
Also on or about June 19, 1995, a purported class action was filed in the
Delaware Court of Chancery by a Company stockholder against the Company and its
directors and Alliance (the "Strougo Action"). The Strougo Action alleged that
the Alliance Proposal (subsequently superseded by the execution of the Alliance
Merger Agreement) to acquire the Company stock was at a grossly unfair and
inadequate price; that the Company's directors had breached their fiduciary
duties by failing seriously to consider potential purchasers for the Company
other than Alliance; and that the transaction proposed by Alliance was wrongful,
unfair and harmful to the Company's public stockholders. The Strougo Action
sought a declaration that defendants had breached their fiduciary duties; an
injunction preventing the consummation of the Alliance transaction or requiring
its rescission; an order requiring defendants to permit a stockholders'
committee to participate in any process undertaken in connection with the sale
of the Company; and compensatory damages.
On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman
Actions and the Strougo Action (collectively, the "Stockholder Plaintiffs")
filed with the Court a motion to consolidate the four actions.
On or about July 27, 1995, certain of the Stockholder Plaintiffs filed an
amended complaint (the "Amended Fiorella Action") that adopted certain
allegations concerning self-dealing by the Company's directors in connection
with the WMS Merger; added a claim relating to the Company's alleged failure to
hold an annual meeting as required and added WMS as defendant. The Amended
Fiorella Action also alleged that the Company intended, in violation of Delaware
law, to sell Wulff without first seeking stockholder approval of the sale. The
action sought an order enjoining defendants from proceeding with, consummating
or closing the WMS Merger, or rescinding it if it closed; preventing the sale of
Wulff without prior stockholder approval; declaring invalid the Company's
agreement to pay WMS a fee if the WMS Merger is terminated by the Company in
certain circumstances; compelling an auction of the Company and the provision of
due diligence to Alliance; scheduling an immediate meeting of the Company
stockholders; and awarding compensatory damages. The Company believes these
lawsuits to be without merit and intends to vigorously defend these actions.
On October 23, 1995, WMS instituted a suit in New York State Court against
the Company for the Company's failure to pay $4.8 million upon termination of
the WMS Merger. The Company believes this lawsuit to be without merit and
intends to vigorously defend this action. On November 22, 1995, the Company
answered the complaint and brought counterclaims against WMS alleging that WMS
repudiated and breached the WMS Merger by, among other things, failing to act in
good faith toward the consummation of the WMS Merger, advising the Company that
it would not perform as agreed but would impose new conditions on the WMS
Merger, acting in excess of its authority and undermining the ability of the
Company to perform the WMS Merger. On February 8, 1996 WMS moved for summary
judgement. The Company's response to that action is presently due on March 15,
1996. Pursuant to the Merger Agreement, Alliance has agreed to indemnify the
directors and officers of the Company in certain circumstances.
In June 1995, BEC asserted that a certain agreement between BEC and the
Company (the "Non-compete Agreement") prohibits the use by the Company of the
tradename "Bally" if it is merged with a company that is in the casino business
within or without the United States and operates such business prior to January
8, 1999. The Company believes such a claim is entirely without merit since the
restriction referred
F-48
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
to expired on January 8, 1996 and in any event does not relate to the use of the
"Bally" tradename, which is covered by the License Agreement. The restriction in
the Non-compete Agreement will not have any impact on the combined company after
the Merger since the effective time of the Alliance Merger contemplates a
closing of the Alliance Merger after the restriction in the Non-compete
Agreement lapses. BEC has not reasserted this position since it was informed by
the Company in July 1995 that the restriction lapses on January 8, 1996.
Consequently, the Company believes BEC has determined not to contest the
Company's position.
On February 16, 1996, the Company received notice from BEC alleging that the
Company has violated the License Agreement by, among other things, granting to
Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which
provides Bally Gaming, Inc.'s revolving line of credit, a security interest in
general intangibles. In such notice, BEC also stated that as a result of the
foregoing, it was immediately terminating the License Agreement. The Company
does not believe that it has violated the terms of the License Agreement and the
Company will defend its position against BEC's claims.
BEC has also asserted that its permission is required for use of the "Bally"
tradename by any entity other than the Company and that a merger between the
Company and another company would violate the terms of the License Agreement.
The Company has denied these claims and believes that the surviving company in
the Alliance Merger will be permitted to use the "Bally" tradename in accordance
with the terms of such License Agreement. The Company believes that no breach of
such License Agreement is caused by the Alliance Merger and use of the "Bally"
tradename by the surviving corporation. In a letter dated November 9, 1995, BEC
reasserted its position. On November 20, 1995, Alliance, the Alliance Merger
Subsidiary and the Company commenced an action against BEC in Federal District
Court in Delaware seeking a declaratory judgment, among other things, that the
surviving company in the Alliance Merger will be permitted to use the "Bally"
tradename in accordance with the terms of the License Agreement, and seeking
injunctive relief (the "Alliance Action"). On November 28, 1995, BEC commenced
an action against the Company, Bally Gaming, Inc., Alliance and the Alliance
Merger Subsidiary in Federal District Court in New Jersey to enjoin the
defendants from using the "Bally" tradename (the "BEC Action"). The BEC Action
alleges that the Company's continued use of the tradename after the Alliance
Merger will (1) constitute a prohibited assignment of the Company's rights to
use the tradename and (2) exceed the scope of the license granted to the Company
because the Company will be under the control of Alliance. Also on November 28,
1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the
Alliance Action pending resolution of the BEC Action. On December 15, 1995 BEC
filed a motion to dismiss, transfer to New Jersey or stay the Alliance Action
pending resolution of the BEC Action. On December 15, 1995, BEC filed a motion
for a preliminary injunction in the BEC Action. At a hearing on January 17,
1996, the court declined to issue a preliminary injunction, but held BEC's
motion in abeyance pending the defendant's motion to dismiss and for summary
judgment, which defendants had filed on December 26, 1995. After a second
hearing on February 20, 1996 the court stated it would attempt to rule on both
motions in fourteen days. The Company, Bally Gaming Inc., Alliance and the
Alliance Merger Subsidiary intend to vigorously defend their position in these
actions.
In 1994, after an intensive federal investigation of Gaming's former
distributor, eighteen individuals were indicted on charges of racketeering and
fraud against Gaming and the Louisiana regulatory system. Among those indicted
were the former distributor's stockholders, directors, employees and others
alleged to be associated with organized crime. Fifteen entered pleas of guilty
before trial and the remaining three were convicted in October 1995. Gaming was
never a subject or target of the federal investigation.
Prior to the conclusion of the federal case, the Company's activities with
regard to its former VLT distributor in Louisiana were the subject of inquiries
by gaming regulators and a report by the New Jersey Division of Gaming
Enforcement ("DGE") dated August 24, 1995. The New Jersey Casino Control
Commission ("CCC") has indicated that it may hold a hearing on the matter, but
no date has been set at this time.
F-49
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The New Jersey report makes no specific recommendations for action by the CCC.
The gaming authorities in Ontario, Canada, who have investigated the matters,
have issued a gaming registration to the Company's subsidiary Bally Gaming, Inc.
on February 8, 1996.
The DGE's report is similar in many respects to one prepared by the
President of the Louisiana Economic Development and Gaming Corporation ("LEDGC")
in January 1995. Hearings on that report were held in January 1995 and on
February 7, 1995 the Board of Directors of the LEDGC found all of the
allegations in its President's report to be without merit and granted a license
to the Company and has announced that it will continue to monitor the Company's
conduct in light of any further information disclosed as a result of the trial
of the eighteen defendants (all of whom have now plead, or been found, guilty)
and other regulatory proceedings. In November 1995, the operator of the land
based casino in New Orleans filed for bankruptcy reorganization and ceased
operations. That action resulted in the termination of funding for the LEDGC
regulatory operations and, shortly thereafter, the Attorney General of Louisiana
took control of the agency and effectively closed its operations. LEDGC's
President and employees were dismissed. The foregoing occurred prior to the
completion of review of the Company's pending application.
The Company believes that the information contained in the DGE's report does
not differ in any material respect from the prior report to the LEDGC the
conclusions of which were found to be without merit in February 1995. An adverse
determination by a gaming regulator in any jurisdiction could result in the loss
of the Company's ability to do business in that jurisdiction. Further regulatory
scrutiny in other jurisdictions would be likely to follow. The Company would
appeal any adverse finding, as was the case when the Company successfully
appealed the LEDGC President's decision in January 1995.
On September 25, 1995, the Company was named as defendant in a class action
lawsuit filed in the United States District Court, District of Nevada, by Larry
Schreier on behalf of himself and all others similarly situated (the
"plaintiffs"). The plaintiffs filed suit against the Company and approximately
45 other defendants (each a "defendant," and collectively the "defendants").
Each defendant is involved in the gaming business as either a gaming machine
manufacturer, distributor, or casino operator. The class action lawsuit arises
out of alleged fraudulent marketing and operation of casino video poker machines
and electronic slot machines. The plaintiffs allege that the defendants have
engaged in a course of fraudulent and misleading conduct intended to induce
people in playing their gaming machines based on a false belief concerning how
those machines actually operate as well as the extent to which there is actually
an opportunity to win on any given play. The plaintiffs allege that the
defendants' actions constitute violations of the Racketeer Influenced and
Corrupt Organizations Act ("RICO") and give rise to claims of common law fraud
and unjust enrichment. The plaintiffs are seeking monetary damages in excess of
one billion dollars, and are asking that any damage awards be trebled under
applicable federal law. The Company believes the plaintiffs' lawsuit to be
without merit and intends to vigorously defend these actions.
While the ultimate results of the matters described above are not presently
known, management does not expect that the results will have a material adverse
effect on the Company's results of operations, financial position or cash flows.
The Company and its subsidiaries are from time to time also subject to
litigation incidental to the conduct of their business. The Company believes
that the results of such litigation and other pending legal proceedings will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
CONCENTRATION OF CREDIT RISK
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts and notes
receivable and customer obligations guaranteed by the Company.
F-50
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Product sales and the resulting receivables are concentrated in specific
legalized gaming regions. The Company also distributes its products through
third party distributors resulting in distributor receivables. At December 31,
1995 net accounts and notes receivable, including obligations of various
customers which are guaranteed by the Company, by region as a percentage to
total net receivables are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-----------------------------------------------------
WULFF GAMING SYSTEMS TOTAL
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Germany............................................... 47.0% --% --% 47.0%
Mississippi Riverboats................................ -- 9.5 -- 9.5
Other Riverboat Casinos............................... -- 1.3 -- 1.3
Nevada................................................ -- 15.0 1.8 16.8
Atlantic City......................................... -- 2.0 2.0 4.0
International......................................... -- 8.0 1.6 9.6
Louisiana............................................. -- 1.6 .1 1.7
New Mexico Indian Casinos............................. -- 5.6 .2 5.8
Other Indian Casinos.................................. -- 1.8 .3 2.1
Others individually less than 5%...................... -- 2.2 -- 2.2
--
--- --- -----
47.0% 47.0% 6.0% 100.0%
--
--
--- --- -----
--- --- -----
</TABLE>
Gaming's receivables and customer obligations guaranteed by Gaming and/or
the Company, from riverboat casinos and casinos on Indian land generally
represent sales to recently opened casinos and, in many cases, new customers to
Gaming. Approximately 43% of the accounts and notes receivable and customer
obligations guaranteed by the Company at December 31, 1995 relate to these
emerging markets including approximately 25% to three customers operating in
Mississippi. Receivables and customer obligations guaranteed by the Company from
emerging market customers contain increased risk factors compared to receivables
at Wulff or other traditional markets for Gaming.
In early 1995, the Governor of the State of New Mexico signed compacts with
certain Indian tribes to permit casino gaming on tribal lands in New Mexico.
These compacts went through appropriate federal approval processes and a number
of casinos began operating. In July 1995 the Supreme Court of New Mexico found
that the Governor did not have proper authority to sign the compacts. The Indian
tribes have filed a lawsuit in federal court to seek resolution to this issue.
Gaming and Systems had sold product to the Indian tribes prior to this ruling.
At December 31, 1995, the Company has $5.5 million in accounts and notes
receivable from an operator of two casinos for two different Indian tribes
including $2.1 million of trade receivables sold to a third party with recourse
to Gaming. This operator is currently four months ahead on payments. No
provision for doubtful accounts for this customer has been included in the
accompanying financial statements at December 31, 1995. Management believes the
receivable is properly valued at December 31, 1995. As events change during 1996
management will reevaluate its estimate of the realizability of the receivable.
CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements are presented to provide
information regarding Bally Gaming, Inc., as guarantor of the Senior Secured
Notes, and Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH, because
substantially all of the common stock of these entities is pledged as collateral
for the Senior Secured Notes. The results herein are presented by each legal
entity rather than by business segment as presented elsewhere in these financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations. Such business segment information of Bally Gaming, Inc.,
Automaten and Vertriebs includes an allocation of parent company revenues and
expenses whereas the following consolidating financial statements do not reflect
these allocations to the subsidiaries. The notes to consolidating financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto.
F-51
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY BALLY CONSOLIDATING BALLY GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
--------- --------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 1,362 $ 7,487 $ 355 $ -- $ -- $ 9,204
Accounts and notes receivable, net of
allowance for doubtful accounts of
$19, $5,659 and $6,604 for Automaten,
Vertriebs and Gaming................. 2,813 46,342 38,773 2,903 (6,199) 84,632
Inventories, net:
Raw materials and work-in-process... 5,063 -- 16,019 -- -- 21,082
Finished goods...................... 2,442 9,413 17,599 -- (1,077) 28,377
--------- --------- -------- -------- ------------- --------------
7,505 9,413 33,618 -- (1,077) 49,459
Other current assets.................. 1,446 2,957 650 196 (175) 5,074
--------- --------- -------- -------- ------------- --------------
Total current assets.............. 13,126 66,199 73,396 3,099 (7,451) 148,369
Long-term notes receivables, net of
allowance for doubtful accounts of $35
and $8,163 for Vertriebs and Gaming.... -- 1,186 4,372 -- -- 5,558
Long-term receivables from affiliate.... 23,314 -- -- 29,014 (52,328) --
Property, plant and equipment, at cost:
Land.................................. -- 332 1,025 -- -- 1,357
Buildings and leasehold
improvements......................... 1,648 7,705 9,909 -- -- 19,262
Machinery and equipment............... 11,174 7,072 8,390 -- -- 26,636
Furniture, fixtures and equipment..... 828 2,181 5,335 -- (2,269) 6,075
Less accumulated depreciation......... (11,615) (5,978) (11,844 ) -- 465 (28,972)
--------- --------- -------- -------- ------------- --------------
Property, plant and equipment,
net.............................. 2,035 11,312 12,815 -- (1,804) 24,358
Intangible assets, less accumulated
amortization of $197, $11,131, $69 and
$1,212 for Automaten, Vertriebs, Gaming
and Parent............................. -- 5,773 181 5,456 -- 11,410
Investment in subsidiaries.............. -- -- -- 90,766 (90,766) --
Other assets............................ 337 586 113 1,511 -- 2,547
--------- --------- -------- -------- ------------- --------------
$38,812 $85,056 $90,877 $129,846 $(152,349) $192,242
--------- --------- -------- -------- ------------- --------------
--------- --------- -------- -------- ------------- --------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable...................... $ 411 $ 4,064 $18,880 $ 891 $ (4,974) $ 19,272
Accrued liabilities and other
payables:
Compensation and benefit related
liabilities........................ 2,287 612 2,433 630 -- 5,962
Interest............................ -- -- -- 1,890 -- 1,890
Other............................... 1,461 4,065 4,495 186 (734) 9,473
--------- --------- -------- -------- ------------- --------------
3,748 4,677 6,928 2,706 (734) 17,325
Current maturities of long-term
debt................................. -- 13,756 1,350 894 -- 16,000
--------- --------- -------- -------- ------------- --------------
Total current liabilities......... 4,159 22,497 27,158 4,491 (5,708) 52,597
Long-term payables to affiliate......... -- 26,741 29,014 -- (55,755) --
10 3/8% Senior Secured Notes due 1998,
net of unamortized discount of $458.... -- -- -- 39,542 -- 39,542
Other long-term debt, less current
maturities............................. -- 5,006 7,927 1,287 -- 14,220
Commitments and contingencies
Stockholders' equity:
Preferred stock....................... -- -- -- -- -- --
Common stock.......................... 2,638 15,142 -- 107 (17,780) 107
Additional paid-in-capital............ 19,191 6,455 34,596 73,852 (66,336) 67,758
Retained earnings (accumulated
deficit)............................. 6,199 1,433 (7,818 ) 11,550 (6,129) 5,235
Cumulative translation adjustments.... 6,625 7,782 -- (206) (641) 13,560
Unearned compensation................. -- -- -- (777) -- (777)
--------- --------- -------- -------- ------------- --------------
Total stockholders' equity.......... 34,653 30,812 26,778 84,526 (90,886) 85,883
--------- --------- -------- -------- ------------- --------------
$38,812 $85,056 $90,877 $129,846 $(152,349) $192,242
--------- --------- -------- -------- ------------- --------------
--------- --------- -------- -------- ------------- --------------
</TABLE>
See accompanying notes.
F-52
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY
BALLY BALLY BALLY CONSOLIDATING GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,353 $ 3,240 $ 933 $ -- $ -- $ 5,526
Accounts and notes receivable, net of
allowance for doubtful accounts of $19,
$7,201, and $9,061 for Automaten, Vertriebs
and Gaming................................. 1,804 51,110 38,948 4,772 (9,458) 87,176
Inventories, net:
Raw materials and work-in-process........... 4,974 -- 11,092 -- -- 16,066
Finished goods.............................. 3,548 12,340 21,020 -- (1,383) 35,525
----------- ----------- --------- --------- ------------- -------------
8,522 12,340 32,112 -- (1,383) 51,591
Other current assets........................ 1,236 1,443 651 560 93 3,983
----------- ----------- --------- --------- ------------- -------------
Total current assets...................... 12,915 68,133 72,644 5,332 (10,748) 148,276
Long-term notes receivables, net of allowance
for doubtful accounts of $48 and $7,821 for
Vertriebs and Gaming......................... -- 1,654 8,327 -- -- 9,981
Long-term receivables from affiliate.......... 23,208 -- -- 28,380 (51,588) --
Property, plant and equipment, at cost:
Land........................................ -- 332 1,025 -- -- 1,357
Buildings and leasehold improvements........ 1,571 8,375 9,925 -- -- 19,871
Machinery and equipment..................... 11,913 9,617 8,798 -- -- 30,328
Furniture, fixtures and equipment........... 812 2,520 5,909 -- (3,079) 6,162
Less accumulated depreciation............... (12,964) (8,787) (13,587) -- 864 (34,474)
----------- ----------- --------- --------- ------------- -------------
Property, plant and equipment, net.......... 1,332 12,057 12,070 -- (2,215) 23,244
Intangible assets, less accumulated
amortization of $11,527, $94 and $2,099 for
Vertriebs, Gaming and Parent................. -- 6,089 156 4,569 -- 10,814
Investment in subsidiaries.................... -- -- -- 90,766 (90,766) --
Other assets.................................. 332 561 113 497 498 2,001
----------- ----------- --------- --------- ------------- -------------
$ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316
----------- ----------- --------- --------- ------------- -------------
----------- ----------- --------- --------- ------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 557 $ 6,386 $ 19,342 $ 31 $ (7,760) $ 18,556
Accrued liabilities and other payables:
Compensation and benefit related
liabilities.............................. 2,335 955 2,318 -- -- 5,608
Interest.................................. -- -- -- 1,890 -- 1,890
Other..................................... 1,472 3,546 4,293 617 (20) 9,908
----------- ----------- --------- --------- ------------- -------------
3,807 4,501 6,611 2,507 (20) 17,406
Current maturities of long-term debt........ -- 14,333 212 412 -- 14,957
----------- ----------- --------- --------- ------------- -------------
Total current liabilities................. 4,364 25,220 26,165 2,950 (7,780) 50,919
Long-term payables to affiliate............... -- 26,421 28,380 -- (54,801) --
10 3/8% Senior Secured Notes due 1998, net of
unamortized discount of $344................. -- -- -- 39,656 -- 39,656
Other long-term debt, less current
maturities................................... -- 4,721 9,435 1,175 -- 15,331
Commitments and contingencies
Stockholders' equity:
Preferred stock............................. -- -- -- -- -- --
Common stock................................ 2,638 15,142 -- 108 (17,780) 108
Additional paid-in-capital.................. 19,191 6,455 34,596 74,439 (66,336) 68,345
Retained earnings(accumulated deficit)...... 2,155 286 (5,273) 11,969 (7,295) 1,842
Cumulative translation adjustments.......... 9,439 10,249 7 (206) (827) 18,662
Unearned compensation....................... -- -- -- (547) -- (547)
----------- ----------- --------- --------- ------------- -------------
Total stockholders' equity................ 33,423 32,132 29,330 85,763 (92,238) 88,410
----------- ----------- --------- --------- ------------- -------------
$ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316
----------- ----------- --------- --------- ------------- -------------
----------- ----------- --------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-53
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales.............................. $ 42,437 $ 100,287 $ 59,709 $ -- $ (37,862) $ 164,571
Other.............................. 1,497 3,083 807 1,479 (2,730) 4,136
----------- ---------- ---------- --------- ------------- -------------
43,934 103,370 60,516 1,479 (40,592) 168,707
----------- ---------- ---------- --------- ------------- -------------
Costs and expenses:
Cost of sales...................... 26,937 81,611 51,888 -- (38,726) 121,710
Selling, general and
administrative.................... 6,737 19,608 24,498 6,531 (17) 57,357
Provision (credit) for doubtful
receivables....................... (13) 326 7,363 500 -- 8,176
----------- ---------- ---------- --------- ------------- -------------
33,661 101,545 83,749 7,031 (38,743) 187,243
----------- ---------- ---------- --------- ------------- -------------
Operating income (loss).............. 10,273 1,825 (23,233) (5,552) (1,849) (18,536)
Interest expense..................... 21 1,873 2,849 2,180 (2,499) 4,424
----------- ---------- ---------- --------- ------------- -------------
Income (loss) before income taxes and
extraordinary gain.................. 10,252 (48) (26,082) (7,732) 650 (22,960)
Provision (benefit) for income
taxes............................... 3,705 (557) 10 -- 1,084 4,242
----------- ---------- ---------- --------- ------------- -------------
Income (loss) before extraordinary
gain................................ 6,547 509 (26,092) (7,732) (434) (27,202)
Extraordinary gain on early
extinguishment of debt.............. -- -- 3,759 -- -- 3,759
----------- ---------- ---------- --------- ------------- -------------
Net income (loss).................... $ 6,547 $ 509 $ (22,333) $ (7,732) $ (434) $ (23,443)
----------- ---------- ---------- --------- ------------- -------------
----------- ---------- ---------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-54
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales............................. $ 47,419 $ 99,218 $ 130,452 $ -- $ (45,771) $ 231,318
Other............................. 1,189 3,578 776 2,856 (3,525) 4,874
----------- ---------- ---------- --------- ------------- -------------
48,608 102,796 131,228 2,856 (49,296) 236,192
----------- ---------- ---------- --------- ------------- -------------
Costs and expenses:
Cost of sales..................... 30,988 79,589 91,107 -- (44,625) 157,059
Selling, general and
administrative................... 6,656 19,408 28,135 5,862 (72) 59,989
Provision for doubtful
receivables...................... 11 1,894 3,858 -- -- 5,763
----------- ---------- ---------- --------- ------------- -------------
37,655 100,891 123,100 5,862 (44,697) 222,811
----------- ---------- ---------- --------- ------------- -------------
Operating income (loss)............. 10,953 1,905 8,128 (3,006) (4,599) 13,381
Interest expense.................. 2 1,648 3,871 4,486 (3,239) 6,768
----------- ---------- ---------- --------- ------------- -------------
Income (loss) before income taxes... 10,951 257 4,257 (7,492) (1,360) 6,613
Provision (benefit) for income
taxes.............................. 3,885 (1,019) 1,685 (1,465) (266) 2,820
----------- ---------- ---------- --------- ------------- -------------
Net income (loss)................... $ 7,066 $ 1,276 $ 2,572 $ (6,027) $ (1,094) $ 3,793
----------- ---------- ---------- --------- ------------- -------------
----------- ---------- ---------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-55
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY
BALLY BALLY CONSOLIDATING GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales............................ $ 52,263 $ 117,618 $ 127,985 $ -- $ (53,395) $ 244,471
Other............................ 889 3,477 1,155 2,911 (3,591) 4,841
----------- ---------- ---------- ---------- ------------- -------------
53,152 121,095 129,140 2,911 (56,986) 249,312
----------- ---------- ---------- ---------- ------------- -------------
Costs and expenses:
Cost of sales.................... 35,337 95,483 85,270 -- (52,959) 163,131
Selling, general and
administrative.................. 7,433 22,492 30,365 5,044 (45) 65,289
Provision for doubtful
receivables..................... -- 1,697 5,015 -- -- 6,712
Unusual charges.................. 799 1,038 125 3,854 -- 5,816
----------- ---------- ---------- ---------- ------------- -------------
43,569 120,710 120,775 8,898 (53,004) 240,948
----------- ---------- ---------- ---------- ------------- -------------
Operating income................... 9,583 385 8,365 (5,987) (3,982) 8,364
Interest expense................... 1 1,398 4,155 4,613 (3,314) 6,853
----------- ---------- ---------- ---------- ------------- -------------
Income (loss) before income
taxes............................. 9,582 (1,013) 4,210 (10,600) (668) 1,511
Provision (benefit) for income
taxes............................. 3,987 134 1,665 (1,380) 498 4,904
----------- ---------- ---------- ---------- ------------- -------------
Net income (loss).................. $ 5,595 $ (1,147) $ 2,545 $ (9,220) $ (1,166) $ (3,393)
----------- ---------- ---------- ---------- ------------- -------------
----------- ---------- ---------- ---------- ------------- -------------
</TABLE>
See accompanying notes.
F-56
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 6,547 $ 509 $ (22,333) $ (7,732) $ (434) $ (23,443)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Extraordinary gain on early extinguishment
of debt...................................... -- -- (3,759) -- -- (3,759)
Depreciation and amortization................. 1,609 2,466 2,221 1,557 250 8,103
Deferred income taxes......................... -- 163 -- -- -- 163
Provision for doubtful receivables............ (13) 326 7,363 500 -- 8,176
Provision for inventory valuation reserves.... -- -- 6,156 -- -- 6,156
(Gain) loss on disposals of property, plant
and equipment................................ (40) 15 89 -- -- 64
Changes in operating assets and liabilities:
Accounts and notes receivable............... 6,842 (3,384) (15,213) (957) (4,936) (17,648)
Inventories................................. (2,987) 3,411 (15,290) -- (211) (15,077)
Other current assets........................ (824) 481 126 (423) (894) (1,534)
Accounts payable and accrued liabilities.... (2,759) (5,814) 12,060 423 5,807 9,717
Other........................................... -- -- -- -- (466) (466)
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) operating
activities................................. 8,375 (1,827) (28,580) (6,632) (884) (29,548)
----------- ----------- ----------- --------- ------------- -------------
Cash flows from investing activities:
Net assets of distribution business acquired.... -- (8,382) -- -- -- (8,382)
Purchases of property, plant and equipment...... (1,541) (3,298) (1,628) -- -- (6,467)
Proceeds from disposals of property, plant and
equipment...................................... 57 585 449 -- -- 1,091
Other........................................... -- -- 110 -- 241 351
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) investing
activities................................. (1,484) (11,095) (1,069) -- 241 (13,407)
----------- ----------- ----------- --------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured
Notes.......................................... -- -- -- 40,000 -- 40,000
Net change in lines of credit................... -- 20,825 5,667 2,219 -- 28,711
Repayments of long-term debt.................... -- (7,376) (415) (21,970) -- (29,761)
Change in payables to/receivables from
affiliates..................................... -- -- 21,170 (21,813) 643 --
Exercise of stock warrants...................... -- -- -- 30 -- 30
Intercompany dividends.......................... (8,167) -- -- 8,167 -- --
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) financing
activities................................. (8,167) 13,449 26,422 6,633 643 38,980
Effect of exchange rate changes on cash........... (69) (320) -- -- -- (389)
----------- ----------- ----------- --------- ------------- -------------
Increase (decrease) in cash and cash
equivalents...................................... (1,345) 207 (3,227) 1 -- (4,364)
Cash and cash equivalents, beginning of period.... 1,844 4,400 3,556 -- -- 9,800
----------- ----------- ----------- --------- ------------- -------------
Cash and cash equivalents, end of period.......... $ 499 $ 4,607 $ 329 $ 1 $ -- $ 5,436
----------- ----------- ----------- --------- ------------- -------------
----------- ----------- ----------- --------- ------------- -------------
Supplemental cash flows information:
Operating activities include cash payments
(receipts) for interest and income taxes as
follows:
Interest paid................................. $ 22 $ 942 $ 327 $ 1,619 $ -- $ 2,910
Income taxes paid (received).................. 5,732 1,077 -- (355) -- 6,454
Investing activities exclude the following
non-cash activities:
Exchange of income tax receivable for
intangible assets and equipment.............. -- -- 454 1,515 -- 1,969
Financing activities exclude the following
non-cash activities:
Issuance of restricted stock awards........... -- -- -- 1,150 -- 1,150
</TABLE>
SEE ACCOMPANYING NOTES.
F-57
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ 7,066 $ 1,276 $ 2,572 $ (6,027) $ (1,094) $ 3,793
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Depreciation and amortization............... 2,556 2,491 1,974 1,342 (92) 8,271
Deferred income taxes....................... (415) (56) -- -- 175 (296)
Provision for doubtful receivables.......... 11 1,894 3,858 -- -- 5,763
Provision for inventory valuation........... -- -- 2,230 -- -- 2,230
(Gain) loss on disposals of property, plant
and equipment.............................. -- 6 (89) -- -- (83)
Changes in operating assets and liabilities:
Accounts and notes receivable............. (2,237) (3,099) (9,783) (644) (60) (15,823)
Inventories............................... 1,096 476 (5,573) -- 112 (3,889)
Other current assets...................... 286 (1,711) 139 572 1 (713)
Accounts payable and accrued
liabilities.............................. 1,708 (342) 2,396 (912) (120) 2,730
Other....................................... 450 (759) -- 183 (633) (759)
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) operating
activities............................. 10,521 176 (2,276) (5,486) (1,711) 1,224
----------- ----------- ----------- --------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment.... (3,086) (4,363) (2,088) -- -- (9,537)
Proceeds from disposals of property, plant and
equipment.................................... -- 1,414 335 -- -- 1,749
Other......................................... -- -- 268 -- 1,129 1,397
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) investing
activities............................. (3,086) (2,949) (1,485) -- 1,129 (6,391)
----------- ----------- ----------- --------- ------------- -------------
Cash flows from financing activities:
Net change in lines of credit................. -- 16,192 4,419 812 -- 21,423
Repayments of long-term debt.................. -- (11,675) (704) (813) -- (13,192)
Change in payables to/receivables from
affiliates................................... -- -- 72 (654) 582 --
Dividends to/from affiliate................... (6,654) 514 -- 6,140 -- --
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) financing
activities............................. (6,654) 5,031 3,787 5,485 582 8,231
Effect of exchange rate changes on cash......... 82 622 -- -- -- 704
----------- ----------- ----------- --------- ------------- -------------
Increase (decrease) in cash and cash
equivalents.................................... 863 2,880 26 (1) -- 3,768
Cash and cash equivalents, beginning of year.... 499 4,607 329 1 -- 5,436
----------- ----------- ----------- --------- ------------- -------------
Cash and cash equivalents, end of year.......... $ 1,362 $ 7,487 $ 355 $ -- $ -- $ 9,204
----------- ----------- ----------- --------- ------------- -------------
----------- ----------- ----------- --------- ------------- -------------
Supplemental cash flows information:
Operating activities include cash payments
(receipts) for interest and income taxes as
follows:
Interest paid............................... $ 3 $ 981 $ 789 $ 4,199 $ -- $ 5,972
Income taxes paid (received)................ 4,038 (105) 12 75 -- 4,020
Investing activities exclude the following
non-cash activities:
Capital contribution to affiliate........... -- -- -- (5,492) -- (5,492)
Long-term note received from sale of
assets..................................... -- -- 517 -- -- 517
Financing activities exclude the following
non-cash activities:
Capital contribution from affiliate......... 899 4,593 -- -- -- 5,492
Issuance of Company common stock under
compensation agreement..................... -- -- -- 222 -- 222
Issuance of note payable for license
agreement.................................. -- -- -- 1,465 -- 1,465
</TABLE>
See accompanying notes.
F-58
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ 5,595 $ (1,147) $ 2,545 $ (9,220) $ (1,166) $ (3,393)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Depreciation and amortization............... 2,602 3,120 2,029 1,312 (110) 8,953
Deferred income taxes....................... -- 63 -- -- (841) (778)
Provision for doubtful receivables.......... -- 1,697 5,015 -- -- 6,712
Provision for inventory valuation........... -- -- 1,955 -- -- 1,955
Provision for writedown of building to be
sold....................................... -- 812 -- -- -- 812
(Gain) loss on disposals of property, plant
and equipment.............................. (17) 67 (2) -- -- 48
Changes in operating assets and liabilities:
Accounts and notes receivable............... 1,223 (2,855) (8,672) -- -- (10,304)
Inventories................................. (393) (2,140) 142 -- 224 (2,167)
Other current assets........................ (119) 1,763 (1) (364) -- 1,279
Accounts payable and accrued liabilities.... 239 1,240 (1,235) (1,139) 1,473 578
Other, net.................................... (1) (402) 7 819 (323) 100
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) operating
activities............................... 9,129 2,218 1,783 (8,592) (743) 3,795
----------- ----------- ----------- --------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and
equipment.................................... (1,694) (5,468) (1,078) -- -- (8,240)
Proceeds from disposals of property, plant and
equipment.................................... 24 1,728 5 -- -- 1,757
Other......................................... -- -- (10) -- 260 250
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) investing
activities............................... (1,670) (3,740) (1,083) -- 260 (6,233)
----------- ----------- ----------- --------- ------------- -------------
Cash flows from financing activities:
Net change in lines of credit................. -- (1,273) 1,632 -- -- 359
Repayments of long-term debt.................. -- (2) (2,287) (620) 1 (2,908)
Change in payables to/receivables from
affiliates................................... 2,058 (2,058) 533 (1,015) 482 --
Exercise of stock options..................... -- -- -- 588 -- 588
Dividends to/from affiliates.................. (9,639) -- -- 9,639 -- --
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) financing
activities............................... (7,581) (3,333) (122) 8,592 483 (1,961)
Effect of exchange rate changes on cash......... 113 608 -- -- -- 721
----------- ----------- ----------- --------- ------------- -------------
Increase (decrease) in cash and cash
equivalents.................................... (9) (4,247) 578 -- -- (3,678)
Cash and cash equivalents, beginning of
period......................................... 1,362 7,487 355 -- -- 9,204
----------- ----------- ----------- --------- ------------- -------------
Cash and cash equivalents, end of period........ $ 1,353 $ 3,240 $ 933 $ -- $ -- $ 5,526
----------- ----------- ----------- --------- ------------- -------------
----------- ----------- ----------- --------- ------------- -------------
Supplemental cash flows information:
Operating activities include cash payments
(receipts) for interest and income taxes as
follows:
Interest paid............................... $ 1 $ 1,335 $ 1,178 $ 4,374 $ -- $ 6,888
Income taxes paid (refunded), net........... 3,104 (1,694) 85 306 -- 1,801
</TABLE>
See accompanying notes.
F-59
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
These notes to consolidating financial statements should be read in
conjunction with the consolidated financial statements and notes thereto.
Certain reclassifications have been made to prior years' financial
statements to conform with the 1995 presentation.
Hereafter, references to the Company are to the subsidiaries of Bally Gaming
International, Inc.
RESEARCH AND DEVELOPMENT
The Company expenses product research and development costs as incurred.
Research and development costs for the years ended December 31, 1993, 1994 and
1995 were:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. INC.
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1993................................... $ 3,350 $ -- $ 4,440 $ 7,790
----------- ----- ------ ------
----------- ----- ------ ------
1994................................... $ 3,546 $ -- $ 5,199 $ 8,745
----------- ----- ------ ------
----------- ----- ------ ------
1995................................... $ 3,561 $ -- $ 5,639 $ 9,200
----------- ----- ------ ------
----------- ----- ------ ------
</TABLE>
ACCOUNTS AND NOTES RECEIVABLE
The following table represents, at December 31, 1995, scheduled collections
of accounts and notes receivable (net of allowances for doubtful accounts) by
year:
<TABLE>
<CAPTION>
CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF BALLY AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS GAMING, INC. PARENT ADJUSTMENTS INC.
----------- ----------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1996.................... $ 1,804 $ 51,110 $ 38,948 $ 4,772 $ (9,458) $ 87,176
1997.................... -- 1,464 6,786 -- -- 8,250
1998.................... -- 190 1,541 -- -- 1,731
----------- ----------- ------------ --------- ------------- -------------
$ 1,804 $ 52,764 $ 47,275 $ 4,772 $ (9,458) $ 97,157
----------- ----------- ------------ --------- ------------- -------------
----------- ----------- ------------ --------- ------------- -------------
</TABLE>
LONG-TERM DEBT
Aggregate annual maturities of long-term debt for the five years after
December 31, 1995 are:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY GAMING, INTERNATIONAL,
VERTRIEBS INC. PARENT INC.
----------- ------------- --------- -------------
<S> <C> <C> <C> <C>
1996..................................... $ 14,333 $ 212 $ 412 $ 14,957
1997..................................... 1,572 9,435 456 11,463
1998..................................... 3,149 -- 40,468 43,617
1999..................................... -- -- 251 251
2000..................................... -- -- -- --
----------- ------ --------- -------------
Total.................................... $ 19,054 $ 9,647 $ 41,587 $ 70,288
----------- ------ --------- -------------
----------- ------ --------- -------------
</TABLE>
F-60
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
OTHER REVENUES
Other revenues for the year ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- --------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest............................. $ 294 $ 2,932 $ 608 $ 2,943 $ (3,239) $ 3,538
Currency transaction gain (loss)..... 3 52 2 (87) -- (30)
Other................................ 892 594 166 -- (286) 1,366
----------- ----------- ----- --------- ------------- ------
$ 1,189 $ 3,578 $ 776 $ 2,856 $ (3,525) $ 4,874
----------- ----------- ----- --------- ------------- ------
----------- ----------- ----- --------- ------------- ------
</TABLE>
Other revenues for the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
------------- ----------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest............................. $ 362 $ 2,626 $ 962 $ 2,979 $ (3,314) $ 3,615
Currency transaction gain (loss)..... -- 62 (29) (68) (18) (53)
Other................................ 527 789 222 -- (259) 1,279
----- ----------- ------ --------- ------------- ------
$ 889 $ 3,477 $ 1,155 $ 2,911 $ (3,591) $ 4,841
----- ----------- ------ --------- ------------- ------
----- ----------- ------ --------- ------------- ------
</TABLE>
UNUSUAL CHARGES
During the year ended December 31, 1995, Parent and Bally Gaming, Inc.
incurred approximately $3.9 million and $.1 million, respectively, in legal,
accounting, investment banking, public and investor relations and printing costs
in connection with the merger agreement with WMS Industries, Inc., which has
since been terminated, Alliance's tender offer and consent solicitation and the
pending Alliance Merger. All of these costs have been expensed as incurred. Such
costs will continue to be incurred in 1996.
During the fourth quarter of 1995, Vertriebs recorded a non-recurring charge
of $.8 million to writedown to net realizable value a building to be sold. The
provision was based on a strategic decision to sell the building as Wulff's
other distribution offices adequately covered the geographic region that would
have been served by this facility.
During 1995, Wulff increased the amount of value added tax reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million. The Company has accrued the liability as, based on current
developments, the Company's estimate of the ultimate outcome and its experience
in contesting these matters, it is probable that a liability has been incurred
and a range of costs can be reasonably estimated. As the scope of the liability
is better determined, there could be changes in the estimate of the ultimate
liability. Management believes that the preliminary proposed adjustments are
without merit and the ultimate results of the audit will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
F-61
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum lease
payments at December 31, 1995 under operating leases that have initial or
remaining lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. INC.
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1996............................................. $ 608 $ 1,610 $ 918 $ 3,136
1997............................................. 608 1,505 640 2,753
1998............................................. -- 1,157 597 1,754
1999............................................. -- 878 483 1,361
2000............................................. -- 680 441 1,121
Thereafter....................................... -- 767 1,077 1,844
----------- ----------- ------ -------------
$ 1,216 $ 6,597 $ 4,156 $ 11,969
----------- ----------- ------ -------------
----------- ----------- ------ -------------
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 was:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT INC.
------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1993..................................... $ 680 $ 1,519 $ 405 $ -- $ 2,604
----- ----------- ------ ----- ------
----- ----------- ------ ----- ------
1994..................................... $ 621 $ 1,604 $ 487 $ -- $ 2,712
----- ----------- ------ ----- ------
----- ----------- ------ ----- ------
1995..................................... $ 615 $ 1,731 $ 1,221 $ 2 $ 3,569
----- ----------- ------ ----- ------
----- ----------- ------ ----- ------
</TABLE>
F-62
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------- -------------------- --------------------
1994 1995 1994 1995 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
Revenues................................. $ 61.7 $ 68.3 $ 58.9 $ 69.2 $ 49.3 $ 51.5 $ 66.3 $ 60.3
Gross profit............................. 19.4 24.8 17.6 23.9 16.3 17.7 25.8 19.8
Operating income (loss).................. 4.0 6.7 2.7 4.6 1.2 (1.3) 5.5 (1.6)
Net income (loss)........................ 1.3 2.8 1.6 1.1 (1.4) (3.8) 2.2 (3.5)
Net income (loss) per share of common
stock................................... $ 0.12 $ 0.27 $ 0.15 $ 0.10 $ (0.13) $ (0.35) $ 0.21 $ (0.33)
WULFF
Revenues................................. $ 29.1 $ 36.0 $ 21.4 $ 35.5 $ 26.4 $ 27.0 $ 34.2 $ 32.2
Gross profit............................. 10.0 12.4 5.6 11.9 8.9 9.3 14.5 8.9
Operating income (loss).................. 2.5 3.8 (0.4) 3.0 2.5 0.8 4.6 (2.0)
Net income (loss)........................ 1.1 1.4 (0.1) 1.0 1.3 (0.3) 3.0 (2.4)
GAMING
Revenues................................. $ 30.2 $ 28.0 $ 35.0 $ 33.0 $ 21.4 $ 24.0 $ 31.3 $ 23.4
Gross profit............................. 7.4 8.6 9.2 9.0 5.2 7.0 9.2 5.9
Operating income (loss).................. 1.0 1.0 1.8 0.6 (1.8) (1.6) 0.6 (2.2)
Net income (loss)........................ (0.3) (0.6) 0.4 (0.9) (3.2) (3.0) (1.1) (3.7)
SYSTEMS
Revenues................................. $ 3.0 $ 6.1 $ 4.3 $ 4.2 $ 2.8 $ 2.4 $ 3.3 $ 8.0
Gross profit............................. 2.0 3.9 2.8 3.0 2.2 1.5 2.1 5.0
Operating income......................... 0.5 2.1 1.3 1.0 0.5 (0.5) 0.3 2.6
Net income............................... 0.5 2.1 1.3 1.0 0.5 (0.5) 0.3 2.6
</TABLE>
F-63
<PAGE>
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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<PAGE>
Facsimile copies of the Letter of Transmittal will be accepted. Letters of
Transmittal, certificates for the Old Convertible Debentures and any other
required documents should be sent by each debentureholder or his broker, dealer,
commercial bank, trust company or other nominee to the Exchange Agent at one of
the addresses set forth below:
THE EXCHANGE AGENT IS:
The Bank of New York
BY MAIL OR BY HAND:
The Bank of New York
101 Barclay Street, Corporate Trust Operations, 7E
New York, New York 10286
Attention: Enrique Lopez
Telephone: (212) 815-2742
BY FACSIMILE:
(212) 571-3080
TOLL FREE NUMBER:
(800) 254-2826
Any questions or requests for assistance or additional copies of this
Prospectus, the Letter of Transmittal and/or the Notice of Guaranteed Delivery
may be directed to the Information Agent at its telephone number and address set
forth below. You may also contact your broker, dealer, commercial bank or trust
company or other nominee for assistance concerning the Exchange Offers.
THE INFORMATION AGENT IS:
[LOGO]
Wall Street Plaza
New York, NY 10005
TOLL FREE NUMBER:
(800) 223-2064
Banks and Brokerage Firms
please call collect:
(212) 440-9800
THE DEALER MANAGERS FOR THE EXCHANGE OFFER ARE:
DEUTSCHE MORGAN GRENFELL JEFFERIES & COMPANY, INC. LADENBURG, THALMANN & CO.
INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of the Company's Articles of Incorporation limits the liability
of the Company's directors and officers. It provides that a director or officer
of the Company will not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director or officer,
except for liability (i) for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law or (ii) for the payment of
dividends in violation of Section 78.300 of the Nevada General Corporation Law.
It also provides that any repeal or modification of the foregoing provision of
the stockholders of the Company will be prospective only, and will not adversely
affect any limitation on the personal liability of a director or officer of the
Company existing at the time of such repeal or modification.
Section 78.300 of the Nevada General Corporation Law provides:
1. The directors of a corporation shall not make dividends or other
distributions to stockholders except as provided by such section.
2. In case of any willful or grossly negligent violation of the
provisions of such section, the directors under whose administration
the violation occurred, except those who caused their dissent to be entered
upon the minutes of the meeting of the directors at the time, or who not
then being present caused their dissent to be entered on learning of such
action, are jointly and severally liable, at any time within 3 years after
each violation, to the corporation, and, in the event of its dissolution or
insolvency, to its creditors at the time of the violation, or any of them,
to the lesser of the full amount of the dividend made or of any loss
sustained by the corporation by reason of the dividend or other distribution
to stockholders.
Section 78.751 of the Nevada General Corporation Law permits the Registrant
to indemnify its directors and officers as follows:
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except any action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit
or proceeding if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, has no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and that, with respect to any criminal action or proceeding, he
had reasonable cause to believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually
and reasonably incurred by him in connection with the defense or settlement
of the action or suit if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter
as to which such a person has been
II-1
<PAGE>
adjudged by a court of competent jurisdiction, after exhaustion of all
appeals therefrom, to be liable to the corporation or for amounts paid in
settlement to the corporation, unless and only to the extent that the court
in which the action or suit was brought or other court of competent
jurisdiction determines, upon application, that in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in subsections 1 and 2, or in
defense of any claim, issue or matter herein, he must be indemnified by the
corporation against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
4. Any indemnification under subsections 1 and 2, unless offered by a
court or advanced pursuant to subsection 5, must be made by the
corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper
in the circumstances. The determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit
or proceeding;
(c) If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by
independent legal counsel in a written opinion; or
(d) If a quorum of directors who were not parties to the act,
suit or proceeding so orders, by independent legal counsel in
a written opinion.
5. The articles of incorporation, the bylaws or an agreement made by the
corporation may provide that the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of the director or officer to repay the amount
if it is ultimately determined by a court of competent jurisdiction that he
is not entitled to be indemnified by the corporation. The provisions of this
subsection do not affect any rights to advancement of expenses to which
corporate personnel other than directors or officers may be entitled under
any contract or otherwise by law.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <C> <S>
Exhibit 1.1 -- Form of Dealer Manager Agreement.(24)
2.1 -- Amended and Restated Agreement and Plan of Merger among Alliance, BGII
Acquisition Corp. and BGII, dated as of October 18, 1995. Incorporated by
reference to Annex I to the Registrant's Joint Proxy Statement/Prospectus
dated March 11, 1996.(24)
2.2 -- Mutual Waiver to Agreement and Plan of Merger dated as of April 17, 1996.(24)
2.3 -- Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc., The
Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, and
exhibits thereto.(12)
2.4 -- Letter Agreement, dated as of November 5, 1993, among United Gaming, Inc.,
Capital Gaming International, Inc., I.G. Davis, Jr. and John E. Dell, with
exhibits thereto.(14)
2.5 -- Asset Purchase Agreement between Plantation Investments, Inc. and Richards-
Schnack Development Corp. dated April 2, 1990.(1)
2.6 -- First Amendment to Agreement of Purchase and Sale between Plantation
Investments, Inc. and Richards-Schnack Development Corp.(1)
2.7 -- Bill of Sale between Plantation Investments, Inc. and Richards-Schnack
Development Corp.(1)
2.8 -- Consolidation Agreement, dated March 29, 1995 among Alliance, United Gaming
Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow
Development Corporation and Leigh Seippel and John A. Barrett, Jr.(23)
3.1 -- Restated Articles of Incorporation of the Registrant, as amended.(16)
3.2 -- Revised By-Laws of the Registrant.(20)
4.1 -- Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Special Stock and Qualifications,
Limitations and Restrictions thereof of 15% Non-Voting Special Stock, Series
B, $.10 par value, of Alliance Gaming Corporation. Incorporated by reference
to Annex VII to the Registrant's Form S-4 Reg. No. 333-01527.
4.2 -- Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Special Stock and Qualifications,
Limitations and Restrictions thereof of 15% Non-Voting Junior Convertible
Pay-in-Kind Special Stock, Series E, par value $.10 per share, of Alliance
Gaming Corporation.(24)
4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his
loan commitment with Video Services, Inc.(6)
4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and
The Bank of New York, as successor Trustee in respect of Old Convertible
Debentures.(16)
4.5 -- Form of Old Convertible Debenture (included in Exhibit 4.4, above).
4.6 -- Registration Rights Agreement, dated as of September 21, 1993, by and among
United Gaming, Inc., Donaldson Lufkin & Jenrette Securities Corporation,
Oppenheimer & Co., Inc. and L.H. Friend, Weinress & Frankson, Inc.(16)
4.7 -- Form of Indenture by and among Alliance Gaming Corporation and The Bank of
New York in respect of New 7 1/2% Convertible Senior Subordinated Debentures
due 2003, including form thereof.
5.1 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey(24)
5.2 -- Opinion of Milbank, Tweed, Hadley & McCloy(24)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <C> <S>
8 -- Opinion of Milbank, Tweed, Hadley & McCloy(24)
10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc.,
Video Services, Inc. and Alfred H. Wilms.(6)
10.2 -- Lease, dated August 3, 1988, as amended April 6, 1989, from Walter Schwartz
to Alliance for Alliance's Corporate headquarters building at 4380 Boulder
Highway, Las Vegas, Nevada.(2)
10.3 -- Employment Agreement between United Gaming, Inc. and Ira S. Levine.(13)
10.4 -- Amendment to Employment Agreement between United Gaming, Inc. and Ira S.
Levine.(21)
10.5 -- Employment Agreement between United Gaming, Inc. and John W. Alderfer.(13)
10.6 -- Amendment to Employment Agreement between United Gaming, Inc. and John W.
Alderfer.(20)
10.7 -- Letter Agreement dated June 25, 1993 among United Gaming, Inc. and
Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation
and, as to certain provisions, Alfred H. Wilms, including Exhibit A (Form of
Securities Purchase Agreement), Exhibit B (Form of Stockholders Agreement),
Exhibit C (Form of Certificate of Designations of Non-Voting Junior
Convertible Special Stock), Exhibit D (Form of Warrant Agreement), and
Exhibit E (Form of press release) thereto.(7)
10.8 -- Advisory Agreement, dated June 25, 1993 among United Gaming, Inc., Gaming
Systems Advisors, L.P. and, as to certain provisions, Mr. Alfred H. Wilms,
including Exhibit A (Form of Warrant Agreement) and Exhibit B (Form of press
release) thereto.(7)
10.9 -- United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (10)
10.10 -- Gaming and Technology, Inc. 1984 Employee Stock Option Plan (11)
10.11 -- Agreement, dated as of September 14, 1993, by and among United Gaming, Inc.,
Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment
Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms.(8)
10.12 -- Warrant Agreement, dated as of September 21, 1993, by and between United
Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P. relating to
warrants to purchase 2.75 million shares of Common Stock.(8)
10.13 -- Warrant Agreement, dated as of September 21, 1993, by and between United
Gaming, Inc. and Gaming Systems Advisors, L.P. relating to warrants to
purchase 1.25 million shares of Common Stock.(8)
10.14 -- Stockholders Agreement, dated as of September 21, 1993, by and among United
Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., Kirkland
Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms.(8)
10.15 -- Amendment to Stockholders Agreement dated as of October 20, 1994.(16)
10.16 -- Selling Stockholder Letter Agreement dated as of March 20, 1995.(22)
10.17 -- Securities Purchase Agreement, dated as of September 21, 1993, by and among
United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P. and
Kirkland Investment Corporation.(8)
10.18 -- Confidential Separation and Consulting Agreement with Carole A. Carter
(including mutual release) dated July 15, 1993.(9)
10.19 -- Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993.(9)
10.20 -- Amendment to Executive Severance Agreement with Shannon L. Bybee dated July
15, 1993.(20)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <C> <S>
10.21 -- Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett,
Jr. and Leigh Seippel to United Gaming, Inc.(12)
10.22 -- Escrow Agreement, dated as of October 29, 1993, among United Gaming, Inc.,
The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and
Butler, Snow, O'Mara, Stevens & Cannada.(12)
10.23 -- Pledge Agreement, dated as of October 29, 1993, among United Gaming, Inc.(as
secured party) and The Rainbow Casino Corporation, John A. Barrett, Jr. and
Leigh Seippel (as pledgors).(12)
10.24 -- Management Agreement, dated as of October 29, 1993, among Rainbow Casino-
Vicksburg Partnership, L.P., The Rainbow Casino Corporation and Mississippi
Ventures, Inc., as manager.(12)
10.25 -- Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc.,
Capital Gaming International, Inc. and I.G.Davis, Jr.(15)
10.26 -- Loan and Security Agreement, dated as of August 2, 1993, between United
Gaming, Inc., Alfred H. Wilms and Video Services, Inc.(16)
10.27 -- Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc.
and Alfred H. Wilms.(16)
10.28 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United
Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.(16)
10.29 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United
Gaming, Inc. and Oppenheimer & Co. Inc.(16)
10.30 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United
Gaming, Inc. and L.H. Friend, Weinress & Frankson, Inc.(16)
10.31 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United
Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.(16)
10.32 -- Consulting Agreement, dated as of November 8, 1993, between David A.
Scheinman and United Gaming, Inc.(16)
10.33 -- Letter Agreement, dated as of March 3, 1994, by and among United Native
American Gaming, Inc., USA Gaming of Native America, Inc., USA Gaming, Inc.
and others.(17)
10.34 -- Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc.,
The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel.(18)
10.35 -- Letter Agreement, dated as of June 29, 1994, among United Gaming, Inc., The
Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented
to by HFS Gaming Corporation.(19)
10.36 -- Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc., The
Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented
to by HFS Gaming Corporation.(19)
10.37 -- Second Amendment to Casino Financing Agreement, dated as of August 11, 1994,
among United Gaming, Inc., United Gaming Rainbow, Inc., Rainbow Casino-
Vicksburg Partnership, L.P., The Rainbow Casino Corporation, John A. Barrett,
Jr., Leigh Seippel and HFS Gaming Corporation.(19)
10.38 -- Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as
of July 8, 1994.(19)
10.39 -- Second Amended and Restated Agreement of Limited Partnership, dated March 29,
1995, between United Gaming Rainbow and RCC.(23)
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <C> <S>
10.40 -- Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc.
to The Rainbow Casino Corporation.(19)
10.41 -- Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc.
to The Rainbow Casino Corporation.(19)
10.42 -- Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and
Leigh Seippel to United Gaming, Inc.(19)
10.43 -- Escrow Agreement, dated as of August 11, 1994, among United Gaming Rainbow,
Inc., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and
Butler, Snow, O'Mara, Stevens & Cannada, together with Agreement dated
February 7, 1994, as amended July 11, 1994 between Rainbow Casino-Vicksburg
Partnership, L.P. and the City of Vicksburg, Mississippi.(19)
10.44 -- Employment Agreement between United Gaming, Inc. and Johnann McIlwain.(20)
10.45 -- Settlement Agreement, dated December 4, 1994, by and among Alliance, United
Gaming of Iowa, Inc., GDREC and Joseph and Paula Zwack.(16)
10.46 -- Employment Agreement, dated August 15, 1994, between Alliance and Steve
Greathouse.(22)
10.47 -- Warrant Agreement, dated August 15, 1994, between Alliance and Steve
Greathouse.(22)
10.48 -- Agreement, dated September 1, 1994, between Alliance and Craig Fields(22)
10.49 -- Warrant Agreement, dated September 1, 1994, between Alliance and Craig
Fields.(22)
10.50 -- Agreement, dated March 20, 1995, between Alliance and Joel Kirschbaum.(22)
10.51 -- Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC,
Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, O'Mara, Stevens &
Cannada.(23)
10.52 -- Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming
Rainbow.(23)
10.53 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming
Rainbow.(23)
10.54 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming
Mississippi, Inc.(23)
10.55 -- Release, dated March 29, 1995, by United Gaming Rainbow and Alliance and
their affiliates of RCC, Rainbow Development Corporation, John A. Barrett,
Jr. and Leigh Seippel and their affiliates (other than RCVP).(23)
10.56 -- Release, dated March 29, 1995, by RCC, Rainbow Development Corporation, John
A. Barrett, Jr. and Leigh Seippel and their affiliates (other than RCVP) of
United Gaming Rainbow and Alliance and their affiliates.(23)
12. -- Ratio of Earnings to Combined Fixed Charges
21.1 -- Consent of Schreck, Jones, Bernhard, Woloson & Godfrey (included in Exhibit
5.1).
21.2 -- Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibits 5.2 and 8).
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
24 -- Power of Attorney.(24)
25 -- Statement of eligibility and qualification of The Bank of New York designated
to act as trustee on Form T-1.(24)
99.1 -- Form of Letter of Transmittal
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <C> <S>
99.2 -- Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9.(24)
99.3 -- Form of Letter from Alliance Gaming Corporation to Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees.
99.4 -- Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees to their Clients.
99.5 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's Form 8-K dated April 9, 1990
as amended.
(2) Incorporated by reference to the Registrant's Form 10-K for the year ended
June 30, 1989.
(3) Incorporated by reference to the Registrant's Form 10-K for the year ended
June 30, 1990.
(4) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 1990.
(5) Incorporated by reference to the Registrant's Form 10-K for the year ended
June 30, 1991.
(6) Incorporated by reference to the Registrant's Form 8-K dated March 31, 1992.
(7) Incorporated by reference to the Registrant's Form 8-K dated June 25, 1993.
(8) Incorporated by reference to the Registrant's Form 8-K dated September 21,
1993.
(9) Incorporated by reference to the Registrant's Form 10-Q dated September 30,
1993.
(10)Incorporated by reference to the Registrant's Form S-8 Reg. Nos. 33-45811
and 33-75308.
(11)Incorporated by reference to the Registrant's Form S-8 Reg. No. 2-98777.
(12)Incorporated by reference to the Registrant's Form 8-K dated October 29,
1993.
(13)Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended March 31, 1993.
(14)Incorporated by reference to the Registrant's Form 8-K dated November 5,
1993.
(15)Incorporated by reference to the Registrant's Form 8-K dated December 10,
1993.
(16)Incorporated by reference to the Registrant's Form S-2 Reg. No. 33-72990 and
subsequent amendments thereto.
(17)Incorporated by reference to the Registrant's Form 8-K dated March 7, 1994.
(18)Incorporated by reference to the Registrant's Form 8-K dated March 15, 1994.
(19)Incorporated by reference to the Registrant's Form 8-K dated August 11,
1994.
(20)Incorporated by reference to the Registrant's Form 10-K for the year ended
June 30, 1994.
(21)Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 1994.
(22)Incorporated by reference to the Registrant's Form S-3 Reg. No. 33-58233.
(23)Incorporated by reference to the Registrant's Form 8-K dated March 29, 1995.
(24)Previously filed.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
II-7
<PAGE>
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii)
To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in response to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Alliance Gaming
Corporation has duly caused this amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on May 10, 1996.
ALLIANCE GAMING CORPORATION
By: /s/ JOHN W. ALDERFER
-----------------------------------
John W. Alderfer
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ---------------------------------------- ---------------
STEVE GREATHOUSE* Chairman of the Board of May 10, 1996
------------------------------------------- Directors, President and
Steve Greathouse Chief Executive Officer
(Principal Executive Officer)
JOHN W. ALDERFER Senior Vice President May 10, 1996
------------------------------------------- Treasurer and Chief
John W. Alderfer Financial Officer (Principal
Financial and Accounting
Officer)
ANTHONY DICESARE* Director and Executive May 10, 1996
------------------------------------------- Vice President
Anthony DiCesare
DR. CRAIG FIELDS* Director (Vice Chairman May 10, 1996
------------------------------------------- of the Board)
Dr. Craig Fields
JOEL KIRSCHBAUM* Director May 10, 1996
-------------------------------------------
Joel Kirschbaum
ALFRED H. WILMS* Director May 10, 1996
-------------------------------------------
Alfred H. Wilms
DAVID ROBBINS* Director May 10, 1996
-------------------------------------------
David Robbins
*By: JOHN W. ALDERFER
--------------------------------------
John W. Alderfer
ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
- -------------------------------------------------------------------------------
ALLIANCE GAMING CORPORATION
and
THE BANK OF NEW YORK, Trustee
Indenture
Dated as of _____________, 1996
$85,000,000
7 1/2% Convertible Senior Subordinated Debentures due 2003
- -------------------------------------------------------------------------------
<PAGE>
ALLIANCE GAMING CORPORATION
Reconciliation and tie between Trust Indenture Act
of 1939 and Indenture, dated as of ___________, 1996
between Alliance Gaming Corporation and
The Bank of New York, as Trustee
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
<S> <C>
Section 310(a)(1). . . . . . . . . . . . . . . . . 5.9
(a)(2). . . . . . . . . . . . . . . . . . . . 5.9
(a)(3). . . . . . . . . . . . . . . . . . . . Not Applicable
(a)(4). . . . . . . . . . . . . . . . . . . . Not Applicable
(a)(5). . . . . . . . . . . . . . . . . . . . 5.9
(b) . . . . . . . . . . . . . . . . . . . . 5.8, 5.10
(c) . . . . . . . . . . . . . . . . . . . . Not Applicable
Section 311(a) . . . . . . . . . . . . . . . . . . 5.13
(b) . . . . . . . . . . . . . . . . . . . . 5.13
(c) . . . . . . . . . . . . . . . . . . . . Not Applicable
Section 312(a) . . . . . . . . . . . . . . . . . . 2.5, 3.6
(b) . . . . . . . . . . . . . . . . . . . . 6.6
(c) . . . . . . . . . . . . . . . . . . . . 6.6
Section 313(a) . . . . . . . . . . . . . . . . . . 3.8
(b)(1). . . . . . . . . . . . . . . . . . . . Not Applicable
(b)(2). . . . . . . . . . . . . . . . . . . . 3.8
(c) . . . . . . . . . . . . . . . . . . . . 3.8
(d) . . . . . . . . . . . . . . . . . . . . 3.8
Section 314(a) . . . . . . . . . . . . . . . . . . 3.7, 3.5
(b) . . . . . . . . . . . . . . . . . . . . Not Applicable
(c)(1). . . . . . . . . . . . . . . . . . . . 10.5
(c)(2). . . . . . . . . . . . . . . . . . . . 10.5
(c)(3). . . . . . . . . . . . . . . . . . . . 10.5
(d) . . . . . . . . . . . . . . . . . . . . Not Applicable
(e) . . . . . . . . . . . . . . . . . . . . 10.5
Section 315(a) . . . . . . . . . . . . . . . . . . 5.1
(b) . . . . . . . . . . . . . . . . . . . . 5.1
(c) . . . . . . . . . . . . . . . . . . . . 5.1
(d) . . . . . . . . . . . . . . . . . . . . 5.1
(e) . . . . . . . . . . . . . . . . . . . . 4.11
Section 316(a)(1)(A) . . . . . . . . . . . . . . . 4.9
(a)(1)(B) . . . . . . . . . . . . . . . . . . 4.10
(a)(2). . . . . . . . . . . . . . . . . . . . Not Applicable
(b) . . . . . . . . . . . . . . . . . . . . 4.7
(c) . . . . . . . . . . . . . . . . . . . . 6.2
Section 317(a)(1). . . . . . . . . . . . . . . . . 4.2
(a)(2). . . . . . . . . . . . . . . . . . . . 4.2
(b) . . . . . . . . . . . . . . . . . . . . 2.4
Section 318(a) . . . . . . . . . . . . . . . . . . 10.7
____________
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.
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TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS
Section 1.1 Certain Terms Defined. . . . . . . . . . . . . . . . . . . 1
ARTICLE 2
THE SECURITIES
Section 2.1 Form and Dating. . . . . . . . . . . . . . . . . . . . . . 7
Section 2.2 Execution and Authentication . . . . . . . . . . . . . . . 7
Section 2.3 Registrar and Paying Agent . . . . . . . . . . . . . . . . 8
Section 2.4 Paying Agent to Hold Money in Trust. . . . . . . . . . . . 8
Section 2.5 Holder Lists . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.6 Transfer and Exchange. . . . . . . . . . . . . . . . . . . 9
Section 2.7 Replacement Securities . . . . . . . . . . . . . . . . . . 10
Section 2.8 Reserved . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.9 Treasury Securities. . . . . . . . . . . . . . . . . . . . 10
Section 2.10 Temporary Securities . . . . . . . . . . . . . . . . . . . 11
Section 2.11 Cancellation . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2.12 Defaulted Interest . . . . . . . . . . . . . . . . . . . . 11
Section 2.13 Cusip Numbers. . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 3
COVENANTS OF THE ISSUER AND THE TRUSTEE
Section 3.1 Payment of Principal and Interest. . . . . . . . . . . . . 11
Section 3.2 Offices for Payments, etc. . . . . . . . . . . . . . . . . 12
Section 3.3 Appointment to Fill a Vacancy
in Office of Trustee . . . . . . . . . . . . . . . . . . 12
Section 3.4 Paying Agents. . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.5 Certificate to Trustee . . . . . . . . . . . . . . . . . . 13
Section 3.6 Securityholders' Lists . . . . . . . . . . . . . . . . . . 13
Section 3.7 Reports by the Issuer. . . . . . . . . . . . . . . . . . . 13
Section 3.8 Reports by the Trustee . . . . . . . . . . . . . . . . . . 13
Section 3.9 Transactions with Affiliates . . . . . . . . . . . . . . . 14
ARTICLE 4
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
ON EVENT OF DEFAULT
Section 4.1 Event of Default Defined; Acceleration
of Maturity; Waiver of Default . . . . . . . . . . . . . 15
Section 4.2 Collection of Indebtedness by Trustee; Trustee
May Prove Debt . . . . . . . . . . . . . . . . . . . . . 17
Section 4.3 Application of Proceeds. . . . . . . . . . . . . . . . . . 19
Section 4.4 Suits for Enforcement. . . . . . . . . . . . . . . . . . . 20
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Section 4.5 Restoration of Rights on
Abandonment of Proceeding. . . . . . . . . . . . . . . . 21
Section 4.6 Limitation on Suits by Securityholders . . . . . . . . . . 21
Section 4.7 Rights of Holders to Receive Payment . . . . . . . . . . . 21
Section 4.8 Powers and Remedies Cumulative; Delay
or Omission Not Waiver of Default. . . . . . . . . . . . 22
Section 4.9 Control by Securityholders . . . . . . . . . . . . . . . . 22
Section 4.10 Waiver of Past Defaults . . . . . . . . . . . . . . . . . 23
Section 4.11 Undertaking for Costs . . . . . . . . . . . . . . . . . . 23
ARTICLE 5
CONCERNING THE TRUSTEE
Section 5.1 Duties and Responsibilities of the Trustee; During
Default; Prior to Default . . . . . . . . . . . . . . . 24
Section 5.2 Certain Rights of the Trustee. . . . . . . . . . . . . . . 25
Section 5.3 Trustee Not Responsible for Recital,
Disposition of Securities or
Application of Proceeds Thereof. . . . . . . . . . . . . 27
Section 5.4 Trustee and Agents May Hold
Securities; Collections, etc.. . . . . . . . . . . . . . 27
Section 5.5 Moneys Held by Trustee.. . . . . . . . . . . . . . . . . . 27
Section 5.6 Compensation and Indemnification of Trustee and Its
Prior Claim. . . . . . . . . . . . . . . . . . . . . . . 27
Section 5.7 Right of Trustee to Rely on Officers'
Certificate, etc.. . . . . . . . . . . . . . . . . . . . 28
Section 5.8 Disqualification; Conflicting Interests. . . . . . . . . . 28
Section 5.9 Persons Eligible for Appointment
as Trustee.. . . . . . . . . . . . . . . . . . . . . . . 28
Section 5.10 Resignation and Removal; Appointment
of Successor Trustee.. . . . . . . . . . . . . . . . . . 28
Section 5.11 Acceptance of Appointment by
Successor Trustee. . . . . . . . . . . . . . . . . . . . 30
Section 5.12 Merger, Conversion, Consolidation or Succession
to Business of Trustee . . . . . . . . . . . . . . . . 31
Section 5.13 Preferential Collection of
Claims Against the Issuer. . . . . . . . . . . . . . . . 31
ARTICLE 6
CONCERNING THE SECURITYHOLDERS
Section 6.1 Evidence of Action Taken by Securityholders . . . . . . . 31
Section 6.2 Proof of Execution of Instruments and of Holding of
Securities; Record Date. . . . . . . . . . . . . . . . . 32
Section 6.3 Holders to be Treated as Owners. . . . . . . . . . . . . . 32
Section 6.4 Securities Owned by Issuer Deemed Not
Outstanding. . . . . . . . . . . . . . . . . . . . . . . 32
Section 6.5 Right of Revocation of Action Taken. . . . . . . . . . . . 33
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Section 6.6 Communications by Holders With Other Holders . . . . . . . 33
ARTICLE 7
SUPPLEMENTAL INDENTURES
Section 7.1 Supplemental Indentures Without Consent of
Securityholders. . . . . . . . . . . . . . . . . . . . . 33
Section 7.2 Supplemental Indentures With Consent of
Securityholders. . . . . . . . . . . . . . . . . . . . . 35
Section 7.3 Effect of Supplemental Indenture . . . . . . . . . . . . . 36
Section 7.4 Documents to Be Given to Trustee . . . . . . . . . . . . . 36
Section 7.5 Notation on Securities in Respect of
Supplemental Indentures. . . . . . . . . . . . . . . . . 36
ARTICLE 8
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
Section 8.1 Covenant Not to Merge, Consolidate, Sell or Convey
Property Except Under Certain Conditions . . . . . . . . 37
Section 8.2 Successor Entity Substituted . . . . . . . . . . . . . . . 37
Section 8.3 Opinion of Counsel to Trustee. . . . . . . . . . . . . . . 38
ARTICLE 9
SATISFACTION AND DISCHARGE OF INDENTURE;
UNCLAIMED MONEYS
Section 9.1 Satisfaction and Discharge of Indenture. . . . . . . . . . 38
Section 9.2 Application by Trustee of Funds
Deposited for Payment of Securities. . . . . . . . . . . 39
Section 9.3 Repayment of Moneys Held by Paying Agent . . . . . . . . . 39
Section 9.4 Return of Moneys Held by Trustee and Paying Agent
Unclaimed for Two Years. . . . . . . . . . . . . . . . . 39
ARTICLE 10
MISCELLANEOUS PROVISIONS
Section 10.1 Incorporators, Stockholders,
Officers and Directors of Issuer
and Others Exempt from Individual
Liability. . . . . . . . . . . . . . . . . . . . . . . . 40
Section 10.2 Provisions of Indenture for the
Sole Benefit of Parties and
Securityholders. . . . . . . . . . . . . . . . . . . . . 40
Section 10.3 Successors and Assigns of Issuer
Bound by Indenture . . . . . . . . . . . . . . . . . . . 40
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Section 10.4 Notices and Demands on Issuer,
Trustee and Securityholders. . . . . . . . . . . . . . . 40
Section 10.5 Officers' Certificates and Opinions of
Counsel; Statements to Be
Contained Therein. . . . . . . . . . . . . . . . . . . . 41
Section 10.6 Payments Due on Saturdays, Sundays
and Holidays . . . . . . . . . . . . . . . . . . . . . . 42
Section 10.7 Conflict of Any Provision of Indenture with Trust
Indenture Act of 1939 . . . . . . . . . . . . . . . . . 42
Section 10.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . 42
Section 10.9 Counterparts. . . . . . . . . . . . . . . . . . . . . . . 43
Section 10.10 Effect of Headings . . . . . . . . . . . . . . . . . . . 43
ARTICLE 11
REDEMPTION OF SECURITIES
Section 11.1 Right of Optional Redemption; Prices. . . . . . . . . . . 43
Section 11.2 Notice of Redemption; Partial Redemptions . . . . . . . . 44
Section 11.3 Payment of Securities Called
for Redemption . . . . . . . . . . . . . . . . . . . . . 45
Section 11.4 Exclusion of Certain Securities from Eligibility for
Selection for Redemption . . . . . . . . . . . . . . . . 46
ARTICLE 12
SUBORDINATION OF SECURITIES
Section 12.1 Agreement to Subordinate. . . . . . . . . . . . . . . . . 46
Section 12.2 Payments to Securityholders . . . . . . . . . . . . . . . 47
Section 12.3 Subrogation of Securities . . . . . . . . . . . . . . . . 49
Section 12.4 Authorization by Securityholders. . . . . . . . . . . . . 50
Section 12.5 Notice to Trustee . . . . . . . . . . . . . . . . . . . . 50
Section 12.6 Trustee's Relation to Senior Indebtedness . . . . . . . . 51
Section 12.7 No Impairment of Subordination. . . . . . . . . . . . . . 52
Section 12.8 Securities Senior to Old Convertible Debentures . . . . . 52
ARTICLE 13
CONVERSION OF SECURITIES
Section 13.1 Conversion Privilege; Mandatory Conversion Upon
Consummation of Merger . . . . . . . . . . . . . . . . . 52
Section 13.2 Exercise of Conversion Privilege. . . . . . . . . . . . . 53
Section 13.3 Fractional Interests. . . . . . . . . . . . . . . . . . . 56
Section 13.4 Conversion Price. . . . . . . . . . . . . . . . . . . . . 56
Section 13.5 Adjustment of Conversion Price. . . . . . . . . . . . . . 56
Section 13.6 Continuation of Conversion Privilege
in Case of Reclassification, Change,
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Merger, Consolidation or Sale of Assets. . . . . . . . . 60
Section 13.7 Notice of Certain Events. . . . . . . . . . . . . . . . . 62
Section 13.8 Taxes on Conversion . . . . . . . . . . . . . . . . . . . 63
Section 13.9 Issuer to Provide Stock . . . . . . . . . . . . . . . . . 63
Section 13.10 Disclaimer of Responsibility
for Certain Matters. . . . . . . . . . . . . . . . . . . 64
Section 13.11 Return of Funds Deposited for
Redemption of Converted Securities . . . . . . . . . . . 64
ARTICLE 14
RIGHT TO REQUIRE REDEMPTION
Section 14.1 Right to Require Redemption . . . . . . . . . . . . . . . 64
Section 14.2 Notices; Method of Exercising
Redemption Right, etc. . . . . . . . . . . . . . . . . . 65
EXHIBIT A . . . . . . . . . . . . . . . . . . . . . . . A-1
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INDENTURE, dated as of ___________, 1996 between Alliance Gaming
Corporation, a Nevada corporation, and The Bank of New York, as Trustee (the
"Trustee").
Each party hereto agrees as follows for the benefit of the other party
and for the equal and ratable benefit of the Holders of the Issuer's 7 1/2%
Convertible Senior Subordinated Debentures due 2003 (the "Securities"):
ARTICLE I
DEFINITIONS
Section 1.1 CERTAIN TERMS DEFINED. The following terms (except as
otherwise expressly provided or unless the context otherwise clearly requires),
for all purposes of this Indenture and of any indenture supplemental hereto
shall have the respective meanings specified in this Section 1.1. All other
terms used in this Indenture which are defined in the Trust Indenture Act of
1939 or the definitions of which in the Securities Act are referred to in the
Trust Indenture of 1939 (except as herein otherwise expressly provided or unless
the context otherwise clearly requires), shall have the meanings assigned to
such terms in the Trust Indenture Act of 1939 and in the Securities Act as in
force at the date of this Indenture. All accounting terms used herein and not
expressly defined shall have the meanings given to them in accordance with
generally accepted accounting principles, and the term "generally accepted
accounting principles" or "GAAP" shall mean such accounting principles which are
generally accepted at the date or time of any computation or at the date hereof.
The words "herein," "hereof" and "hereunder" and other words of similar import
refer to this Indenture as a whole and not to any particular Article, Section or
other subdivision. The terms defined in this Article I include the plural as
well as the singular.
"AFFILIATE" of any Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control" when
used with respect to any Person means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"AGENT" means any Paying Agent or Registrar.
<PAGE>
"BOARD OF DIRECTORS" means either the Board of Directors of the Issuer
or any committee of such Board duly authorized to act hereunder.
"BUSINESS DAY" means a Trading Day which in the city (or in any of the
cities, if more than one) where amounts are payable in respect of the
Securities, as specified on the face of the form of Security, is neither a legal
holiday nor a day on which banking institutions in the State of New York are
authorized or required by law or regulation to close.
"CAPITAL LEASE OBLIGATION" of any Person means the portion of any
obligation of such Person and its subsidiaries on a consolidated basis, under
any capital lease of real or personal property which, in accordance with
generally accepted accounting principles, has been recorded as a capitalized
lease obligation.
"CAPITAL STOCK" of any Person means any and all shares, interests,
participations, or other equivalents (however designated) of such Person's
capital stock whether now outstanding or issued after the date hereof.
"CHANGE OF CONTROL" means at such time as (i) any person or group
(as the term "person" or "group" is used in Section 13(d)(3) or Section
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) other than an Exempt Person has become the beneficial owner of 50% or
more of the Issuer's Capital Stock having the power to vote in the election
of directors under ordinary circumstances ("Voting Stock"), (ii) there shall
be consummated any consolidation or merger of the Issuer that is not approved
by at least a majority of the Continuing Directors (A) in which the Issuer is
not the continuing or surviving corporation or (B) pursuant to which any
Voting Stock of the Issuer would be converted into cash, securities or other
property, in each case other than a consolidation or merger in which the
holders of such Voting Stock immediately prior thereto have at least a
majority of the Voting Stock, directly or indirectly, of the resulting or
surviving corporation immediately after the consolidation or merger or (iii)
any Person acquires all or substantially all of the assets of the Issuer;
PROVIDED, HOWEVER, that a Change in Control shall not be deemed to have
occurred if either (x) the closing price per share of the Issuer's Common
Stock for any five Trading Days within the period of ten consecutive Trading
Days ending immediately before the Change in Control shall equal or exceed
105% of the Conversion Price (as defined in Section 13.5 hereof) in effect on
such Trading Day, or (y) with respect to a Change in Control described in
clause (ii) or clause (iii) above, at least 90% of the consideration to be
paid for the Voting Stock of the Issuer in the transaction or transactions
constituting the Change in Control consists of common stock traded on a
national securities exchange or quoted on the National Association of
Securities Dealers Automated Quotation/National Market System and, as a
result of the transaction or transactions referred to in clause
2
<PAGE>
(ii) or clause (iii) above, the Securities become convertible principally
into such common stock.
"COMMON STOCK" means the Common Stock, par value $.10 per share, of
the Issuer as the same exists at the date of execution and delivery of this
Indenture or as such stock may be reconstituted from time to time. For purposes
of calculating the number of shares of Common Stock at any time outstanding,
shares of Common Stock held in the treasury of the Issuer shall not be
considered outstanding.
"CONTINUING DIRECTOR" means a director of the Issuer who was either
(i) a member of the board of directors of the Issuer on the date hereof or (ii)
subsequently became a director of the Issuer and whose election or nomination
for election is approved or recommended by a vote of a majority of the board of
directors of the Issuer, which majority includes a majority of the then existing
Continuing Directors then on the board of directors of the Issuer.
"CORPORATE TRUST OFFICE" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date as of which this
Indenture is dated, located at 101 Barclay Street, Floor 21 West, New York,
New York 10286, Attention: Corporate Trust Trustee Administration.
"EVENT OF DEFAULT" means any event or condition specified as such in
Section 4.1 hereof which shall have continued for the period of time, if any,
therein designated.
"EXEMPT PERSON" means (i) the Issuer, any subsidiary of the Issuer or
any employee benefit plan or stock ownership plan of either the Issuer or any
subsidiary of the Issuer or (ii) any of Kirkland, KIC, GSA or Mr. Wilms, or any
of their respective Affiliates, or any successor to any of Kirkland, KIC or GSA
or any of their respective Affiliates by merger, sale or transfer of assets or
similar transaction or any successor to Mr. Wilms by a transfer from Mr. Wilms
to any estate planning vehicle controlled by Mr. Wilms or established for the
benefit of Mr. Wilms' family or his estate.
"GSA" means Gaming System Advisors, L.P., a Delaware limited
partnership, and its successors and assigns.
"GUARANTEE" by any Person, means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Indebtedness
or other obligation of any other Person and, without limiting the generality of
the foregoing, any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
of payment of) such Indebtedness or other obligation (whether arising by virtue
of partnership arrangements, by agreement to keep well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement
3
<PAGE>
conditions or otherwise), or (ii) entered into for the purpose of assuring in
any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof
(in whole or in part), provided that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business.
The term "Guarantee" used as a verb has a corresponding meaning.
"HOLDER," "HOLDER OF SECURITIES," "SECURITYHOLDER" or other similar
terms means the registered holder of any Security.
"INDEBTEDNESS" of any Person means (i) all indebtedness of such
Person, including the principal of and premium, if any, and interest on such
indebtedness, whether outstanding currently or hereafter created, for borrowed
money, for indebtedness incurred in connection with acquisitions, and for money
owed or reimbursement obligations under letters of credit or under any lease of
any real or personal property, which obligations are capitalized on such
Person's books, (ii) all currency or interest rate hedging obligations of such
Person and (iii) all interest on any of the foregoing that would accrue but for
the filing of a bankruptcy or similar proceeding at the rate specified in the
instrument governing such Indebtedness, whether or not such interest is an
allowable claim in such proceeding. Such term shall also include Guarantees of
any of the foregoing and any renewals, extensions, refinancings, refundings,
deferrals, restructurings, amendments and modifications thereof, or any
securities, notes or other evidences of indebtedness issued in exchange for such
indebtedness.
"INDENTURE" means this instrument as originally executed and delivered
or, if amended or supplemented as herein provided, as so amended or
supplemented.
"ISSUER" means Alliance Gaming Corporation, a Nevada corporation, and
subject to Article 8 hereof, its successors and assigns.
"KIC" means Kirkland Investment Corporation, a Delaware corporation,
and its successors and assigns.
"KIRKLAND" means Kirkland-Ft. Worth Investment Partners, L.P., a
Delaware limited partnership, and its successors and assigns.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For purposes of this Indenture, the Issuer shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
4
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"MERGER" means the merger of a wholly-owned subsidiary of the Issuer
with and into Bally Gaming International, Inc., pursuant to that certain
Agreement and Plan of Merger, dated as of October 1995, as amended on January
__, 1996, and as the same may be hereinafter amended from time to time.
"NASDAQ/NMS" means the National Association of Securities Dealers
Automated Quotation/National Market System.
"OFFICERS' CERTIFICATE" means a certificate signed by the Chairman of
the Board of Directors or Vice Chairman of the Board of Directors or the
President or any Vice President (whether or not designated by a number or
numbers or a word or words added before or after the title "Vice President") and
by the Chief Financial Officer or the Secretary or any Assistant Secretary of
the Issuer and delivered to the Trustee. Each such certificate shall comply
with Section 314 of the Trust Indenture Act of 1939 and include the statements
provided for in Section 10.5 hereof, if and to the extent required thereby. Any
of the foregoing persons may be referred to herein as "Officers."
"OLD CONVERTIBLE DEBENTURES" means the 7-1/2% Convertible Subordinated
Debentures due 2003 issued pursuant to the Indenture dated as of September 14,
1993 between the Issuer (then named United Gaming, Inc.) and NationsBank of
Texas, N.A., as Trustee.
"OPINION OF COUNSEL" means an opinion in writing signed by legal
counsel who may be an employee of or counsel to the Issuer or who may be other
counsel reasonably satisfactory to the Trustee. Each such opinion shall comply
with Section 314 of the Trust Indenture Act and include the statements provided
for in Section 10.5 hereof, if and to the extent required hereby.
"ORIGINAL ISSUE DATE" of any Security (or portion thereof) means the
earlier of (a) the date of such
Security and (b) the date of any Security (or portion thereof) for which such
Security was issued (directly or indirectly), on registration of transfer,
exchange or substitution.
"OUTSTANDING" when used with reference to Securities, shall, subject
to the provisions of Section 6.4 hereof, mean, as of any particular time, all
Securities authenticated and delivered by the Trustee under this Indenture,
except (i) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation; (ii) Securities, or portions thereof, for the payment
or redemption of which moneys or direct obligations of the United States of
America backed by its full faith and credit in the necessary amount shall have
been deposited in trust with the Trustee or with any Paying Agent (other than
the Issuer) or shall have been set aside, segregated and held in trust by the
Issuer (if the Issuer shall act as its own Paying Agent); PROVIDED that if such
Securities are to be redeemed prior to the maturity thereof, notice of such
redemption
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shall have been given as herein provided, or provision satisfactory to the
Trustee shall have been made for giving such notice; (iii) Securities in
substitution for which other Securities shall have been authenticated and
delivered, or which shall have been paid, pursuant to the terms of Section
2.6 hereof (unless proof satisfactory to the Trustee is presented that any
such Security is held by a person in whose hands such Security is a legal,
valid and binding obligation of the Issuer); (iv) Securities converted into
Common Stock or Special Stock pursuant hereto; and (v) Securities not deemed
outstanding pursuant to Section 11.2 hereof. Except as set forth in Section
2.9 hereof, a Security does not cease to be Outstanding because the Issuer or
an Affiliate holds the Security.
"PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"PRINCIPAL" wherever used with reference to the Securities or any
Security or any portion thereof, shall be deemed to include "and premium, if
any."
"REDEMPTION EVENT" shall be deemed to have occurred at such time as
(i) there is a Change of Control of the Issuer or (ii) the Issuer's Common Stock
(or other Common Stock into which the Securities are then convertible) is not
listed for trading on a United States national securities exchange or admitted
for trading in the NASDAQ/NMS or the National Association of Securities Dealers
Automated Quotation listing of Small Capitalization Stocks.
"RESPONSIBLE OFFICER" when used with respect to the Trustee means any
officer of the Trustee to administer its corporate trust matters.
"SECURITY" or "SECURITIES" means any Convertible Subordinated
Debenture referred to in the second paragraph of this Indenture, authenticated
and delivered under this Indenture.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR INDEBTEDNESS" means (i) all Indebtedness of the Issuer unless,
by the terms of the instrument creating or evidencing such Indebtedness, it is
provided that such Indebtedness is not superior in right of payment to the
Securities or to other Indebtedness which is pari passu with, or subordinated
to, the Securities, and (ii) any modifications, refunding, deferrals, renewals
or extensions of any such Indebtedness or securities, notes or other evidences
of Indebtedness issued in exchange for such Indebtedness; PROVIDED, HOWEVER,
that Senior Indebtedness shall not include the Old
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Convertible Debentures or any other Indebtedness which is PARI PASSU with, or
subordinated to, the Old Convertible Debentures.
"SPECIAL STOCK" means the Non-Voting Junior Convertible Pay-in-Kind
Special Stock, Series E, par value $.10 per share, of the Issuer as the same
exists at the date of execution and delivery of this Indenture or as such stock
may be reconstituted from time to time.
"SUBSIDIARY" means any corporation a majority of the voting stock of
which is owned, directly or indirectly, by the Issuer.
"TRADING DAY" means each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day on which securities are not traded on the applicable
securities exchange or in the applicable securities market.
"TRUSTEE" means the entity identified as "Trustee" in the first
paragraph hereof and, subject to the provisions of Article 5 hereof, shall also
include any successor trustee.
"TIA" OR "TRUST INDENTURE ACT OF 1939" means the Trust Indenture Act
of 1939, as amended.
"MR. WILMS" means Alfred H. Wilms, the holder of approximately 46.9%
of the Common Stock of the Issuer as of the date of this Indenture.
ARTICLE 2
THE SECURITIES
Section 2.1 FORM AND DATING. The Securities and the Trustee's
certificate of authentication shall be substantially in the form of Exhibit A to
this Indenture. The Securities shall be in a principal amount at maturity of no
greater than $85,000,000. The Securities may have notations, legends or
endorsements required by law, stock exchange rule or usage. Each Security shall
be dated the date of its authentication. The Securities shall be in
denominations of $1,000 and integral multiples thereof.
The terms and provisions contained in the Securities shall constitute,
and are hereby expressly made, a part of this Indenture and to the extent
applicable, the Issuer and the Trustee, by their execution and delivery of this
Indenture, expressly agree to such terms and provisions and to be bound thereby.
Section 2.2 EXECUTION AND AUTHENTICATION. Two Officers shall sign
the Securities for the Issuer by manual or facsimile signature. The Issuer's
seal shall be reproduced on the Securities and may be in facsimile form.
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If an Officer whose signature is on a Security no longer holds that
office at the time the Security is authenticated, the Security shall
nevertheless be valid.
A Security shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Security has been authenticated under this Indenture.
The Trustee shall authenticate Securities for original issue up to the
aggregate Principal amount stated in paragraph 4 of the Securities, upon a
written order of the Issuer signed by an Officer to a Responsible Officer of the
Trustee. The aggregate Principal amount of Securities Outstanding at any time
may not exceed such amount except as provided in Section 2.7 hereof.
The Trustee may appoint an authenticating agent acceptable to the
Issuer to authenticate Securities. An authenticating agent may authenticate
Securities whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Issuer or
an Affiliate of the Issuer.
Section 2.3 REGISTRAR AND PAYING AGENT. The Issuer shall maintain an
office or agency where Securities may be presented for registration of transfer
or for exchange ("REGISTRAR") and an office or agency where Securities may be
presented for payment ("PAYING AGENT"). The Registrar shall keep a register of
the Securities and of their transfer and exchange. The Issuer may appoint one
or more co-registrars and one or more additional paying agents. The term
"Registrar" includes any co-registrar and the term "Paying Agent" includes any
additional paying agent. The Issuer may change any Paying Agent or Registrar
without notice to any Holder. The Issuer shall notify the Trustee in writing of
the name and address of any Agent not a party to this Indenture. If the Issuer
fails to appoint or maintain another entity as Registrar or Paying Agent, the
Trustee shall act as such. The Issuer or any of its subsidiaries may act as
Paying Agent or Registrar.
The Issuer initially appoints the Trustee to act as Paying Agent and
Registrar.
Section 2.4 PAYING AGENT TO HOLD MONEY IN TRUST. The Issuer shall
require each Paying Agent other than the Trustee to agree in writing that the
Paying Agent will hold in trust of the benefit of Holders or the Trustee all
money held by the Paying Agent for the payment of Principal or interest on the
Securities, and will notify the Trustee of any default by the Issuer in making
any such payment. While any such default continues, the Trustee may require a
Paying Agent to pay all money held by it to the Trustee. The Issuer at any time
may require a Paying Agent
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to pay all money held by it to the Trustee. Upon payment over to the
Trustee, the Paying Agent (if other than the Issuer or a Subsidiary) shall
have no further liability for the money. If the Issuer or a Subsidiary acts
as Paying Agent, it shall segregate and hold in a separate trust fund for the
benefit of the Holders all money held by it as Paying Agent.
Section 2.5 HOLDER LISTS. The Trustee shall preserve in as current a
form as is reasonably practicable the most recent list available to it of the
names and addresses of Holders and shall otherwise comply with the Trust
Indenture Act of 1939 Section 312(a). If the Trustee is not the Registrar, the
Issuer shall furnish to the Trustee at least seven Business Days before each
Interest Payment Date (as defined in Paragraph 1 of the form of Security
attached as Exhibit A hereto), and at such other times as the Trustee may
request in writing, a list in such form and as of such date as the Trustee may
require of the names and addresses of Holders, and the Issuer shall otherwise
comply with the Trust Indenture Act of 1939 Section 312(a).
Section 2.6 TRANSFER AND EXCHANGE.
(a) When Securities are presented to the Registrar with the request
(x) to register the transfer of the Securities or (y) to exchange such
Securities for an equal Principal amount of Securities of other authorized
denominations, the Registrar shall register the transfer or make the exchange as
requested if its requirements for such transactions are met; PROVIDED, HOWEVER,
that the Securities presented or surrendered for register of transfer or
exchange shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Registrar duly executed by the Holder
thereof or by his attorney, duly authorized in writing.
(b) To permit registrations of transfers, exchanges and partial
conversions, the Issuer shall execute and the Trustee shall authenticate
Securities at the Registrar's request.
(c) No service charge shall be made to a Holder for any registration,
transfer, exchange or conversion, but the Issuer may require payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable in
connection therewith (other than any such transfer taxes or similar governmental
charge payable upon exchange or transfer pursuant to Section 11.1 hereof).
(d) The Registrar shall not be required to register the transfer or
exchange of any Security selected for redemption in whole or in part after such
selection as provided for herein, except the unredeemed portion of any Security
being redeemed in part.
(e) All Securities issued upon any registration of transfer or
exchange of Securities shall be the valid obligations
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of the Issuer, evidencing the same debt, and entitled to the same benefits
under the Indenture, as the Securities surrendered upon such registration of
transfer or exchange.
(f) The Issuer shall not be required:
(i) to issue, register the transfer of or exchange Securities
during a period beginning at the opening of business 15 days before
the day of any selection of Securities for redemption under Section
11.2 hereof and ending at the close of business on the day of mailing
of the notice of such selection, or
(ii) to register the transfer of any Security so selected for
redemption in whole or in part, except the unredeemed portion of any
Security being redeemed in part.
(g) Prior to due presentment for registration of transfer of any
Security, the Trustee, any Agent and the Issuer may deem and treat the person in
whose name any Security is registered as the absolute owner of such Security for
the purpose of receiving payment of Principal of and interest on such Security,
whether or not such payment is overdue, and neither the Trustee, any Agent nor
the Issuer shall be affected by notice to the contrary.
Section 2.7 REPLACEMENT SECURITIES. If any mutilated Security is
surrendered to the Trustee, or the Issuer and the Trustee receive evidence to
their satisfaction of the destruction, loss or theft of any Security, the Issuer
shall issue and the Trustee, upon the written order of the Issuer signed by an
Officer, shall authenticate a replacement Security if the Trustee's requirements
are met. If required by the Trustee or the Issuer, an indemnity bond must be
supplied by the Holder that is sufficient in the judgment of the Trustee and the
Issuer to protect the Issuer, the Trustee, any Agent or any authenticating agent
from any loss which any of them may suffer if a Security is replaced. The
Issuer and the Trustee may charge for their expenses in replacing a Security.
Every replacement Security is an additional obligation of the Issuer
and shall be entitled to all benefits of this Indenture equally and
proportionately with all other Securities duly issued hereunder.
Section 2.8 Reserved.
Section 2.9 TREASURY SECURITIES. In determining whether the
Holders of the required Principal amount of Securities have concurred in any
direction, waiver or consent, Securities owned by the Issuer, or by an
Affiliate of the Issuer shall be considered as though not Outstanding, except
that for the purposes of determining whether the Trustee shall be
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protected in relying on any such direction, waiver or consent, only
Securities which a Trustee actually knows are so owned shall be so
disregarded.
Section 2.10 TEMPORARY SECURITIES. Until definitive Securities
are ready for delivery, the Issuer may prepare and the Trustee shall
authenticate temporary securities upon a written order of the Issuer signed
by an Officer and delivered or caused to be delivered to a Responsible
Officer. Temporary Securities shall be substantially in the form of
definitive Securities but may have variations that the Issuer considers
appropriate for temporary Securities. Without unreasonable delay, the Issuer
shall prepare and the Trustee shall authenticate definitive Securities in
exchange for temporary Securities.
Holders of temporary Securities shall be entitled to all benefits of
this Indenture.
Section 2.11 CANCELLATION. The Issuer at any time may deliver
Securities to the Trustee for cancellation. The Registrar and Paying Agent
shall forward to the Trustee any Securities surrendered to them for
registration of transfer, exchange or payment. The Trustee and no one else
shall cancel all Securities surrendered for registration of transfer,
exchange, payment, replacement or cancellation and shall return such
cancelled Securities to the Issuer. The Issuer may not issue new Securities
to replace Securities that it has paid or that have been delivered to the
Trustee for cancellation.
Section 2.12 DEFAULTED INTEREST. If the Issuer defaults in a payment
of interest on the Securities, it shall pay the defaulted interest in any lawful
manner plus, to the extent lawful, interest payable on the defaulted interest,
to the Persons who are holders on a subsequent special record date, in each case
at the rate provided in the Securities and in Section 4.3 hereof. The Issuer
shall, with the consent of the Trustee, fix each such special record date and
payment date. At least 15 days before the record date, the Issuer (or the
Trustee, in the name of and at the expense of the Issuer) shall mail to Holders
a notice that states the special record date, the related payment date and the
amount of such interest to be paid.
Section 2.13. CUSIP NUMBERS. The Issuer in issuing the Securities may
use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall
use "CUSIP" numbers in notices of redemption as a convenience to Holders;
PROVIDED that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Securities or as contained
in any notice of a redemption and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such redemption shall
not be affected by any defect in or omission of such numbers. The Issuer will
promptly notify the Trustee of any change in the CUSIP numbers.
ARTICLE 3
COVENANTS OF THE ISSUER AND THE TRUSTEE
Section 3.1 PAYMENT OF PRINCIPAL AND INTEREST. The Issuer covenants
and agrees that it will duly and punctually pay or cause to be paid the
Principal of, and interest on, each of the Securities at the place or places, at
the respective times and in the manner provided in the Securities. All payments
in respect of the Securities shall be made by mailing checks for such interest
payable to or upon the written order of the holders
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of Securities entitled thereto as they shall appear on the registry books of
the Issuer.
Section 3.2 OFFICES FOR PAYMENTS, ETC. So long as any of the
Securities remain Outstanding, the Issuer will maintain in New York City, New
York, the following: (a) an office or agency where the Securities may be
presented for payment, (b) an office or agency where the Securities may be
presented for registration of transfer and for exchange and conversion as in
this Indenture provided and (c) an office or agency where notices and demands
to or upon the Issuer in respect of the Securities or of this Indenture may
be served. The Issuer will give to the Trustee written notice of the
location of any such office or agency and of any change of location thereof.
The Issuer hereby initially designates The Bank of New York, 101 Barclay
Street, New York, New York 10286 as the office or agency for each such
purpose. In case the Issuer shall fail to maintain any such office or agency
or shall fail to give such notice of the location or of any change in the
location thereof presentations and demands may be made and notices may be
served at such address.
Section 3.3 APPOINTMENT TO FILL A VACANCY IN OFFICE OF TRUSTEE. The
Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint, in the manner provided in Section 5.10 hereof, a Trustee, so that
there shall at all times be a Trustee hereunder; it being understood that the
occurrence of any of the events affecting the Trustee under Section 5.10(b)
hereunder shall not be a default hereunder.
Section 3.4 PAYING AGENTS. Whenever the Issuer shall appoint a
paying agent other than the Trustee, it will cause such paying agent to execute
and deliver to the Trustee an instrument in which such agent shall agree with
the Trustee, subject to the provisions of this Section 3.4, (a) that it will
hold all sums received by it as such agent for the payment of the Principal of
or interest on the Securities (whether such sums have been paid to it by the
Issuer or by any other obligor on the Securities) in trust for the benefit of
the holders of the Securities or of the Trustee, (b) that it will give the
Trustee notice of any failure by the Issuer (or by any other obligor on the
Securities) to make any payment of the Principal of or interest on the
Securities when the same shall be due and payable, and (c) that it will pay any
such sums so held in trust by it to the Trustee upon the Trustee's written
request at any time during the continuance of the failure referred to in clause
(b) above.
The Issuer will, prior to each due date of the Principal of or
interest on the Securities, deposit with the Paying Agent a sum sufficient to
pay such Principal or interest, and (unless such paying agent is the Trustee)
the Issuer will promptly notify the Trustee of any failure to take such action.
If the Issuer shall act as its own Paying Agent, it will, on or before
each due date of the Principal of or interest
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on the Securities, set aside, segregate and hold in trust for the benefit of
the holders of the Securities a sum sufficient to pay such Principal or
interest so becoming due. The Issuer will promptly notify the Trustee of any
failure to take such action.
Anything in this Section to the contrary notwithstanding, the Issuer
may at any time, for the purpose of obtaining a satisfaction and discharge of
this Indenture or for any other reason, pay or cause to be paid to the Trustee
all sums held in trust by the Issuer or any Paying Agent hereunder, as required
by this Section, such sums to be held by the Trustee upon the trusts herein
contained. Anything in this Section to the contrary notwithstanding, the
agreement to hold sums in trust as provided in this Section is subject to the
provisions of Sections 9.3 and 9.4 hereof.
Section 3.5 CERTIFICATE TO TRUSTEE. The Issuer will furnish to the
Trustee on or before September 1 in each year (beginning with 1996) a brief
certificate (which need not comply with Section 10.5 hereof) from the principal
executive, financial or accounting officer of the Issuer as to his or her
knowledge of the Issuer's compliance with all conditions and covenants under
this Indenture (such compliance to be determined without regard to any period of
grace or requirement of notice provided under this Indenture) and as to any
default in such performance.
Section 3.6 SECURITYHOLDERS' LISTS. If and so long as the Trustee
shall not be the Registrar, the Issuer will furnish or cause to be furnished to
the Trustee a list in such form as the Trustee may require of the names and
addresses of the holders of the Securities pursuant to Section 312 of the Trust
Indenture Act (a) semi-annually not more than 15 days after each record date for
the payment of semi-annual interest on the Securities, as hereinabove specified,
as of such record date, and (b) at such other times as the Trustee may request
in writing, within 30 days after receipt by the Issuer of any such request as of
a date not more than 15 days prior to the time such information is furnished.
Section 3.7 REPORTS BY THE ISSUER. The Issuer covenants to file with
the Trustee, within 15 days after the Issuer is required to file the same with
the Securities and Exchange Commission ("SEC"), copies of the annual reports and
of the information, documents, and other reports which the Issuer may be
required to file with the SEC pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934. The Issuer shall also comply with the other
provisions of Section 314(a) of the Trustee Indenture Act of 1939.
Section 3.8 REPORTS BY THE TRUSTEE. Any Trustee's report required
under Section 313(a) of the Trustee Indenture Act of 1939 shall be transmitted
by mail to each Securityholder and certain other holders in accordance with
Section 313(c) of the Trust Indenture Act of 1939 within 60 days after
March 15 of each year
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beginning March 15, 1997. The Trustee shall also comply with Section 313(b)
of the Trust Indenture Act of 1939. A copy of each report at the time of its
mailing to Securityholders shall be mailed to the Issuer and filed with the
SEC and each stock exchange, if any, on which the Securities are listed.
Section 3.9 TRANSACTIONS WITH AFFILIATES. The Issuer will not, and
will not permit any of its Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Issuer or the relevant Subsidiary than those
that would have been obtained in a comparable transaction by the Issuer or such
Subsidiary with an unrelated person and (b) the Issuer delivers to the Trustee
with respect to any Affiliate Transaction involving aggregate payments in excess
of $500,000, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (a)
above and such Affiliate Transaction is approved by a majority of the
independent members of the Board of Directors; PROVIDED, HOWEVER, that none of
the following shall be deemed Affiliate Transactions: (i) any employment
agreement entered into by the Issuer or any of its subsidiaries in the ordinary
course of business, (ii) the continuation, extension or renewal of any
transaction entered into between the Issuer or any of its subsidiaries and any
Affiliate on or prior to October 31, 1993, (iii) transactions among the Issuer
and any of Kirkland, KIC, GSA, Mr. Wilms, or their respective Affiliates
pursuant to or contemplated by agreements existing on October 31, 1993 as in
effect on such date, (iv) any agreement between the Issuer, KIC, Kirkland, GSA
or their respective Affiliates providing for the payment by the Issuer of
management or related fees in connection with providing services to the Issuer
in an aggregate amount not exceeding $1.4 million per annum, plus reimbursement
of reasonable related expenses, (v) any agreement between the Issuer and Mr.
Wilms or any of his Affiliates providing for the payment by the Issuer of
consulting fees or similar fees in an aggregate amount not to exceed $500,000
per annum, (vi) any agreement with Mr. Wilms pursuant to which the Issuer loaned
funds to Mr. Wilms to be used to exercise stock purchase warrants if such
exercise occurred so that Mr. Wilms could comply with his commitment to the
Issuer to obtain sufficient shares to approve (A) the investment by Kirkland and
certain other parties concurrently with the original issuance of the Old
Convertible Debentures of $5,000,000 in the Issuer's Capital Stock and various
related transactions and (B) the increase in the authorized number of shares of
the Issuer's Common Stock to 100,000,000 or (vii) transactions between or among
the Issuer and/or its Subsidiaries or among the Subsidiaries.
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ARTICLE 4
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
ON EVENT OF DEFAULT
Section 4.1 EVENT OF DEFAULT DEFINED; ACCELERATION OF MATURITY;
WAIVER OF DEFAULT. In case one or more of the following Events of Default
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) shall have occurred and be continuing:
(a) failure to pay Principal with respect to any Securities when due,
whether or not such payment is prohibited by the subordination provisions
of this Indenture;
(b) failure to pay any interest on any Securities when due, continued
for 30 days, whether or not such payment is prohibited by the subordination
provisions of this Indenture;
(c) failure on the part of the Issuer duly to observe or perform any
other of the covenants or agreements on the part of the Issuer in the
Securities or in this Indenture and continuance of such failure for a
period of 60 days after the date on which written notice specifying such
failure, stating that such notice is a "Notice of Default" hereunder and
demanding that the Issuer remedy the same, shall have been given by
registered or certified mail, return receipt requested, to the Issuer by
the Trustee, or to the Issuer and the Trustee by the holders of at least
25% in aggregate Principal amount of the Securities at the time
Outstanding;
(d) a court having jurisdiction in the premises shall enter a decree
or order for relief in respect of the Issuer in an involuntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of the Issuer or for any
substantial part of its property or ordering the winding up or liquidation
of its affairs, and such decree or order shall remain unstayed and in
effect for a period of 60 consecutive days;
(e) the Issuer shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consent to the entry of an order for relief in an involuntary case under
any such law, or consent to the appointment or taking possession by a
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receiver, liquidator, assignee, custodian, trustee, sequestrator (or
similar official) of the Issuer or for any substantial part of its
property, or make any general assignment for the benefit of creditors;
(f) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Issuer or any of its Subsidiaries,
and as a result of such default the maturity of such Indebtedness has been
accelerated prior to its express maturity and the principal amount of such
Indebtedness, together with the principal amount of any other such
Indebtedness the maturity of which has been accelerated, aggregates $5
million or more, PROVIDED that if such default under such indenture or
instrument shall be remedied or cured by the Issuer or waived by the
holders of such Indebtedness within 90 days of the date of acceleration of
such Indebtedness, then the Event of Default under this Indenture by reason
thereof shall be deemed likewise to have been thereupon remedied, cured or
waived without further action upon the part of either the Trustee or any of
the holders; or
(g) a final judgment or judgments or order or orders for the payment
of money which aggregates $5 million or more is entered against the Issuer
or one or more of its subsidiaries, which judgment or judgments or order or
orders shall not have been discharged or stayed pending appeal within 75
days after the entry thereof or discharged within 75 days after the
expiration of any such stay;
then, and in each such case (other than in the case of an Event of Default
specified in Sections 4.1(d) or (e) hereof), unless the Principal of all of the
Securities shall have already become due and payable, either the Trustee or the
holders of not less than 25% in aggregate Principal amount of the Securities
then Outstanding hereunder, by notice in writing to the Issuer (and to the
Trustee if given by Securityholders), may declare the entire Principal of all
the Securities and the interest accrued thereon, to be due and payable
immediately, and upon any such declaration the same shall become immediately due
and payable. If an Event of Default specified in Section 4.1(d) or (e) hereof
occurs, the entire Principal of all of the Securities and the interest accrued
thereon shall automatically become due and payable without any declaration or
other act on the part of the Trustee or any Securityholder. This provision,
however, is subject to the condition that if, at any time after the Principal of
the Securities shall have become due and payable, and before any judgment or
decree for the payment of the moneys due shall have been obtained or entered as
hereinafter provided, the Issuer shall pay or shall deposit with the Trustee a
sum sufficient to pay all matured installments of interest upon all the
Securities and the Principal of any and all Securities which shall have become
due otherwise than by acceleration (with interest upon
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such Principal and, to the extent that payment of such interest is
enforceable under applicable law, on overdue installments of interest, at the
same rate as the rate of interest specified in the Securities, to the date of
such payment or deposit) and such amount as shall be sufficient to cover
reasonable compensation to the Trustee and each predecessor Trustee, their
respective agents, attorneys and counsel, and all other reasonable agents,
attorneys and counsel, and all other expenses and liabilities incurred, and
all advances made, by the Trustee and each predecessor Trustee except as a
result of negligence or bad faith, and if any and all Events of Default under
this Indenture, other than the non-payment of the Principal of Securities
which have become due by acceleration, shall have been cured, waived or
otherwise remedied as provided herein, then and in every such case the
holders of a majority in aggregate Principal amount of the Securities then
outstanding, by written notice to the Issuer and to the Trustee, may waive
all defaults and rescind and annul an acceleration and its consequences, but
no such waiver or rescission and annulment shall extend to or shall affect
any subsequent default or shall impair any right consequent thereon.
Section 4.2 COLLECTION OF INDEBTEDNESS BY TRUSTEE; TRUSTEE MAY PROVE
DEBT. The Issuer covenants that (a) in case default shall occur in the payment
of any installment of interest on any of the Securities when such interest shall
have become due and payable, and such default shall have continued for a period
of 30 days or (b) in case default shall occur in the payment of all or any part
of the Principal of any of the Securities when the same shall have become due
and payable, whether upon maturity or upon any redemption or by declaration or
otherwise, then upon demand of the Trustee, the Issuer will pay to the Trustee
for the benefit of the holders of the Securities the whole amount that then
shall have become due and payable on all such Securities for Principal or
interest, as the case may be (with interest to the date of such payment upon the
overdue Principal and, to the extent that payment of such interest is
enforceable under applicable law, on overdue installments of interest at the
same rate as the rate of interest specified in the Securities); and in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including reasonable compensation to the Trustee and
each predecessor Trustee, their respective agents, attorneys and counsel, and
any expenses and liabilities incurred, and all advances made, by the Trustee and
each predecessor Trustee except as a result of its negligence or bad faith.
Until such demand is made by the Trustee, the Issuer may pay the
Principal of and interest on the Securities to the Holders, whether or not the
Securities are overdue.
In case the Issuer shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any action or proceedings at law or in
equity for the
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collection of the sums so due and unpaid, and may prosecute any such action
or proceedings to judgment or final decree, and may enforce any such judgment
or final decree against the Issuer or other obligor upon the Securities and
collect in the manner provided by law out of the property of the Issuer or
other obligor upon the Securities, wherever situated the moneys adjudged or
decreed to be payable.
In case there shall be pending proceedings relative to the Issuer or
any other obligor upon the Securities under the United States Bankruptcy Code or
any other applicable Federal or state bankruptcy, insolvency or other similar
law, or in case a receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, sequestrator or similar official shall have been appointed for or
taken possession of the Issuer or its property or such other obligor, or in case
of any other comparable judicial proceedings relative to the Issuer or other
obligor upon the Securities, or to the creditors or property of the Issuer or
such other obligor, the Trustee, irrespective of whether the Principal of the
Securities shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
pursuant to the provisions of this Section, shall be entitled and empowered, by
intervention in such proceedings or otherwise:
(a) to file and prove a claim or claims for the whole amount of
Principal and interest owing and unpaid in respect of the Securities, and
to file such other papers or documents as may be necessary or advisable in
order to have the claims of the Trustee (including any claim for reasonable
compensation to the Trustee and each predecessor Trustee, and their
respective agents, attorneys and counsel, and for reimbursement of all
reasonable expenses and liabilities incurred, and all reasonable advances
made, by the Trustee and each predecessor Trustee, except as a result of
negligence or bad faith) and of the Securityholders allowed in any judicial
proceedings relative to the Issuer or other obligor upon the Securities, or
to the creditors or property of the Issuer or such other obligor;
(b) unless prohibited by applicable law and regulations, to vote on
behalf of the holders of the Securities in any election of a trustee or a
standby trustee in arrangement, reorganization, liquidation or other
bankruptcy or insolvency proceedings or person performing similar functions
in comparable proceedings; and
(c) to collect and receive any moneys or other property payable or
deliverable on any such claims, and to distribute all amounts received with
respect to the claims of the Securityholders and of the Trustee on their
behalf, and any trustee, receiver, or liquidator, custodian or other
similar official is hereby authorized by each of the Securityholders to
make payments to the Trustee, and in the
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event that the Trustee shall consent to the making of payments directly
to the Securityholders, to pay to the Trustee such amounts as shall be
sufficient to cover reasonable compensation to the Trustee, each
predecessor Trustee and their respective agents, attorneys and counsel,
and all other expenses and liabilities incurred, and all advances made,
by the Trustee and each predecessor Trustee except as a result of
negligence or bad faith.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or vote for or accept or adopt on behalf of any
Securityholder any plan of reorganization, arrangement, adjustment or
composition affecting the Securities or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Securityholder in
any such proceeding except, as aforesaid, to vote for the election of a trustee
in bankruptcy or similar person.
All rights of action and of asserting claims under this Indenture, or
under any of the Securities, may be enforced by the Trustee without the
possession of any of the Securities or the production thereof on any trial or
other proceedings relative thereto, and any such action or proceedings
instituted by the Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment, subject to the payment of the
expenses, disbursements and compensation of the Trustee, each predecessor
Trustee and their respective agents and attorneys, shall be for the ratable
benefit of the holders of the Securities.
In any proceedings brought by the Trustee (and also any proceedings
involving the interpretation of any provision of this Indenture to which the
Trustee shall be a party) the Trustee shall be held to represent all the holders
of the Securities, and it shall not be necessary to make any holders of the
Securities parties to any such proceedings.
Section 4.3 APPLICATION OF PROCEEDS. Any moneys collected by the
Trustee pursuant to this Article 4 shall be applied in the following order at
the date or dates fixed by the Trustee and, in case of the distribution of such
moneys on account of Principal or interest, upon presentation of the several
Securities and stamping (or otherwise noting) thereon the payment, or issuing
Securities in reduced Principal amounts in exchange for the presented Securities
if only partially paid, or upon surrender thereof if fully paid:
FIRST: To the payment of costs and expenses, including reasonable
compensation to the Trustee and each predecessor Trustee and
their respective agents and attorneys and of all expenses
and liabilities incurred, and all advances made, by the
Trustee and each
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predecessor Trustee except as a result of negligence or bad
faith;
SECOND: In case the Principal of the Securities shall not have
become and be then due and payable, to the payment of
interest in default in the order of the maturity of the
installments of such interest, with interest (to the extent
that such interest has been collected by the Trustee) upon
the overdue installments of interest, to the extent
permitted by applicable law, at the same rate as the rate
of interest specified in the Securities, such payments to
be made ratably to the persons entitled thereto, without
discrimination or preference;
THIRD In case the Principal of the Securities shall have become
and shall be then due and payable, to the payment of the
whole amount then owing and unpaid upon all the Securities
for Principal and interest (unless already applied pursuant
to section "SECOND" above), with interest upon the overdue
Principal, and (to the extent that such interest has been
collected by the Trustee) upon overdue installments of
interest, to the extent permitted by applicable law, at the
same rate as the rate of interest specified in the
Securities; and in case such moneys shall be insufficient to
pay in full the whole amount so due and unpaid upon the
Securities, then to the payment of such Principal and interest
(unless already applied pursuant to section "SECOND" above),
without preference or priority of Principal over interest, or of
interest over Principal, or of any installment of interest
over any other installment of interest, or of any Security
over any other Security, ratably to the aggregate of such
Principal payments accrued and unpaid interest; and
FOURTH: To the payment of the remainder, if any, to the Issuer or
any other person lawfully entitled thereto.
Section 4.4 SUITS FOR ENFORCEMENT. In case an Event of Default has
occurred, has not been waived and is continuing, the Trustee may in its
discretion proceed to protect and enforce
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the rights vested in it by this Indenture by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce
any of such rights, either at law or in equity or in bankruptcy or otherwise,
whether for the specific enforcement of any covenant or agreement contained
in this Indenture or in aid of the exercise of any power granted in this
Indenture or to enforce any other legal or equitable right vested in the
Trustee by this Indenture or by law.
Section 4.5 RESTORATION OF RIGHTS ON ABANDONMENT OF PROCEEDINGS. In
case the Trustee shall have proceeded to enforce any right under this Indenture
and such proceedings shall have been discontinued or abandoned for any reason,
or shall have been determined adversely to the Trustee, then and in every such
case the Issuer and the Trustee shall be restored respectively to their former
positions and rights hereunder, and all rights, remedies and powers of the
Issuer, the Trustee and the Securityholders shall continue as though no such
proceedings had been taken.
Section 4.6 LIMITATION ON SUITS BY SECURITYHOLDERS. No holder of any
Security shall have any right by virtue or by availing of any provision of this
Indenture to institute any action or proceeding at law or in equity or in
bankruptcy or otherwise upon or under or with respect to this Indenture, or for
the appointment of a trustee, receiver, liquidator, custodian or other similar
official or for any other remedy hereunder, unless such holder previously shall
have given to the Trustee written notice of default and of the continuance
thereof, as hereinbefore provided, and unless also the holders of not less than
25% in aggregate Principal amount of the Securities then Outstanding shall have
made written request upon the Trustee to institute such action or proceedings in
its own name as trustee hereunder and shall have offered to the Trustee such
reasonable indemnity as it may require against the costs, expenses and
liabilities to be incurred therein or thereby and the Trustee for 60 days after
its receipt of such notice, request and offer of indemnity shall have failed to
institute any such action or proceedings and no direction inconsistent with such
written request shall have been given to the Trustee pursuant to Section 4.9
hereof; it being understood and intended, and being expressly covenanted by the
taker and holder of every Security with every other taker and holder and the
Trustee, that no one or more holders of Securities shall have any right in any
manner whatever by virtue or by availing of any provision of this Indenture to
affect, disturb or prejudice the rights of any other holder of Securities, or to
obtain or seek to obtain priority over or preference to any other such holder or
to enforce any right under this Indenture, except in the manner herein provided
and for the equal, ratable and common benefit of all holders of Securities. For
the protection and enforcement of the provisions of this Section, each and every
Securityholder and the Trustee shall be entitled to such relief as can be given
either at law or in equity.
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Section 4.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding
any other provision of this Indenture, the right of any Holder of a Security
to receive payment of Principal of and interest on the Securities as set
forth herein, on or after the respective due dates expressed in the
Securities, or to bring suit for the enforcement of any such payment on or
after such respective dates, shall not be impaired or affected without the
consent of the Holder.
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Security to bring suit for the enforcement of the right to
convert the Security shall not be impaired or affected without the consent of
the Holder.
Section 4.8 POWERS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT
WAIVER OF DEFAULT. No right or remedy herein conferred upon or reserved to the
Trustee or to the Securityholders is intended to be exclusive of any other right
or remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
No delay or omission of the Trustee or of any holder of any of the
Securities to exercise any right or power accruing upon any Event of Default
occurring and continuing as aforesaid shall impair any such right or power or
shall be construed to be a waiver of any such Event of Default or an
acquiescence therein; and, subject to Section 4.6 hereof, every power and remedy
given by this Indenture or by law to the Trustee or to the Securityholders may
be exercised from time to time, and as often as shall be deemed expedient, by
the Trustee or by the Securityholders.
Section 4.9 CONTROL BY SECURITYHOLDERS. The holders of a majority in
aggregate Principal amount of the Securities at the time Outstanding shall have
the right to direct the time, method, and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
on the Trustee by this Indenture, provided that such direction shall not be
otherwise than in accordance with law and the provisions of this Indenture and
provided further that (subject to the provisions of Section 5.1 hereof) the
Trustee shall have the right to decline to follow any such direction if the
Trustee, being advised by counsel, shall determine that the action or proceeding
so directed may not lawfully be taken or if the Trustee in good faith by its
board of directors, the executive committee, or a trust committee of directors
or Responsible Officers of the Trustee shall determine that the action or
proceedings so directed would involve the Trustee in personal liability or if
the Trustee in good faith shall so determine that the actions or forbearances
specified in or
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pursuant to such direction shall be unduly prejudicial to the interests of
holders of the Securities not joining in the giving of said direction, it
being understood that (subject to Section 5.1) the Trustee shall have no duty
to ascertain whether or not such actions or forbearances are unduly
prejudicial to such holders.
Nothing in this Indenture shall impair the right of the Trustee in its
discretion to take any action deemed proper by the Trustee and which is not
inconsistent with such direction by Securityholders.
Section 4.10 WAIVER OF PAST DEFAULTS. Prior to the declaration of
acceleration of the maturity of the Securities as provided in Section 4.1
hereof, the holders of a majority in aggregate Principal amount of the
Securities at the time Outstanding may on behalf of the holders of all the
Securities waive any past default or Event of Default hereunder and its
consequences, except a default (a) in the payment of Principal of or interest
on any of the Securities or (b) in respect of a covenant or provision hereof
which cannot be modified or amended without the consent of the holder of each
Security affected. In the case of any such waiver, the Issuer, the Trustee
and the holders of the Securities shall be restored to their former positions
and rights hereunder, respectively, but no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.
Upon any such waiver, such default shall cease to exist and be deemed
to have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured, and not to have occurred for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any right consequent thereon.
Section 4.11 UNDERTAKING FOR COSTS. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit
against the Trustee for any action taken or omitted by it as Trustee, a court
in its discretion may require the filing by any party litigant in the suit of
an undertaking to pay the costs of the suit and the court in its discretion
may assess reasonable costs, including reasonable attorneys' fees and
expenses against any party litigant in the suit, having due regard to the
merits and good faith of the claims or defenses made by the party litigant.
This Section 4.11 does not apply to any suit instituted by the Issuer, to any
suit instituted by the Trustee, to any suit instituted by any Holder pursuant
to Section 4.7, or group of Holders, holding in the aggregate more than 10%
in principal amount of the Outstanding Securities.
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ARTICLE 5
CONCERNING THE TRUSTEE
Section 5.1 DUTIES AND RESPONSIBILITIES OF THE TRUSTEE; DURING
DEFAULT; PRIOR TO DEFAULT. The Trustee, prior to the occurrence of an Event of
Default and after the curing or waiving of all Events of Default which may have
occurred, undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture. In case an Event of Default has
occurred (which has not been cured or waived) the Trustee shall exercise such of
the rights and powers vested in it by this Indenture, and use the same degree of
care and skill in their exercise, as a prudent person would exercise or use
under the circumstances in the conduct of his or her own affairs. The Trustee
shall give the Securityholders notice of all defaults or Events of Default known
to the Trustee within 90 days of the occurrence thereof. Except in the case of
a default or an Event of Default in payment of any Security, the Trustee may
withhold the notice if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interest of
Securityholders.
No provisions of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that:
(a) prior to the occurrence of an Event of Default and after the
curing or waiving of all such Events of Default which may have occurred:
(i) the duties and obligations of the Trustee shall be
determined solely by the express provisions of this
Indenture, and the Trustee shall not be liable except for
the performance of such duties and obligations as are
specifically set forth in this Indenture, and no implied
covenants or obligations shall be read into this Indenture
against the Trustee; and
(ii) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed
therein, upon any statements, certificates or opinions
furnished to the Trustee and conforming the requirements of
this Indenture; but in the case of any such statements,
certificates or opinions which by any provision hereof are
specifically required to be furnished to the Trustee, the
Trustee shall be under a duty to examine the
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same to determine whether or not they conform to the
requirements of this Indenture;
(b) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer or Responsible Officers of the Trustee,
unless it shall be proved that the Trustee was negligent in ascertaining
the pertinent facts; and
(c) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction
of the holders of not less than a majority in Principal amount of the
Securities at the time Outstanding relating to the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture.
None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties or in the exercise of any of
its rights or powers, if there shall be reasonable ground for believing that the
repayment of such funds or adequate indemnity against such liability is not
reasonably assured to it.
The Trustee shall have no responsibility for making any
calculations hereunder, including without limitation the amount of any
additional interest owing on the Securities hereunder. The Issuer shall
deliver to the Trustee an Officers' Certificate specifying the amount of any
additional interest due hereunder on or before the 15th day prior to the date
such amount is required to be paid.
This Section 5.1 is in furtherance of and subject to Sections 315 and
316 of the Trust Indenture Act of 1939.
Section 5.2 CERTAIN RIGHTS OF THE TRUSTEE. In furtherance of and
subject to the Trust Indenture Act of 1939, and subject to Section 5.1 hereof:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, Officers' Certificate or any
other certificate, statement, instrument, opinion, report, notice, request,
consent, order, bond, debenture, note, coupon, security or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper party or parties;
(b) any request, direction, order or demand of the Issuer mentioned
herein shall be sufficiently evidenced by an Officers' Certificate (unless
other evidence in respect thereof be herein specifically prescribed); and
any resolution of the Board of Directors may be evidenced to the
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Trustee by a copy thereof certified by the secretary or an assistant
secretary of the Issuer;
(c) the Trustee may consult with counsel of its selection and any
advice or Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted to be
taken by it hereunder in good faith and in accordance with such advice or
Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
trusts or powers vested in it by this Indenture at the request, order or
direction of any of the Securityholders pursuant to the provisions of this
Indenture, unless such Securityholders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred therein or thereby;
(e) the Trustee shall not be liable for any action taken or omitted
by it in good faith and believed by it to be authorized or within the
discretion, rights or powers conferred upon it by this Indenture;
(f) prior to the occurrence of an Event of Default hereunder and
after the curing or waiving of all Events of Default, the Trustee shall not
be bound to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, approval, appraisal, bond, debenture, note,
coupon, security, or other paper or document unless requested in writing so
to do by the holders of not less than a majority in aggregate Principal
amount of the Securities then Outstanding; PROVIDED that, if the payment
within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation
is, in the opinion of the Trustee, not reasonably assured to the Trustee by
the security afforded to it by the terms of this Indenture, the Trustee may
require reasonable indemnify against such expenses or liabilities as a
condition to proceeding; the expenses of every such investigation shall be
paid by the Issuer or, if paid by the Trustee or any predecessor trustee,
shall be repaid by the Issuer upon demand; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder whether directly or by or through agents or
attorneys not regularly in its employ and the Trustee shall not be
responsible for any misconduct or negligence on the part of any such agent
or attorney appointed with due care by it hereunder.
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Section 5.3 TRUSTEE NOT RESPONSIBLE FOR RECITAL, DISPOSITION OF
SECURITIES OR APPLICATION OF PROCEEDS THEREOF. The recitals contained herein
and in the Securities, except the Trustee's certificates of authentication,
shall be taken as the statements of the Issuer, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representation as to the validity or sufficiency of this Indenture or of the
Securities. The Trustee shall not be accountable for the use or application by
the Issuer of any of the Securities or of the proceeds thereof.
Section 5.4 TRUSTEE AND AGENTS MAY HOLD SECURITIES COLLECTIONS, ETC.
The Trustee or any agent of the Issuer or the Trustee, in its individual or any
other capacity, may become the owner or pledgee of Securities with the same
rights it would have if it were not the Trustee or such agent and may otherwise
deal with the Issuer and receive, collect, hold and retain collections from the
Issuer with the same rights it would have if it were not the Trustee or such
agent.
Section 5.5 MONEYS HELD BY TRUSTEE. Subject to the provisions of
Section 9.4 hereof, all moneys received by the Trustee shall, until used or
applied as herein provided, be held in trust for the purposes for which they
were received, but need not be segregated from other funds except to the extent
required by mandatory provisions of law. Neither the Trustee nor any agent of
the Issuer or the Trustee in the absence of negligence of such persons, shall be
under any liability for interest on any moneys received by it hereunder.
Section 5.6 COMPENSATION AND INDEMNIFICATION OF TRUSTEE AND ITS
PRIOR CLAIM. The Issuer covenants and agrees to pay to the Trustee from time
to time, and the Trustee shall be entitled to, such compensation as the
Issuer and the Trustee shall from time to time agree in writing (which shall
not be limited by any provision of law in regard to the compensation of a
trustee of an express trust) and the Issuer covenants and agrees to pay or
reimburse the Trustee and each predecessor Trustee upon its request for all
expenses, disbursements and advances incurred or made by or on behalf of it
in accordance with any of the provisions of this Indenture (including the
compensation and the expenses and disbursements of its counsel and of all
agents and other persons not regularly in its employ), except to the extent
any such expense, disbursement or advance may arise from its negligence or
bad faith. The Issuer also covenants to indemnify the Trustee and each
predecessor Trustee for, and to hold it harmless against, any loss, liability
or expense arising out of or in connection with the acceptance or
administration of this Indenture or the trusts hereunder and its duties
hereunder and the performance of its duties hereunder, including the costs
and expenses of defending itself against or investigating any claim of
liability in the premises, except to the extent any such loss, liability or
expense is due to its own negligence or bad faith. The obligations of the
Issuer under this Section to compensate and indemnify the Trustee and each
predecessor Trustee and to pay
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or reimburse the Trustee and each predecessor Trustee for expenses,
disbursements and advances shall constitute additional indebtedness hereunder
and shall survive the satisfaction and discharge of this Indenture. Such
additional indebtedness shall be a senior claim to that of the Securities
upon all property and funds held or collected by the Trustee as such, except
funds held in trust for the benefit of the holders of some but not all of the
Securities, and the Securities are hereby subordinated to such senior claim.
When the Trustee incurs expenses or renders services in connection
with an Event of Default specified in Section 4.1(d) or Section 4.1(e) the
expenses (including the reasonable charges and expenses of its counsel) and the
compensation for the services are intended to constitute expenses of
administration under any applicable Federal or state bankruptcy, insolvency or
other similar law.
Section 5.7 RIGHT OF TRUSTEE TO RELY ON OFFICERS' CERTIFICATE, ETC.
Subject to Section 5.1 and 5.2 hereof, whenever in the administration of the
trusts of this Indenture the Trustee shall deem it necessary or desirable that a
matter be proved or established prior to taking or suffering or omitting any
action hereunder, such matter (unless other evidence in respect thereof be
herein specifically prescribed) may, in the absence of negligence or bad faith
on the part of the Trustee, be deemed to be conclusively proved and established
by an Officers' Certificate delivered to the Trustee, and such certificate, in
the absence of negligence or bad faith on the part of the Trustee, shall be full
warrant to the Trustee for any action taken, suffered or omitted by it under the
provisions of this Indenture upon the faith thereof.
Section 5.8 DISQUALIFICATION; CONFLICTING INTERESTS. If the Trustee
has or shall acquire a conflicting interest within the meaning of Section 310(b)
of the Trust Indenture Act of 1939, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of the Trust Indenture Act of 1939 and this Indenture. Nothing
herein shall prohibit the Trustee from filing the application provided for by
the penultimate paragraph of Section 310(b) of the Trust Indenture Act of 1939.
Section 5.9 PERSONS ELIGIBLE FOR APPOINTMENT AS TRUSTEE. The Trustee
hereunder shall at all times be a corporation having a combined capital and
surplus of at least $50,000,000, and which is eligible in accordance with the
provisions of Section 310(a) of the Trust Indenture Act of 1939. If such
corporation publishes reports of condition at least annually, pursuant to law or
to the requirements of a Federal, State or District of Columbia supervising or
examining authority, then for the purposes of this Section, the combined capital
and surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published.
Section 5.10 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR
TRUSTEE.
(a) The Trustee may at any time resign by giving written notice
of resignation to the Issuer and by mailing notice thereof by first-class
mail to holders of Securities
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at their last addresses as they shall appear on the Security register.
Upon receiving such notice of resignation, the Issuer shall promptly
appoint a successor trustee by written instrument in duplicate,
executed by authority of the Board of Directors, one copy of which
instrument shall be delivered to the resigning Trustee and one copy
to the successor trustee. If no successor trustee shall have been so
appointed and have accepted appointment within 30 days after the mailing of
such notice of resignation, the resigning trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee, or any
Securityholder who has been a bona fide holder of a Security or Securities
for at least six months may, on behalf of himself and all others similarly
situated, petition any such court for the appointment of a successor
trustee. Such court may thereupon, after such notice, if any, as it may
deem proper and prescribe, appoint a successor trustee.
(b) In case at any time any of the following shall occur:
(i) the Trustee shall fail to comply with the provisions of
Section 5.8 hereof after written request therefor by the Issuer or by
any Securityholder who has been a bona fide holder of a Security or
Securities for at least six months; or
(ii) the Trustee shall cease to be eligible in accordance
with the provisions of Section 5.9 hereof and this Section 5.10 and
shall fail to resign after written request therefor by the Issuer or
by any such Securityholder; or
(iii) the Trustee shall become incapable of acting, or
shall be adjudged a bankrupt or insolvent, or a receiver or liquidator
of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property
or affairs for the purpose of rehabilitation, conservation or
liquidation; or
(iv) the Trustee shall be found unsuitable by the Nevada
Gaming Commission or the Nevada Gaming Control Board,
then, in any such case, the Issuer may remove the Trustee and promptly
appoint a successor trustee by written instrument, in duplicate, executed
by order of the Board of Directors of the Issuer, one copy of which
instrument shall be delivered to the Trustee so removed and one copy of the
successor trustee, or, subject to Section 315(e) of the Trust Indenture Act
of 1939, any Securityholder who has been a bona fide holder of a Security
or Securities for at least
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six months may on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the removal of the
Trustee and the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor trustee.
(c) The holders of a majority in aggregate Principal amount of the
Securities at the time Outstanding may at any time remove the Trustee and
appoint a successor trustee by delivering to the Trustee so removed, to the
successor trustee so appointed and to the Issuer the evidence provided for
in Section 6.1 hereof of the action in that regard taken by the
Securityholders.
(d) Any resignation or removal of the Trustee and any appointment of
a successor trustee pursuant to any of the provisions of this Section 5.10
shall become effective upon acceptance of appointment by the successor
trustee as provided in Section 5.11 hereof.
Section 5.11 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR TRUSTEE. Any
successor trustee appointed as provided in this Section 5.11 shall execute and
deliver to the Issuer and to its predecessor trustee an instrument accepting
such appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become vested with all rights,
powers, duties and obligations of its predecessor hereunder, with like effect as
if originally named as trustee herein; but, nevertheless, on the written request
of the Issuer or of the successor trustee, upon payment of its charges then
unpaid, the trustee ceasing to act shall, subject to Section 9.4 hereof, pay
over to the successor trustee all moneys at the time held by it hereunder and
shall execute and deliver an instrument transferring to such successor trustee
all such rights, powers, duties and obligations. Upon request of any such
successor trustee, the Issuer shall execute any and all instruments in writing
for more fully and certainly vesting in and confirming to such successor trustee
all such rights and powers. Any trustee ceasing to act shall, nevertheless,
retain a prior claim upon all property or funds held or collected by such
trustee to secure any amounts then due it pursuant to the provisions of Section
5.6 hereof.
Upon acceptance of appointment by a successor trustee as provided in
this Section 5.11 hereof, the Issuer shall mail notice thereof by first-class
mail to the holders of Securities at their last addresses as they shall appear
in the Security register. If the acceptance of appointment is substantially
contemporaneous with the resignation, then the notice called for by the
preceding sentence may be combined with the notice called for by Section 5.10
hereof. If the Issuer fails to mail such notice within 10 days after acceptance
of appointment by the
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successor trustee, the successor trustee shall cause such notice to be mailed
at the expense of the Issuer.
Section 5.12 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO
BUSINESS OF TRUSTEE. Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party, or any corporation succeeding to all or substantially all the
corporate trust business of the Trustee, shall be the successor of the
Trustee hereunder, provided that such corporation shall be eligible under the
provisions of Section 5.10 hereof, without the execution or filing of any
paper or any further act on the part of any of the parties hereto, anything
herein to the contrary notwithstanding.
In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture any of the Securities shall have been
authenticated but not delivered, any such successor to the Trustee may adopt the
certificate of authentication of any predecessor Trustee and deliver such
Securities so authenticated; and, in case at that time any of the Securities
shall not have been authenticated, any successor to the Trustee may authenticate
such Securities either in the name of any predecessor hereunder or in the name
of the successor Trustee; and in all such cases such certificate shall have the
full force which it is anywhere in the Securities or in this Indenture provided
that the certificate of the Trustee shall have; provided, that the right to
adopt the certificate of authentication of any predecessor Trustee or to
authenticate Securities in the name of any predecessor Trustee shall apply only
to its successor or successors by merger, conversion or consolidation.
Section 5.13 PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE ISSUER.
If and when the Trustee shall be, or shall become a creditor, directly or
indirectly, secured or unsecured of the Issuer (or any other obligor upon the
Securities), the Trustee shall be subject to the provisions of Section 311 of
the Trust Indenture Act of 1939.
ARTICLE 6
CONCERNING THE SECURITYHOLDERS
Section 6.1 EVIDENCE OF ACTION TAKEN BY SECURITYHOLDERS. Any
request, demand, authorization, direction, notice, consent, waiver or other
action provided by this Indenture to be given or taken by Securityholders may be
embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Securityholders in person or by an agent duly appointed in
writing; and, except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are delivered to the
Trustee. Proof of execution of any instrument or of a writing appointing any
such
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agent shall be sufficient for any purpose of this Indenture and (subject to
Sections 5.1 and 5.2 hereof) conclusive in favor of the Trustee and the Issuer,
if made in the manner provided in this Article 6.
Section 6.2 PROOF OF EXECUTION OF INSTRUMENTS AND OF HOLDING OF
SECURITIES; RECORD DATE. Subject to Section 5.1 and 5.2 hereof, the execution
of any instrument by a Securityholder or his agent or proxy may be proved in
accordance with such reasonable rules and regulations as may be prescribed by
the Trustee or in such manner as shall be satisfactory to the Trustee. The
holding of Securities shall be proved by the Security register or by a
certificate of the Registrar thereof. The Issuer may set a record date for
purposes of determining the identity of holders of Securities entitled to vote
or consent to any action referred to in Section 6.1 hereof, which record date
may be set at any time or from time to time by notice to the Trustee, for any
date or dates (in the case of any adjournment or resolicitation) not more than
60 days nor less than 15 days prior to the proposed date of such vote or
consent, and thereafter, notwithstanding any other provisions hereof, only
holders of Securities of record on such record date shall be entitled to so vote
or give such consent or to draw such vote or consent.
Section 6.3 HOLDERS TO BE TREATED AS OWNERS. The Issuer, the
Trustee and any agent of the Issuer or the Trustee may deem and treat the
person in whose name any Security shall be registered upon the Security
register as the absolute owner of such Security (whether or not such Security
shall be overdue and notwithstanding any notation of ownership or other
writing thereon) for the purpose of receiving payment of or on account of the
Principal of and, subject to the provisions of this Indenture, interest on
such Security and for all other purposes; and neither the Issuer nor the
Trustee nor any agent of the Issuer or the Trustee shall be affected by any
notice to the contrary. All such payments so made to any such person, or
upon his order, shall be valid, and, to the extent of the sum or sums so
paid, effectual to satisfy and discharge the liability for moneys payable
upon any such Security.
Section 6.4 SECURITIES OWNED BY ISSUER DEEMED NOT OUTSTANDING. In
determining whether the holders of the requisite aggregate Principal amount of
Securities have concurred in any direction, consent or waiver under this
Indenture, Securities which are owned by the Issuer or any other obligor on the
Securities or any Affiliate of the Issuer or any other obligor on the Securities
shall be disregarded and deemed not to be Outstanding for the purpose of any
such determination, except that for the purpose of determining whether the
Trustee shall be protected in relying on any such direction, consent or waiver
only Securities which the Trustee actually knows are so owned shall be so
disregarded. Securities so owned which have been pledged in good faith and in
respect of which the pledgee
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possesses voting rights may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Issuer or any
other obligor upon the Securities or any Affiliate of the Issuer or any other
obligor on the Securities. In case of a dispute as to such right, the advise
of counsel shall be full protection in respect of any decision made by the
Trustee in accordance with such advice. Upon request of the Trustee, the
Issuer shall furnish to the Trustee promptly an Officers' Certificate listing
and identifying all Securities, if any, known by the Issuer to be owned or
held by or for the account of any of the above-described persons; and,
subject to Sections 5.1 and 5.2 hereof, the Trustee shall be entitled to
accept such Officers' Certificate as conclusive evidence of the facts therein
set forth and of the fact that all Securities not listed therein are
Outstanding for the purpose of any such determination.
Section 6.5 RIGHT OF REVOCATION OF ACTION TAKEN. At any time prior
to (but not after) the evidencing to the Trustee, as provided in Section 6.1
hereof, of the taking of any action by the holders of the percentage in
aggregate Principal amount of the Securities specified in this Indenture, in
connection with such action, any holder of a Security the serial number of which
is shown by the evidence to be included among the serial numbers of the
Securities the holders of which have consented to such action may, by filing
written notice at the Corporate Trust Office and upon proof of holding as
provided in this Article, revoke such action so far as concerns such Security.
Except as aforesaid any such actions taken by the holder of any Security shall
be conclusive and binding upon such holder and upon all future holders and
owners of such Security and of any Securities issued in exchange or substitution
therefor or upon registration or transfer thereof, irrespective of whether or
not any notation in regard thereto is made upon any such Security. Any action
taken by the holders of the percentage in aggregate Principal amount of the
Securities specified in this Indenture in connection with such action shall be
conclusively binding upon the Issuer, the Trustee and the holders of all the
Securities.
Section 6.6 COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS.
Securityholders may communicate pursuant to Section 312(b) of the Trust
Indenture Act of 1939 with respect to their rights under this Indenture or the
Securities. The Issuer, the Trustee, the Registrar and any other person shall
have the protection of Section 312(c) of the Trust Indenture Act of 1939.
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ARTICLE 7
SUPPLEMENTAL INDENTURES
Section 7.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF
SECURITYHOLDERS. The Issuer, when authorized by a resolution of its Board of
Directors, and the Trustee may from time to time and at any time enter into an
indenture or indentures supplemental hereto for one or more of the following
purposes:
(a) to convey, transfer, assign, mortgage or pledge to the Trustee as
security for the Securities any property or assets;
(b) to evidence the succession of another corporation to the Issuer,
or successive successions, and the assumption by the successor corporation
of the covenants, agreements and obligations of the Issuer pursuant to
Article 8 hereof;
(c) to add to the covenants of the Issuer such further covenants,
restrictions, conditions or provisions as its Board of Directors and the
Trustee shall consider to be for the protection of the holders of
Securities, and to make the occurrence, or the occurrence and continuance,
of a default in any such additional covenants, restrictions, conditions or
provisions an Event of Default permitting the enforcement of all or any of
the several remedies provided in this Indenture as herein set forth;
provided, that in respect of any such additional covenant, restriction,
condition or provision such supplemental indenture may provide for a
particular period of grace after default (which period may be shorter or
longer than that allowed in the case of other defaults) or may provide for
an immediate enforcement upon such an Event of Default or may limit the
remedies available to the Trustee upon such an Event of Default or may
limit the right of the holders of a majority in aggregate Principal amount
of the Securities to waive such an Event of Default;
(d) to cure any ambiguity or to correct or supplement any provision
contained herein or in any supplemental indenture which may be defective or
inconsistent with any other provision contained herein or in any
supplemental indenture;
(e) to make such other provisions in regard to matters or questions
arising under this Indenture or under any supplemental indenture as the
Board of Directors may deem necessary or desirable and which shall not
adversely affect the interests of the holders of the Securities;
(f) to make any changes required by amendments to the TIA;
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(g) to unilaterally reduce the Conversion Price (as defined in
Section 13.5 hereof) or the Special Conversion Price (as defined in Section
13.5 hereof); and
(h) subject to Section 5.10(c) of this Indenture, appoint a successor
Trustee.
The Trustee is hereby authorized to join in the execution of any such
supplemental indenture, to make any further appropriate agreements and
stipulations which may be therein contained and to accept the conveyance,
transfer, assignment, mortgage or pledge of any property thereunder, but the
Trustee shall not be obligated to enter into any such supplemental indenture
which adversely affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this
Section may be executed without the consent of the holders of any of the
Securities at the time Outstanding, notwithstanding any of the provisions of
Section 7.2 hereof.
Section 7.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF SECURITYHOLDERS.
With the consent (evidenced as provided in Article 6 hereof) of the Holders of
not less than a majority in aggregate principal amount of the Securities at the
time Outstanding, the Issuer, when authorized by a resolution of its Board of
Directors, and the Trustee may, from time to time and at any time, enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of any supplemental Indenture or modifying in any manner the
rights of the holders of the Securities; PROVIDED, that no such supplemental
indenture shall (a) extend the final maturity of any Security, or reduce the
Principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon, or alter the redemption provisions thereof, or impair or
affect the right of any Securityholder to institute suit for the payment or
conversion thereof, or amend Section 4.10 hereof, or adversely affect the right
to convert the Securities into Common Stock or Special Stock or the right to
require the Issuer to redeem the Securities upon a Redemption Event (as defined
in Section 14.3 hereof) in accordance herewith without the consent of the holder
of each Security so affected, PROVIDED, no consent of any Holder of any Security
shall be necessary under this Section 7.2 to permit the Trustee and the Issuer
to execute supplemental indentures pursuant to Section 7.1 hereof and Section
13.6 hereof of this Indenture or (b) reduce the aforesaid percentage in
aggregate principal amount of Securities, the consent of the holders of which is
required for any such supplemental indenture, without the consent of the holders
of all Securities then Outstanding. Notwithstanding any other provision
thereof, no such supplemental indenture shall modify any provision of this
Indenture so as to affect adversely the rights under Article 12
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hereof of any holder of Senior Indebtedness at the time outstanding without
the consent of such holder.
Upon the request of the Issuer, accompanied by a copy of a resolution
of the Board of Directors certified by the Secretary or an Assistant Secretary
of the Issuer authorizing the execution of any such supplemental indenture, and
upon the filing with the Trustee of evidence of the consent of Securityholders
and other documents, if any, required by Section 6.1 hereof, the Trustee shall
join with the Issuer in the execution of such supplemental indenture unless such
supplemental indenture affects the Trustee's own rights, duties or immunities
under this Indenture or otherwise, in which case the Trustee may in its
discretion, but shall not be obligated to, enter into such supplemental
indenture.
It shall not be necessary for the consent of the Securityholders under
this Section to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.
Promptly after the execution by the Issuer and the Trustee of any
supplemental indenture pursuant to the provisions of this Section, the Issuer
shall mail a notice thereof by first-class mail to the holders of Securities at
their addresses as they shall appear on the registry books of the Issuer,
setting forth in general terms the substance of such supplemental indenture.
Any failure of the Issuer to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such supplemental
indenture.
Section 7.3 EFFECT OF SUPPLEMENTAL INDENTURE. Upon the execution of
any supplemental indenture pursuant to the provisions hereof, this Indenture
shall be and be deemed to be modified and amended in accordance therewith and
the respective rights, limitations of rights, obligations, duties and immunities
under this Indenture of the Trustee, the Issuer and the holders of Securities
shall thereafter be determined, exercised and enforced hereunder subject in all
respects to such modifications and amendments, and all the terms and conditions
of any such supplemental indenture shall be and be deemed to be part of the
terms and conditions of this Indenture for any and all purposes.
Section 7.4 DOCUMENTS TO BE GIVEN TO TRUSTEE. The Trustee, subject
to the provisions of Sections 5.1 and 5.2 hereof, may receive an Officers'
Certificate and an Opinion of Counsel as conclusive evidence that any such
supplemental indenture complies with the applicable provisions of this
Indenture.
Section 7.5 NOTATION ON SECURITIES IN RESPECT OF SUPPLEMENTAL
INDENTURES. Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to the provisions of this Article may bear a
notation in form approved
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by the Trustee as to any matter provided for by such supplemental indenture
or as to any action taken at any such meeting. If the Issuer or the Trustee
shall so determine, new Securities so modified as to conform, in the opinion
of the Trustee and the Board of Directors, to any modification of this
Indenture contained in any such supplemental indenture may be prepared by the
Issuer, authenticated by the Trustee and delivered in exchange for the
Securities then Outstanding.
ARTICLE 8
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
Section 8.1 COVENANT NOT TO MERGE, CONSOLIDATE, SELL OR CONVEY
PROPERTY EXCEPT UNDER CERTAIN CONDITIONS. The Issuer covenants that it will not
merge or consolidate with any corporation, partnership or other entity and will
not sell, lease or convey all or substantially all its assets to any entity,
unless the Issuer shall be the surviving entity, or the successor entity that
acquires all or substantially all of the assets of the Issuer shall be a
corporation, partnership or limited liability company or trust organized under
the laws of the United States or a State therein or the District of Columbia and
shall expressly assume by supplemental indenture all obligations of the Issuer
under this Indenture and the Securities, and immediately after giving effect to
such merger, consolidation, sale, lease or conveyance, no Event of Default, and
no event which, after notice or lapse of time or both, would become an Event of
Default, shall have happened and be continuing.
Section 8.2 SUCCESSOR ENTITY SUBSTITUTED. In case of any such
consolidation, merger, sale, lease or conveyance, and following such an
assumption by the successor entity, such successor entity shall succeed to and
be substituted for the Issuer, with the same effect as if it had bene named
herein.
Such successor entity may cause to be signed, and may issue either in
its own name or in the name of the Issuer prior to such succession any or all of
the Securities issuable hereunder which theretofore shall not have been signed
by the Issuer and delivered to the Trustee; and, upon the order of such
successor entity, instead of the Issuer, and subject to all the terms,
conditions and limitations in this Indenture prescribed, the Trustee shall
authenticate and shall deliver any Securities which previously shall have been
signed and delivered by the officers of the Issuer to the Trustee for
authentication, and any Securities which such successor entity thereafter shall
cause to be signed and delivered to the Trustee for that purpose. All of the
Securities so issued shall in all respects have the same legal rank and benefit
under this Indenture as the Securities theretofore or thereafter issued in
accordance with the terms of this Indenture as though all such Securities had
been issued at the date of the execution hereof.
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In case of any such consolidation, merger, sale, lease or conveyance
such changes in phraseology and form (but not in substance) may be made in the
Securities thereafter to be issued as may be appropriate.
In the event any such sale or conveyance (other than a conveyance by
way of lease) the Issuer or any successor entity which shall theretofore have
become such in the manner described in this Article shall be discharged from all
obligations and covenants under this Indenture and the Securities and may be
liquidated and dissolved.
Section 8.3 OPINION OF COUNSEL TO TRUSTEE. The Trustee, subject to
the provisions of Sections 5.1 and 5.2 hereof, may receive an Opinion of Counsel
as conclusive evidence that any such consolidation, merger, sale, lease or
conveyance, and any such assumption, and any such liquidation or dissolution,
complies with the applicable provisions of this Indenture.
Section 8.4 SUBSIDIARY AS SUCCESSOR. In the event that a
subsidiary of the Issuer is or becomes the holder of all or substantially all
of the assets of the Issuer, then such subsidiary shall expressly assume by
supplemental indenture all obligations of the Issuer under this Indenture and
the Securities. Notwithstanding the assumption of the Issuer's obligations by
a subsidiary of the Issuer, the Issuer will remain fully obligated under this
Indenture and the Securities.
ARTICLE 9
SATISFACTION AND DISCHARGE OF INDENTURE;
UNCLAIMED MONEYS
Section 9.1 SATISFACTION AND DISCHARGE OF INDENTURE. If at any time
(a) the Issuer shall have delivered to the Trustee for cancellation all
Securities theretofore authenticated (other than any Securities which shall have
been destroyed, lost or stolen and which shall have been replaced or paid as
provided in Section 2.7 hereof) and Securities for whose payment money has
theretofore been deposited in trust with the Trustee or a paying agent and
repaid pursuant to Section 9.4 hereof or (b)(i) all such Securities not
theretofore delivered to the Trustee for cancellation shall have become due and
payable, or are by their terms to become due and payable within one year or are
to be called for redemption within one year under arrangements reasonably
satisfactory to the Trustee for the giving of notice of redemption, and (ii) the
Issuer shall have irrevocably deposited or caused to be deposited with the
Trustee as trust funds the entire amount in cash (other than moneys repaid by
the Trustee or any Paying Agent to the Issuer in accordance with Section 9.4
hereof) or direct obligations of the United States of America backed by its full
faith and credit, maturing as to Principal and interest in such amounts and at
such times as in the written opinion of a firm of nationally recognized
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independent public accountants delivered to the Trustee will insure the
availability of cash sufficient to pay at maturity or upon redemption all
such Securities not theretofore delivered to the Trustee for cancellation,
including Principal and interest due or to become due to such date of
maturity or redemption as the case may be, and if, in any such case, the
Issuer shall also pay or cause to be paid all other sums payable hereunder by
the Issuer, then this Indenture shall cease to be of further effect (except
as to (i) rights of registration of transfer, conversion and exchange, and
the Issuer's right to optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Securities, (iii) rights of
holders to receive payments of Principal thereof and interest thereon upon
the original stated due dates therefor (but not upon acceleration), (iv) the
rights, obligations and immunities of the Trustee hereunder and (v) the
rights of the Securityholders as beneficiaries hereof with respect to the
property so deposited with the Trustee payable to all or any of them), and
the Trustee, on demand of the Issuer accompanied by an Officers' Certificate
and an Opinion of Counsel and at the cost and expense of the Issuer, shall
execute proper instruments acknowledging such satisfaction of and discharging
this Indenture, provided that the rights of holders of the Securities to
receive amounts in respect of Principal of and interest on the Securities
held by them shall not be delayed longer than required by then-applicable
mandatory rules or policies of any securities exchange upon which the
Securities are listed.
The Issuer agrees to reimburse the Trustee for any costs or expenses
thereafter reasonably and properly incurred and to compensate the Trustee for
any services thereafter reasonably and properly rendered by the Trustee in
connection with this Indenture or the Securities.
Section 9.2 APPLICATION BY TRUSTEE OF FUNDS DEPOSITED FOR PAYMENT OF
SECURITIES. Subject to Section 9.4 hereof, all moneys deposited with the
Trustee pursuant to Section 9.1 hereof shall be held in trust and applied by it
to the payment, either directly or through any paying agent (including the
Issuer acting as its own paying agent), to the holders of the particular
Securities for the payment or redemption for which such moneys have been
deposited with the Trustee, of all sums due and to become due thereon for
Principal and interest, but such money need not be segregated from other funds
except to the extent required by law. Moneys held in trust pursuant to Section
9.1 hereof shall not be subject to the claims of holders of Senior Indebtedness
under Article Twelve.
Section 9.3 REPAYMENT OF MONEYS HELD BY PAYING AGENT. In connection
with the satisfaction and discharge of this Indenture all moneys then held by
any Paying Agent under the provisions of this Indenture shall, upon demand of
the Issuer, be repaid to it or paid to the Trustee and thereupon such Paying
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Agent shall be released from all further liability with respect to such moneys.
Section 9.4 RETURN OF MONEYS HELD BY TRUSTEE AND PAYING AGENT
UNCLAIMED FOR TWO YEARS. Any moneys deposited with or paid to the Trustee or
any Paying Agent for the payment of the Principal of, interest on, or
payments in respect of redemptions of any Security and not applied but
remaining unclaimed for two years after the date upon which such Principal,
interest or redemption payment shall have become due and payable, shall,
upon the written request of the Issuer and unless otherwise required by
mandatory provisions of applicable escheat or abandoned or unclaimed property
law, be repaid to the Issuer by the Trustee or such Paying Agent, and the
holder of such Security shall, unless otherwise required by mandatory
provisions of applicable escheat or abandoned or unclaimed property laws,
thereafter look only to the Issuer for any payment which such holder may be
entitled to collect, and all liability of the Trustee or any paying agent
with respect to such moneys shall thereupon cease.
ARTICLE 10
MISCELLANEOUS PROVISIONS
Section 10.1 INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS OF
ISSUER AND OTHERS EXEMPT FROM INDIVIDUAL LIABILITY. No recourse under or upon
any obligations, covenant or agreement contained in this Indenture, or in any
Security, or because of any indebtedness evidenced thereby, shall be had against
any incorporator, as such, or against any past, present or future stockholder,
officer, director, employee, manager, agent or Affiliate, as such, of the Issuer
or of any successor, either directly or through the Issuer or any successor,
under any rule of law, statute or constitutional provision or by the enforcement
of any assessment or by any legal or equitable proceeding or otherwise, all such
liability being expressly waived and released by the acceptance of the
Securities by the holders thereof and as part of the consideration for the issue
of the Securities.
Section 10.2 PROVISIONS OF INDENTURE FOR THE SOLE BENEFIT OF PARTIES
AND SECURITYHOLDERS. Nothing in this Indenture or in the Securities, expressed
or implied, shall give or be construed to give to any person, firm or
corporation, other than the parties hereto and their successors and the holders
of Senior Indebtedness and the holders of the Securities, any legal or equitable
right, remedy or claim under this Indenture or under any covenant or provision
herein contained, all such covenants and provisions being for the sole benefit
of the parties hereto and their successors and the holders of Senior
Indebtedness and of the holders of the Securities.
Section 10.3 SUCCESSORS AND ASSIGNS OF ISSUER BOUND BY INDENTURE.
All the covenants, stipulations, promises and
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agreements in this Indenture contained by or in behalf of the Issuer shall
bind its successors and assigns, whether so expressed or not.
Section 10.4 NOTICES AND DEMANDS ON ISSUER, TRUSTEE AND
SECURITYHOLDERS. Any notice or demand which by any provision of this Indenture
is required or permitted to be given or served by the Trustee or by the holders
of Securities to or on the Issuer may be given or served by being deposited
postage prepaid, first-class mail or a national next-day delivery service
(except as otherwise specifically provided herein) addressed (until another
address of the Issuer is filed by the Issuer with the Trustee) to Alliance
Gaming Corporation, 4380 Boulder Highway, Las Vegas, Nevada 89121. Any notice,
direction, request or demand by the Issuer or any Securityholder to or upon the
Trustee shall be deemed to have been sufficiently given or made, for all
purposes, if in writing and given or made at the Corporate Trust Office.
Where this Indenture provides for notice to holders, such notice shall
be sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed, first-class postage prepaid, to each holder entitled thereto, at his
last address as it appears in the Security register. In any case where notice
to holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular holder shall affect the
sufficiency of such notice with respect to other holders. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by
holders shall be filed with the Trustee, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.
In case, by reason of the suspension of or irregularities in regular
mail service, it shall be impracticable to mail notice to the Issuer and
Securityholders when such notice is required to be given pursuant to any
provision of this Indenture, then any manner of giving such notice as shall be
satisfactory to the Trustee shall be deemed to be a sufficient giving of such
notice.
Section 10.5 OFFICERS' CERTIFICATES AND OPINIONS OF COUNSEL;
STATEMENTS TO BE CONTAINED THEREIN. Upon any application or demand by the
Issuer to the Trustee to take any action under any of the provisions of this
Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate
stating that all conditions precedent provided for in this Indenture relating to
the proposed action have been complied with and an Opinion of Counsel stating
that in the opinion of such counsel all such conditions precedent have been
complied with, except that in the case of any such application or demand as to
which the furnishing of such documents is specifically required by any
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provision of this Indenture relating to such particular application or
demand, no additional certificate or opinion need be furnished.
Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or covenant
provided for in this Indenture shall include (a) a statement that the person
making such certificate or opinion has read such covenant or condition, (b) a
brief statement as to the nature and scope of the examination or investigation
upon which the statements or opinions contained in such certificate or opinion
are based, (c) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with and (d) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
Any certificate, statement or opinion of an officer of the Issuer may
be based, insofar as it relates to legal matters, upon a certificate or opinion
of or representations by counsel, unless such officer knows that the certificate
or opinion or representations with respect to the matters upon which his
certificate, statement or opinion may be based as aforesaid are erroneous, or in
the exercise of reasonable care should know that the same are erroneous. Any
certificate, statement or opinion of counsel may be based, insofar as it relates
to factual matters information with respect to which is in the possession of the
Issuer, upon the certificate, statement or opinion of or representations by an
officer or officers of the Issuer, unless such counsel knows that the
certificate, statement or opinion or representations with respect to the matters
upon which his certificate, statement or opinion may be based as aforesaid are
erroneous, or in the exercise of reasonable care should know that the same are
erroneous.
Any certificate, statement or opinion of an officer of the Issuer or
of counsel may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of or representations by an accountant or firm of
accountants in the employ of the Issuer, unless such officer or counsel, as the
case may be, knows that the certificate or opinion or representations with
respect to the accounting matters upon which his certificate, statement or
opinion may be based as aforesaid are erroneous, or in the exercise of
reasonable care should know that the same are erroneous.
Any certificate or opinion of any independent firm of public
accountants filed with the Trustee shall contain a statement that such firm is
independent.
Section 10.6 PAYMENTS DUE ON SATURDAYS, SUNDAYS AND HOLIDAYS. If the
date of maturity of interest on or Principal of
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the Securities or the date fixed for redemption of any Security shall not
be a Business Day, then payment of interest or Principal need not be made on
such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the date of maturity or the date fixed for
redemption, and no interest shall accrue for the period after such date.
Section 10.7 CONFLICT OF ANY PROVISION OF INDENTURE WITH TRUST
INDENTURE ACT OF 1939. If and to the extent that any provision of this
Indenture limits, qualifies or conflicts with another provision included in this
Indenture by operation of Sections 310 to 317, inclusive, of the Trust Indenture
Act of 1939, which Sections are incorporated herein by reference and made a part
hereof (an "incorporated provision"), such incorporated provision shall control.
Section 10.8 GOVERNING LAW. This Indenture and each Security shall
be deemed to be a contract under, and shall be governed by and construed under
the laws of the State of New York, except as otherwise required by mandatory
provisions of Nevada law, including without limitation, the Nevada Gaming
Control Act and the regulations promulgated thereunder.
Section 10.9 COUNTERPARTS. This Indenture may be executed in any
number of counterparts, each of which shall be an original; but such
counterparts shall together constitute but one and the same instrument.
Section 10.10 EFFECT OF HEADINGS. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
ARTICLE 11
REDEMPTION OF SECURITIES
Section 11.1 RIGHT OF OPTIONAL REDEMPTION; PRICES.
(a) The Issuer at its option may, at any time, redeem all, or from
time to time any part of, the Securities upon payment of the optional
redemption prices set forth in the form of Security attached as Exhibit A
hereto, together with accrued but unpaid interest to the date fixed for
redemption to the extent not theretofore paid, if any; provided, that until
September 15, 1996 the Securities cannot be so redeemed at the option of the
Issuer unless the last sale price of the Common Stock as reported on the
Composite Tape for New York Stock Exchange Listed Stocks (or if not listed or
admitted to trading on such Exchange, then on the principal national
securities exchange on which the Common Stock is listed or admitted to
trading, or, if not listed or admitted to trading on any national securities
exchange, on the NASDAQ/NMS or a similar organization if NASDAQ/NMS is no
longer reporting
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information) has equaled or exceed 250% of the then existing Conversion Price
(as defined in Section 13.5 hereof) per share for at least 20 out of any 30
consecutive Trading Days ending within 60 days before the notice of
redemption is first mailed.
(b) Notwithstanding any other provision hereof, if a Holder or
beneficial owner of a Security or any underlying Common Stock or Special Stock
is required by the Nevada Gaming Commission to be found suitable, the Holder or
beneficial owner shall apply for a finding of suitability within 30 days after
the Nevada Gaming Commission's request. The applicant for a finding of
suitability shall pay all costs of the investigation for such finding of
suitability. If a Holder or beneficial owner is required to be found suitable
and is not found suitable by the Nevada Gaming Commission, at the Issuer's
option (i) the Holder or beneficial owner shall, upon request of the Issuer,
dispose of his Securities and underlying Common Stock or Special Stock within 30
days or within that time prescribed by the Nevada Gaming Commission, whichever
is earlier, or (ii) the Issuer may, at its option, redeem the Holder's or
beneficial owner's Securities at the lesser of (x) the principal amount thereof
and (y) the price at which the Securities were acquired by the Holder or
beneficial owner, together with, in either case, accrued interest to the date of
the finding of unsuitability by the Nevada Gaming Commission.
Section 11.2 NOTICE OF REDEMPTION; PARTIAL REDEMPTIONS. Notice of
redemption to the Holders of Securities to be redeemed as a whole or in part
shall be given by mailing notice of such redemption by first class mail, postage
prepaid, at least 20 days and not more than 60 days prior to the date fixed for
redemption to such Holders of Securities at their last addresses as they shall
appear upon the registry books. Any notice which is mailed in the manner herein
provided shall be conclusively presumed to have been duly given, whether or not
the Holder receives the notice. Failure to give notice by mail, or any defect
in the notice to the Holder of any Security designated for redemption as a whole
or in part, shall not affect the validity of the proceedings for the redemption
of any other Security.
The notice of redemption to each such Holder shall identify the
Securities to be redeemed (including CUSIP numbers) and shall specify the
Principal amount of each Security held by such Holder to be redeemed, the
date fixed for redemption, the redemption price, the place or places of
payment, that payment will be made upon presentation and surrender of such
Securities, that interest accrued but unpaid to the date fixed for redemption
will be paid as specified in said notice and that on and after said date
interest thereon or on the portions thereof to be redeemed will cease to
accrue and shall also specify the Conversion Price (as defined in Section
13.5 hereof) then in effect and the date on which the right to convert such
Securities or the portions thereof to be redeemed will expire. In case any
Security is to be redeemed in part only the notice of redemption shall state
the portion of the Principal amount
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thereof to be redeemed and shall state that on and after the date fixed for
redemption, upon surrender of such Security, a new Security or Securities in
Principal amount equal to the unredeemed portion thereof will be issued.
The notice of redemption of Securities to be redeemed at the option of
the Issuer shall be given by the Issuer or, at the Issuer's request, by the
Trustee in the name and at the expense of the Issuer.
At least one Business Day prior to the redemption date specified in
the notice of redemption given as provided in this Section, the Issuer will
deposit with the Trustee or with one or more Paying Agents (or, if the Issuer
is acting as its own Paying Agent, set aside, segregate and hold in trust as
provided in Section 3.4 hereof) an amount of money sufficient to redeem on
the redemption date all the Securities so called for redemption (other than
those theretofore surrendered for conversion into Common Stock or Special
Stock), at the appropriate redemption price, together with accrued but unpaid
interest to the date fixed for redemption. If any Security called for
redemption is converted pursuant hereto, any money deposited with the Trustee
or any Paying Agent or so segregated and held in trust for the redemption of
such Security shall be paid to the Issuer upon the Issuer's request, or, if
then held by the Issuer, shall be discharged from such trust. The Issuer will
deliver to the Trustee no less than 10 Business Days prior to the mailing of
notices of redemption as required by this Section 11.2 an Officers'
Certificate stating the aggregate Principal amount of Securities to be
redeemed, as well as all other information required to be in such notices.
If less than all the Securities are to be redeemed, the Trustee shall
select, by lot, pro rata or in such manner as the Trustee shall deem fair and
equitable, Securities to be redeemed in whole or in part. Securities may be
redeemed in part in integral multiples of $1,000 only. The Trustee shall
promptly notify the Issuer in writing of the Securities selected for redemption
and, in the case of any Securities selected for partial redemption, the
Principal amount thereof to be redeemed. For all purposes of this Indenture,
unless the context otherwise requires, all provisions relating to the redemption
of Securities shall relate, in the case of any Security redeemed or to be
redeemed only in part, to the portion of the Principal amount of such Security
which has been or is to be redeemed. If any Security selected for partial
redemption is surrendered for conversion after such selection, the converted
portion of such Security shall be deemed (so far as may be) to be the portion
selected for redemption. Upon any redemption of less than all the Securities,
the Issuer and the Trustee may treat as Outstanding Securities surrendered for
conversion during the period of 15 days next preceding the mailing of a notice
of redemption, and need not treat as Outstanding any Security authenticated and
delivered during such period in exchange for
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the unconverted portion of any Security converted in part during such period.
Section 11.3 PAYMENT OF SECURITIES CALLED FOR REDEMPTION. If notice
of redemption has been given as above provided, the Securities or portions of
Securities specified in such notice shall become due and payable on the date and
at the place stated in such notice at the applicable redemption price, together
with interest accrued but unpaid to the date fixed for redemption, and on and
after said date (unless the Issuer shall default in the payment of such
Securities at the redemption price, together with interest accrued but unpaid to
said date) interest on the Securities or portions of Securities so called for
redemption shall cease to accrue and, except as provided in Sections 5.5 and 9.4
hereof, such Securities shall cease from and after the date fixed for redemption
to be convertible into Common Stock or Special Stock and to be entitled to any
benefit or security under this Indenture, and the holders thereof shall have no
right in respect of such Securities except the right to receive the redemption
price thereof and unpaid interest to the date fixed for redemption. On
presentation and surrender of such Securities at a place of payment specified in
said notice, said Securities or the specified portions thereof shall be paid and
redeemed by the Issuer at the applicable redemption price, together with
interest accrued thereon to the date fixed for redemption; PROVIDED that any
semi-annual payment of interest becoming due on the date fixed for redemption
shall be payable to the holders of such Securities registered as such on the
relevant record date subject to the terms and provisions of Section 2.4 hereof.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the Principal shall, until paid or duly
provided for, bear interest from the date fixed for redemption at the rate borne
by the Security and such Security shall remain convertible into Common Stock or
Special Stock until the Principal of such Security shall have been paid or duly
provided for.
Upon presentation of any Security redeemed in part only, the Issuer
shall execute and the Trustee shall authenticate and deliver to or on the order
of the holder thereof, at the expense of the Issuer, a new Security or
Securities, of authorized denominations, in Principal amount equal to the
unredeemed portion of the Security so presented.
Section 11.4 EXCLUSION OF CERTAIN SECURITIES FROM ELIGIBILITY FOR
SELECTION FOR REDEMPTION. Securities shall be excluded from eligibility for
selection for redemption if they are identified by registration and certificate
number in a written statement signed by an authorized officer of the Issuer and
delivered to the Trustee at least 40 days prior to the last date on which notice
of redemption may be given as being owned of record and beneficially by, and not
pledged or hypothecated by
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either (a) the Issuer or (b) an entity specifically identified in such
written statement as an Affiliate of the Issuer.
ARTICLE 12
SUBORDINATION OF SECURITIES
Section 12.1 AGREEMENT TO SUBORDINATE. The Issuer covenants and
agrees, and each holder of Securities issued hereunder by his acceptance
thereof likewise covenants and agrees, that all Securities shall be issued
subject to the provisions of this Article 12; and each person holding any
Security, whether upon original issue or upon transfer, assignment or
exchange thereof accepts and agrees that the Principal of, interest on and
payments in respect of redemption at the option of Holders of all Securities
issued hereunder shall, to the extent and in the manner herein set forth, be
subordinated and subject in right of payment to the prior payment in full of
all Senior Indebtedness.
Section 12.2 PAYMENTS TO SECURITYHOLDERS. No payment on account
of Principal of, interest on and redemptions at the option of Holders of the
Securities shall be made if at the time of such payment or immediately after
giving effect thereto there shall have occurred and be continuing a default
in any payment with respect to any Senior Indebtedness permitting the holders
thereof to accelerate the maturity thereof or a default in any payment due
thereon at maturity or any judicial proceeding shall be pending with respect
to any such default and such event of default shall not have been cured or
waived or shall not have ceased to exist. In addition, upon the occurrence
of any other default with respect to any Senior Indebtedness permitting any
holder of or agent for a syndicate of lenders which syndicate in the
aggregate holds in excess of $5 million of Senior Indebtedness to accelerate
the maturity thereof, and upon receipt by the Issuer and the Trustee of
written notice of such occurrence (a "Blockage Notice") by any of the
foregoing Persons, no payment on account of Principal of, interest on and
redemptions at the option of Holders of the Securities in cash, property or
securities shall be made by the Issuer to the Trustee or any holder of the
Securities during a period (the "Payment Blockage Period") commencing on the
date of receipt of a Blockage Notice by the Issuer and ending 179 days
thereafter (unless such Payment Blockage Period shall be earlier terminated
by written notice to the Trustee), or such earlier date, if any, on which the
Senior Indebtedness to which such event of default relates is paid in full or
such event of default is waived in writing by the holders or owners of such
Senior Indebtedness or otherwise cured. Not more than one Payment Blockage
Period may be commenced with respect to the Securities during any period of
360 consecutive days.
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Upon (i) any acceleration of the Principal amount due on the
Securities or (ii) any payment or distribution of assets of the Issuer of any
kind or character, whether in cash, property or securities, to creditors upon
any dissolution, winding-up, assignment for the benefit of creditors,
marshalling of assets and liabilities or total or partial liquidation or
arrangement or reorganization of the Issuer, whether voluntary or involuntary
or in bankruptcy, insolvency, receivership or other proceedings, all amounts
due or to become due upon all Senior Indebtedness shall first be paid in full
in cash, or payment thereof provided for in accordance with its terms, before
any payment is made on account of the Principal of, interest on or
redemptions at the option of the Holders of the Securities, and upon any such
dissolution, winding-up, assignment for the benefit of creditors, marshalling
of assets and liabilities or liquidation, arrangement or reorganization, any
payment or distribution of assets of the Issuer of any kind or character,
whether in cash, property or securities, to which the holders of the
Securities or the Trustee under this Indenture would be entitled, except for
the provisions hereof, shall be paid by the Issuer or by any receiver,
trustee in bankruptcy, liquidating trustee, agent or other person making such
payment or distribution, or by the Holders of the Securities or by the
Trustee under this Indenture if received by them or it, directly to the
holders of Senior Indebtedness (pro rata to such holders on the basis of the
respective amounts of Senior Indebtedness held by such holders) or their
respective representatives, or to the trustee or trustees under any indenture
pursuant to which any instruments evidencing any of such Senior Indebtedness
may have been issued, as their respective interests may appear, to the extent
necessary to pay all Senior Indebtedness in full in cash (including, without
limitation, except to the extent, if any, prohibited by mandatory provisions
of law, post-petition interest, in any such proceedings), after giving effect
to any concurrent payment or distribution to or for the holders of Senior
Indebtedness, before any payment or distribution is made to the holders of
the indebtedness evidenced by the Securities or to the Trustee under this
Indenture.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Issuer of any kind or character, whether in cash,
property or securities, prohibited by the foregoing, shall be received by the
Trustee under this Indenture or by any Holder of the Securities before all
Senior Indebtedness is paid in full or provision is made for such payment in
accordance with its terms, such payment or distribution shall be held in trust
for the benefit of and shall be paid over or delivered to the holders of such
Senior Indebtedness or their respective representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any of
such Senior Indebtedness may have been issued, as their respective interests may
appear, for application to the payment of all Senior Indebtedness remaining
unpaid until all such Senior Indebtedness shall have been paid in
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full in accordance with its terms, after giving effect to any concurrent
payment or distribution to or for the holders of such Senior Indebtedness.
For purposes of this Article 12, the words, "cash, property or
securities" shall not be deemed to include shares of stock of the Issuer as
reorganized or readjusted, or securities of the Issuer or any other corporation
provided for by a plan of arrangement, reorganization or readjustment, the
payment of which is subordinated (to a greater extent than provided in this
Article with respect to the Securities) to the payment of all Senior
Indebtedness which may at the time be outstanding; provided, that (i) the Senior
Indebtedness is assumed by the new corporation, if any, resulting from any such
arrangement, reorganization or readjustment, and (ii) the rights of the holders
of the Senior Indebtedness are not, without the consent of such holders, altered
by such arrangement, reorganization or readjustment. The consolidation of the
Issuer with, or the merger of the Issuer into, another corporation or the
liquidation or dissolution of the Issuer following the conveyance or transfer of
all or substantially all of its assets, to another corporation upon the terms
and conditions provided in Article 8 hereof shall not be deemed a dissolution,
winding-up, liquidation or reorganization for the purposes of this Section 12.2
if such other corporation shall, as a part of such consolidation, merger,
conveyance or transfer, comply with the conditions stated in Article 8 hereof.
Nothing in this Section shall apply to claims of, or payments to, the Trustee
under or pursuant to Section 5.6 hereof, except as provided therein. This
Section 12.2 shall be subject to the further provisions of Section 12.5 hereof.
Section 12.3 SUBROGATION OF SECURITIES. Subject to the payment in
full of all Senior Indebtedness, the Holders of the Securities shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of cash, property, securities of the Issuer
applicable to the Senior Indebtedness until the Principal of and interest on
and redemption prices payable at the option of the Holders of the Securities
shall be paid in full; and, for the purposes of such subrogation, no payments
or distributions to the holders of the Senior Indebtedness of any cash,
property or securities to which the Holders of the Securities or the Trustee
on their behalf would be entitled except for the provisions of this Article
12, and no payment pursuant to the provisions of this Article 12 to the
holders of Senior Indebtedness by Holders of the Securities or the Trustee on
their behalf shall, as between the Issuer, its creditors other than holders
of Senior Indebtedness and the Holders of the Securities, be deemed to be a
payment by the Issuer to or on account of the Senior Indebtedness, and no
payments or distributions of cash, property or securities to or for the
benefit of the Securityholders pursuant to the subrogation provision of this
Article 12, which would otherwise have been paid to the holders of Senior
Indebtedness shall be deemed to be
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a payment by the Issuer to or for the account of the Securities. It is
understood that the provisions of this Article 12 are and are intended solely
for the purpose of defining the relative rights of the Holders of the
Securities, on the one hand, and the holders of the Senior Indebtedness, on
the other hand.
Nothing contained in this Article 12 or elsewhere in this Indenture
or in the Securities is intended to or shall impair, as between the Issuer,
its creditors other than the holders of Senior Indebtedness, and the Holders
of the Securities, the obligation of the Issuer, which is absolute and
unconditional, to pay to the Holders of the Securities the Principal of,
interest on and redemption prices payable at the option of the Holders of
the Securities as and when the same shall become due and payable in
accordance with their terms, or is intended to or shall affect the relative
rights of the holders of the Securities and creditors of the Issuer other
than the holders of the Senior Indebtedness, nor shall anything herein or
therein prevent the Holder of any Security or the Trustee on his behalf from
exercising all remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, under this Article 12 of
the holders of Senior Indebtedness in respect of cash, property or securities
of the Issuer received upon the exercise of any such remedy.
Upon any payment or distribution of assets of the Issuer referred to
in this Article 12, the Trustee, subject to the provisions of Sections 5.1 and
5.2 hereof, and the Holders of the Securities shall be entitled to rely upon any
order or decree made by any court of competent jurisdiction in which such
bankruptcy, dissolution, winding-up, liquidation, arrangement or reorganization
proceedings are pending, or a certificate of the receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, delivered to the Trustee or to the Holders of the Securities, for
the purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other indebtedness of
the Issuer, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article 12.
Section 12.4 AUTHORIZATION BY SECURITYHOLDERS. Each Holder of a
Security by his acceptance thereof authorizes the Trustee in his behalf to take
such action as may be necessary or appropriate to effectuate the subordination
provided in this Article 12 and appoints the Trustee his, her or its attorney-
in-fact for any and all such purposes.
Section 12.5 NOTICE TO TRUSTEE. The Issuer shall give prompt written
notice to the Trustee and to any Paying Agent of any fact known to the Issuer
which would prohibit the making of any payment of moneys to or by the Trustee or
any Paying Agent in respect of the Securities pursuant to the provisions of this
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Article 12. Regardless of anything to the contrary contained in this Article 12
or elsewhere in this Indenture, the Trustee shall not be charged with knowledge
of the existence of any Senior Indebtedness or of any default or event of
default with respect to any Senior Indebtedness or of any other facts which
would prohibit the making of any payment of moneys to or by the Trustee, unless
and until the Trustee shall have received notice in writing at its Corporate
Trust Office to that effect signed by an officer of the Issuer, or by a holder
or agent of a holder of Senior Indebtedness who shall have been certified by the
Issuer or otherwise established to the reasonable satisfaction of the Trustee to
be such holder or agent, or by the trustee under any indenture pursuant to which
Senior Indebtedness shall be outstanding, and, prior to the receipt of any such
written notice, the Trustee shall, subject to Sections 5.1 and 5.2 hereof, be
entitled to assume that no such facts exist; provided that if on a date at least
one Business Day prior to the date upon which by the terms hereof any such
moneys shall become payable for any purpose (including, without limitation, the
payment of the Principal of, or interest on, any Security) the Trustee shall not
have received with respect to such moneys the notice provided for in this
Section, then, regardless of anything herein to the contrary, the Trustee shall
have full power and authority to receive such moneys and to apply the same to
the purpose for which they were received, and shall not be affected by any
notice to the contrary which may be received by it on or after such prior date.
Regardless of anything to the contrary herein, nothing shall prevent
(a) any payment by the Issuer or the Trustee to the Securityholders of amounts
in connection with a redemption of Securities if (i) notice of such redemption
has been given pursuant to Article 11 prior to the receipt by the Trustee of
written notice as aforesaid, and (ii) such notice of redemption is given not
earlier than 60 days before the redemption date, or (b) any payment by the
Trustee to the Securityholders of amounts deposited with it pursuant to Section
9.1 hereof.
The Trustee shall be entitled to rely on the delivery to it of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a trustee on behalf of such holder) to establish that such
notice has been given by a holder of Senior Indebtedness or a trustee on behalf
of any such holder. In the event that the Trustee determines in good faith that
further evidence is required with respect to the right of any Person as a holder
of Senior Indebtedness to participate in any payment or distribution pursuant to
this Article 12, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such Person, the extent to which such person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such Person under this Article 12, and if such evidence is not furnished the
Trustee may
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defer any payment to such Person pending judicial determination as to the right
of such Person to receive such payment.
Section 12.6 TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS. The Trustee
and any agent of the Issuer or the Trustee shall be entitled to all the rights
set forth in this Article 12 with respect to any Senior Indebtedness which may
at any time be held by it in its individual or any other capacity to the same
extent as any other holder of Senior Indebtedness and nothing in this Indenture
shall deprive the Trustee, or any such agent, of any of its rights as such
holder. Nothing in this Article 12 shall apply to claims of, or payments to,
the Trustee under or pursuant to Section 5.6 hereof.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if
the Trustee shall in good faith without gross negligence pay over or distribute
to Holders of Securities or to the Issuer or to any other person cash, property
or securities to which any holders of Senior Indebtedness shall be entitled by
virtue of this Article 12 or otherwise. With respect to the holders of Senior
Indebtedness, the Trustee undertakes to perform or to observe only such of
its covenants and obligations as are specifically set forth in this Article
12, and no implied covenants or obligations with respect to the holders of
Senior Indebtedness shall be read into this Indenture against the Trustee.
Section 12.7 NO IMPAIRMENT OF SUBORDINATION. No right of any present
or future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Issuer or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Issuer with the
terms, provisions and covenants of this Indenture, regardless of any knowledge
thereof which any such holder may have or otherwise be charged with. No
modification, amendment, extension or renewal of any Senior Indebtedness shall
impair the rights of the holders of such Senior Indebtedness under the
subordination provisions of this Article 12.
Section 12.8. SECURITIES SENIOR TO OLD CONVERTIBLE DEBENTURES. The
Securities shall be superior in right of payment to the Old Convertible
Debentures and to any other Indebtedness which is pari passu with, or
subordinated to, the Old Convertible Debentures.
ARTICLE 13
CONVERSION OF SECURITIES
Section 13.1 CONVERSION PRIVILEGE; MANDATORY CONVERSION UPON
CONSUMMATION OF MERGER.
(a) Subject to and upon compliance with the provisions of this
Article 13 and subject to Sections 14.2(b) and (d) hereof, at the option of the
Holder thereof, any Security may, at any time until and including, but not after
the close of business on the second Business Day prior to September 15, 2003 or
in case such Security or some portion thereof shall be called for redemption
prior to such date, then, with respect to such
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Security or portion thereof as is so called, until and including, but (if no
default is made in making due provision for the payment of the redemption
price) not after, the close of business on, the fifth Business Day prior to
the date fixed for redemption, be converted, in whole, or in part in integral
multiples of $1,000 principal amount, into fully paid and non-assessable
shares of Common Stock issuable upon conversion of the Securities, at the
Conversion Price (as defined in Section 13.5 hereof) in effect at the Date of
Conversion (as hereinafter defined).
(b) In the event that prior to ____________, 1996 the Merger
becomes effective under Section 251 of the Delaware General Corporation Law,
then at the time and date of such effectiveness (the "Effective Time of the
Merger"), each Security then outstanding shall be automatically, and without
any further action on the part of the Issuer, the Trustee or any Securityholder,
converted into fully paid and non-assessable shares of Common Stock, at the
Special Conversion Price (as defined in Section 13.5 hereof) in effect at the
Effective Time of the Merger; provided, however, that, if so specified on the
face of any Security, then, in lieu of such shares of Common Stock, such
Security shall be automatically converted into fully paid and non-assessable
shares of Special Stock, at the conversion rate of ten shares of Special Stock
for each $1,000 principal amount of Securities held by such Securityholders
immediately prior to the Effective Time of the Merger. From and after the
Effective Time of the Merger, all of the Securities shall cease to be
convertible into Common Stock pursuant to Section 13.1(a) hereof, and the
holders thereof shall have no right in respect of the Securities (including
without limitation the right to receive interest and Principal except the right
to receive shares of Common Stock or Special Stock in accordance with this
Section 13.1(b) and the procedures set forth in Section 13.2(b) hereof.
Section 13.2 EXERCISE OF CONVERSION PRIVILEGE.
(a) In order to exercise the conversion privilege, the holder of any
Security to be converted pursuant to Section 13.1(a) hereof shall surrender such
Security to the Issuer at any time during usual business hours at its office or
agency maintained for the purpose as provided in this Indenture, accompanied by
a fully executed written optional conversion notice, in substantially the form
set forth on the reverse of the Security, that the holder elects to convert such
Security or a stated portion thereof constituting an integral multiple of $1,000
principal amount, and, if such Security is surrendered for conversion during the
period between the close of business on March 1 or September 1 in any year and
the opening of business on the following March 15 or September 15 and has not
been called for redemption on a redemption date within such period accompanied
also by payment of an amount equal to the interest
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payable on such March 15 or September 15 on the principal amount of the
Security being surrendered for conversion. Such notice shall also state the
name or names (with address) in which the certificate or certificates for
shares of Common Stock shall be issued. Securities surrendered for
conversion pursuant to Section 13.1(a) hereof shall (if so required by the
Issuer or the Trustee) be duly endorsed by, or be accompanied by a written
instrument or instruments of transfer in form satisfactory to the Trustee
duly executed by, the holder or his attorney duly authorized in writing. As
promptly as practicable after the receipt of such notice and the surrender of
such Security as aforesaid, the Issuer shall, subject to the provisions of
Section 13.8 hereof, issue and deliver at such office or agency to such
holder, or on his written order, a certificate or certificates for the number
of full shares of Common Stock issuable on such conversion of Securities
pursuant to Section 13.1(a) hereof in accordance with the provisions of this
Article and cash, as provided in Section 13.3 hereof, in respect of any
fraction of a share of Common Stock otherwise issuable upon such conversion.
Such conversion shall be deemed to have been effected immediately prior to
the close of business on the date (herein called the "Date of Conversion") on
which such notice shall have been received by the Issuer and such Security
shall have been surrendered as aforesaid, and the person or persons in whose
name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become on the
Date of Conversion the holder or holders of record of the shares represented
thereby; PROVIDED, HOWEVER, that any such surrender on any date when the
stock transfer books of the Issuer shall be closed shall constitute the
person or persons in whose name or names the certificate or certificates for
such shares are to be issued as the record holder or holders thereof for all
purposes at the opening of business on the next succeeding day on which such
stock transfer books are open but such conversion shall nevertheless be at
the Conversion Price in effect at the close of business on the date when such
Security shall have been so surrendered with the conversion notice. In the
case of conversion of a portion, but less than all, of a Security pursuant to
Section 13.1(a) hereof, the Issuer shall execute, and the Trustee shall
authenticate and deliver to the holder thereof, at the expense of the Issuer,
a Security or Securities in the aggregate principal amount of the unconverted
portion of the Security surrendered. Except as otherwise expressly provided
in this Indenture, no payment or adjustment shall be made for interest
accrued on any Security (or portion thereof) converted pursuant to Section
13.1(a) hereof or for dividends or distributions on any Common Stock issued
upon any such conversion.
(b) As soon as practicable (but in any case within five Business
Days) after the Effective Time of the Merger, the Issuer shall give written
notice thereof (the "Issuer's Notice") to the Trustee and each holder of
Securities in accordance with Section 10.4 hereof. The Issuer's Notice shall
specify (i) that
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the Merger has become effective, (ii) the time and date of the Effective Time
of the Merger, (iii) that all of the Securities outstanding as of the
Effective Time of the Merger were automatically, and without any further
action on the part of the Issuer, the Trustee or any Securityholder,
converted into (A) fully paid and non-assessable shares of Common Stock at
the Special Conversion Price or (B) or Special Stock at a conversion rate of
ten shares of Special Stock for each $1,000 princpal amount of Securities in
accordance with Section 13.1(b) hereof and (iv) that from and after the
Effective Time of the Merger, all of the Securities ceased to be convertible
into Common Stock pursuant to Section 13.1(a) hereof, and the holders thereof
no longer have any right in respect of the Securities (including without
limitation the right to receive interest and Principal in respect thereof)
except the right to receive shares of Common Stock or Special Stock in
accordance with Section 13.1(b) hereof and the procedures set forth in this
Section 13.2(b). Any Issuer's Notice which is sent in the manner provided in
Section 10.4 hereof shall be conclusively presumed to have been duly given,
whether or not the Trustee or any Holder receives such notice. Failure to
give the Issuer's Notice, or any defect in the Issuer's Notice to the Trustee
or any Holder, shall not in any way affect the validity of the conversion
pursuant to Section 13.1(b).
Following the Effective Time of the Merger, the holder of any
Security may surrender such Security to the Issuer at any time during usual
business hours at its office or agency maintained for the purpose as provided
in this Indenture, accompanied by a fully executed written notice, in
substantially the form set forth on the reverse of the Security, that the
Security is being surrendered for conversion in accordance with Section
13.1(b) hereof. Such notice shall also state the name or names (with
address) in which the certificate or certificates for shares of Common Stock
or Special Stock shall be issued. Securities surrendered for conversion
shall (if so required by the Issuer or the Trustee) be duly endorsed by, or
be accompanied by a written instrument or instruments of transfer in form
satisfactory to the Issuer or the Trustee duly executed by, the holder or his
attorney duly authorized in writing. As promptly as practicable after the
receipt of such notice and the surrender of such Security as aforesaid, the
Issuer shall, subject to the provisions of Section 13.8 hereof, issue and
deliver at such office or agency to such holder, or on his written order, a
certificate or certificates for the number of full shares of Common Stock
and/or
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Special Stock issuable on such conversion of Securities in accordance with
the provisions of this Article and cash, as provided in Section 13.3 hereof,
in respect of any fraction of a share of Common Stock or Special Stock
otherwise issuable upon such conversion. Such conversion shall be deemed to
have been effected at the Effective Time of the Merger, and the person or
persons in whose name or names any certificate or certificates for shares of
Common Stock or Special Stock shall be issuable upon such conversion shall be
deemed to have become at the Effective Time of the Merger the holder or
holders of record of the shares represented thereby; provided, however, that
no holder or holders of Securities shall be entitled to vote, or to receive
any dividends or distributions on, any shares of Common Stock or Special
Stock issuable upon conversion thereof until such time as such Securities are
surrendered for conversion pursuant to this Section 13.2(b). No payment or
adjustment shall be made for interest accrued on any Security converted
pursuant to Section 13.1(b) or for dividends or distributions on any Common
Stock or Special Stock issued upon any such conversion.
Section 13.3 FRACTIONAL INTERESTS. No fractions of shares of
Common Stock or scrip representing fractions of shares of Common Stock shall be
issued upon conversion of Securities. If more than one Security shall be
surrendered for conversion at one time by the same holder, the number of full
shares of Common Stock which shall be issuable upon conversion thereof shall be
computed on the basis of the aggregate Principal amount of the Securities so
surrendered. If any fraction of a share of Common Stock would, except for the
provisions of this Section, be issuable on the conversion of any Security or
Securities, the Issuer shall make payment in lieu thereof in an amount of United
States dollars equal to the value of such fraction computed on the basis of the
last sale price of the Common Stock as reported on the Composite Tape for New
York Exchange Listed Stocks (or if not listed or admitted to trading on such
Exchange, then on the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or, if not listed or admitted to trading
on any national securities exchange, on the NASDAQ/NMS or a similar organization
if NASDAQ/NMS is no longer reporting information) on the last Trading Day
priorto the Date of Conversion or if no such sale takes place on such day, the
last sale price for such day shall be the average of the closing bid and asked
prices regular way on the New York Stock Exchange (or if not listed or admitted
to trading on such Exchange, on the principal national securities exchange on
which the Common Stock is listed or admitted to trading, or if not listed or
admitted to trading on any national securities exchange, the average of the
highest bid and lowest asked prices on NASDAQ/NMS or a similar organization if
NASDAQ/NMS is no longer reporting information) for such day (any such last sale
price being hereinafter referred to as the "Last Sale Price"). If on such
Trading Day the Common Stock is not quoted by any such organization, the fair
value of such Common Stock on suchday, as determined by the Board of Directors,
shall
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be used. Fractional shares of Special Stock (in integral multiples of one
ten-thousandth of a share of Special Stock) shall be issued, if and to the
extent necessary to effectuate any conversion into Special Stock pursuant to
Section 13.1(b) hereof, and no adjustment in cash shall be made for any
fractional shares of Special Stock.
Section 13.4 CONVERSION PRICE. The conversion price per share of
Common Stock issuable upon conversion of the Securities pursuant to Section
13.1(a) hereof shall initially be $8.33. The conversion price per share of
Common Stock issuable upon conversion of the Securities pursuant to Section
13.1(b) hereof shall initially be $5.56.
Section 13.5 ADJUSTMENT OF CONVERSION PRICE AND SPECIAL CONVERSION
PRICE. The conversion price per share of Common Stock issuable upon conversion
of the Securities pursuant to Section 13.1(a) hereof (herein called the
"Conversion Price") and the conversion price per share of Common Stock issuable
upon conversion of the Securities pursuant to Section 13.1(b) hereof (herein
called the "Special Conversion Price") shall be subject to adjustment from time
to time as follows:
(a) In case the Issuer shall (1) pay a dividend or make a
distribution in shares of Common Stock on any class of Capital Stock of the
Issuer, (2) subdivide its outstanding shares of Common Stock into a greater
number of shares or (3) combine its outstanding shares of Common Stock into
a smaller number of shares, the Conversion Price and Special Conversion
Price in effect immediately prior to such action shall be adjusted so that
the holder of any Security thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock which he would
have owned immediately following such action had such Security been
converted immediately prior thereto. An adjustment made pursuant to this
subsection (a) shall become effective immediately, except as provided in
subsection (g) below, after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision or combination.
(b) In case the Issuer shall issue rights or warrants to all holders
of Common Stock entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the current market price per
share (as determined pursuant to subsection (e) below) of the Common Stock
on the record date mentioned below, the Conversion Price and the Special
Conversion Price shall be adjusted to a price, computed to the nearest
cent, so that the same shall equal the price determined by multiplying:
(i) the Conversion Price or the Special Conversion Price,
as the case may be, in effect immediately prior to the date of
issuance of such rights or warrants by a fraction, of which
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(ii) the numerator shall be (A) the number of shares of
Common Stock outstanding on the date of issuance of such rights or
warrants, immediately prior to such issuance, plus (B) the number of
shares which the aggregate offering price of the total number of
shares so offered for subscription or purchase would purchase at such
current market price (determined by multiplying such total number of
shares by the exercise price of such rights or warrants and dividing
the product so obtained by such current market price), and of which
(iii) the denominator shall be (A) the number of shares of
Common Stock outstanding on the date of issuance of such rights or
warrants, immediately prior to such issuance, plus (B) the number of
additional shares of Common Stock which are so offered for
subscription or purchase.
Such adjustment shall become effective immediately, except as provided
in subsection (g) below, after the record date for the determination of holders
entitled to receive such rights or warrants. No adjustment will be made under
this Section 13.5(b) in the event of the issuance or exercise of any warrants
issued by the Issuer to Kirkland, KIC or GSA pursuant to any agreement among
such parties and the Issuer which was entered into prior to the date of this
Indenture.
(c) In case the Issuer or any subsidiary of the Issuer shall
distribute to all holders of Common Stock, any of its assets, evidences of
indebtedness or securities other than Common Stock (other than (x) ordinary
dividends in cash or other property whether or not paid out of retained
earnings of the Issuer or (y) any dividend or distribution referred to in
subsection (a) or (b) above) then in each such case the Conversion Price
and the Special Conversion Price shall be adjusted so that the same shall
equal the price determined by multiplying the Conversion Price or the
Special Conversion Price, as the case may be, in effect immediately prior
to the date of such distribution by a fraction of which the numerator shall
be the current market price per share (determined as provided in subsection
(e) below) of the Common Stock immediately prior to the record date
mentioned below less the then fair market value (as determined by the Board
of Directors, whose determination shall, if made in good faith, be
conclusive evidence of such fair market value) of the portion of the assets
so distributed or of such subscription rights or warrants applicable to one
share of Common Stock, and of which the denominator shall be such current
market price per share of the Common Stock. Such adjustment shall become
effective immediately, except as provided in subsection (g) below, after
the record date for the determination of stockholders entitled to receive
such distribution. Notwithstanding the
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foregoing, 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 Conversion Price and the Special
Conversion Price shall not be adjusted pursuant to this subsection (c)
until such time as the cumulative amount of all such distributions
exceeds $0.10 per share.
(d) Unless provision is made, to the Trustee's reasonable
satisfaction, for the Contingent Conversion (as defined below) by the
Holders of the Securities in connection with an Offer (as defined below),
then, the Issuer or any Subsidiary of the Issuer shall be prohibited from
making a tender or exchange offer for all or any portion of the Issuer's
Common Stock (any such tender or exchange offer being referred to as an
"Offer") which involves (i) per share consideration the fair market value
of which is in excess of 120% of the current market price per share
(determined as provided in subsection (e) of this Section) prevailing three
Business Days prior to the commencement of such Offer and (ii) an aggregate
consideration having a fair market value as of the expiration of such Offer
(the "Expiration Time") that, exceeds 110% of the product of the current
market price per share (determined as provided in subsection (e) of this
Section) of the Common Stock on the Expiration Time times the number of
shares of Common Stock outstanding (including any tendered shares) on the
Expiration Time.
For purposes of this subsection (d), (i) the fair market value of any
consideration with respect to an Offer shall be determined by the Board of
Directors, whose determination shall be conclusive and described in a board
resolution and (ii) a Contingent Conversion shall mean a conversion of
Securities pursuant to Section 13.1(a) hereof pursuant to which the Holder of
Securities can tender such Securities for conversion subject to the Common Stock
issuable upon such conversion being acquired by the Issuer or any Subsidiary of
the Issuer pursuant to an Offer and, to the extent such Common Stock is not so
acquired, the portion of the Securities which would have been converted upon
such acquisition but which were not acquired pursuant to the Offer shall be
considered for all purposes under this Indenture as if such Securities were
never tendered for conversion hereunder.
(e) For the purpose of any computation under subsections (b), (c) and
(d) above, the current market price per share of Common Stock on any date
shall be deemed to be the average of the Last Sale Prices of a share of
Common Stock for the five consecutive Trading Days selected by the Issuer
commencing not more than 20 Trading Days before, and ending not later than,
the earlier of the date in question
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and the date before the "`ex' date," with respect to the issuance,
distribution or Offer requiring such computation. If on any such Trading
Day the Common Stock is not quoted by any organization referred to in the
definition of Last Sale Price in Section 13.3 hereof, the fair value of
the Common Stock on such day, as determined by the Board of Directors,
shall be used. For purposes of this paragraph, the term "`ex' date,"
when used with respect to any issuance, distribution or payments with
respect to an Offer, means the first date on which the Common Stock trades
regular way on the principal national securities exchange on which the
Common Stock trades or on which the Common Stock is listed or admitted to
trading without the right to receive such issuance, distribution or Offer.
(f) In addition to the foregoing adjustments in subsections (a), (b),
(c) and (d) above, the Issuer will be permitted to make such reductions in
the Conversion Price or the Special Conversion Price, as the case may be,
as its considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend of stock or stock rights will be
not be taxable to the holders of the shares of Common Stock.
(g) In any case in which this Section 13.5 shall require that an
adjustment (including by reason of the last sentence of subsection (a) or
(c) above) be made immediately following a record date, the Issuer may
elect to defer the effectiveness of such adjustment (but in no event until
a date later than the effective time of the event giving rise to such
adjustment), in which case the Issuer shall, with respect to any Security
converted after such record date and on and before such adjustment shall
have become effective (i) defer paying any cash payment pursuant to Section
13.3 hereof or issuing to the Holder of such Security the number of shares
of Common Stock and other capital stock of the Issuer (or other assets or
securities) issuable upon such conversion in excess of the number of shares
of Common Stock and other capital stock of the Issuer issuable thereupon
only on the basis of the Conversion Price or the Special Conversion Price,
as the case may be, prior to adjustment, and (ii) not later than five
Business Days after such adjustment shall have become effective, pay to
such Holder the appropriate cash payment pursuant to Section 13.3 hereof
and issue to such Holder the additional shares of Common Stock and other
capital stock of the Issuer issuable on such conversion.
(h) No adjustment in the Conversion Price or the Special Conversion
Price shall be required unless such adjustment would require an increase or
decrease of at least 1% of the Conversion Price or the Special Conversion
Price, as the case may be; PROVIDED, that any adjustments which by reason
of this subsection (h) are not required to be made
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shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Article 13 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may
be.
(i) Whenever the Conversion Price or the Special Conversion Price is
adjusted as herein provided, the Issuer shall promptly (i) file with the
Trustee and each conversion agent an Officers' Certificate setting forth
the Conversion Price and the Special Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment,
which certificate shall be conclusive evidence of the correctness of such
adjustment, and (ii) mail or cause to be mailed a notice of such adjustment
to each holder of Securities at his address as the same appears on the
registry books of the Issuer.
Section 13.6 CONTINUATION OF CONVERSION PRIVILEGE IN CASE OF
RECLASSIFICATION, CHANGE, MERGER, CONSOLIDATION OR SALE OF ASSETS. If any of
the following shall occur, namely: (a) any reclassification or change of
outstanding shares of Common Stock issuable upon conversion of the Securities
pursuant to Section 13.1 hereof (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), (b) any consolidation or merger of the Issuer with
or into any other Person, or any other Person with or into the Issuer (other
than a merger which does not result in any reclassification, change, conversion,
exchange or cancellation of outstanding shares of Common Stock) or (c) sale or
conveyance of all or substantially all of the assets of the Issuer, then the
Issuer, or such successor or purchasing entity, as the case may be, shall, as a
condition precedent to such reclassification, change, consolidation, merger,
sale or conveyance, execute and deliver to the Trustee a supplemental indenture
providing that, upon conversion of the Securities pursuant to Section 13.1
hereof, the holder of each Security then Outstanding shall have the right to
convert such Security into the kind and amount of shares of stock and other
securities and property (including cash) receivable upon such reclassification,
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock issuable upon conversion of such Security pursuant to
Section 13.1(a) hereof or Section 13.1(b) hereof, as the case may be,
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance assuming such holder of Common Stock of the Issuer (i) is not a
Person with which the Issuer consolidated or into which the Issuer merged or
which merged into the Issuer or to which such sale, transfer or conveyance was
made, as the case may be ("Constituent Person") or an Affiliate of a Constituent
Person and (ii) failed to exercise his rights of an election, if any, as to the
kind or amount of securities, cash and other property receivable upon such
reclassification, change, consolidation, merger, sale, transfer or conveyance
(PROVIDED that if the kind or amount of securities, cash, and other property
receivable upon
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such reclassification, change, consolidation, merger, sale, transfer or
conveyance is not the same for each share of Common Stock of the Issuer held
immediately prior to such reclassification, change, consolidation, merger,
sale, transfer or conveyance by others than a Constituent Person or an
Affiliate thereof and in respect of which such rights of election shall not
have been exercised ("non-electing share"), then for the purpose of this
Section the kind and amount of securities, cash and other property receivable
upon such reclassification, change, consolidation, merger, sale, transfer or
conveyance by each non-electing share shall be deemed to be the kind and
amount so receivable per share by a plurality of the non-electing shares).
Such supplemental indenture shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in
this Article 13. If, in the case of any such consolidation, merger, sale or
conveyance, the stock or other securities, and property (including cash)
receivable thereupon by a holder of shares of Common Stock includes shares of
stock or other securities and property (including cash) of a corporation
other than the successor or purchasing corporation, as the case may be, in
such consolidation, merger, sale or conveyance, then such supplemental
indenture shall also be executed by such other corporation and shall contain
such additional provisions to protect the interests of the holders of the
Securities as the Board of Directors shall reasonably consider necessary by
reason of the foregoing. The provisions of this Section shall similarly
apply to successive consolidations, mergers, sales or conveyances.
Notice of the execution of each such supplemental indenture shall be
mailed by the Trustee to each Holder of Securities at his address as the same
appears on the registry books of the Issuer.
Neither the Trustee nor any conversion agent shall be under any
responsibility to determine the correctness of any provisions contained in any
such supplemental indenture relating either to the kind or amount of shares of
stock or securities or property (including cash) receivable by holders of
Securities upon the conversion of their Securities after any such
reclassification, change, consolidation, merger, sale or conveyance or to any
adjustment to be made with respect thereto, but, subject to the provisions of
Sections 5.1 and 5.2 hereof, may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, the
Officers' Certificate (which the Issuer shall be obligated to file with the
Trustee prior to the execution of any such supplemental indenture) with respect
thereto.
Section 13.7 NOTICE OF CERTAIN EVENTS. In case:
(a) the Issuer shall declare a dividend (or any other
distribution) payable to the holders of Common Stock
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otherwise than in cash dividends paid out of retained earnings; or
(b) the Issuer shall authorize the granting to all the holders
of Common Stock of rights to subscribe for or purchase any shares of stock
of any class or of any other rights; or
(c) the Issuer shall authorize any reclassification or change of
the Common Stock (other than a subdivision or combination of its
outstanding shares of Common Stock), or any consolidation or merger to
which the Issuer is a party and for which approval of any stockholders of
the Issuer is required, or the sale or conveyance of all or substantially
all the property or business of the Issuer; or
(d) there shall be proposed any voluntary or involuntary
dissolution, liquidation or winding-up of the Issuer;
then, the Issuer shall cause to be filed at the office or agency maintained for
the purpose of conversion of the Securities as provided in Section 3.2 hereof,
and shall cause to be mailed to each Holder of Securities, at his address as it
shall appear on the registry books of the Issuer, at least 20 days before the
date hereinafter specified (or the earlier of the dates hereinafter specified,
in the event that more than one date is specified), a notice stating the date on
which (i) a record is expected to be taken for the purpose of such dividend,
distribution or rights, or if a record is not to be taken, the date as of which
the holders of Common Stock of record to be entitled to such dividend,
distribution or rights are to be determined, or (ii) such reclassification,
change, consolidation, merger, sale, conveyance, dissolution, liquidation or
winding-up is expected to become effective and the date, if any is to be fixed,
as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, change, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding-up.
Section 13.8 TAXES ON CONVERSION. The Issuer will pay any and all
documentary, stamp or similar taxes payable to the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
the issue or delivery of shares of Common Stock or Special Stock on conversion
of Securities pursuant to Section 13.1 hereof; PROVIDED, HOWEVER, that the
Issuer shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issue or delivery of shares of Common Stock or
Special Stock in a name other than that of the Holder of the Securities to be
converted and no such issue or delivery shall be made unless and until the
person requesting such issue or delivery has paid to the Issuer
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the amount of any such tax or has established, to the satisfaction of the
Issuer, that such tax has been paid. The Issuer extends no protection with
respect to any other taxes imposed in connection with conversion of Securities.
Section 13.9 ISSUER TO PROVIDE STOCK. The Issuer shall reserve from
time to time, free from preemptive rights, out of its authorized but unissued
shares, or, with respect to no more than 5% of the number of shares issuable
upon conversion of the Outstanding Securities, shall otherwise cause to be made
available, sufficient shares to provide for the conversion of the Securities as
such Securities are presented for conversion, PROVIDED, that nothing contained
herein shall be construed to preclude the Issuer from satisfying its obligations
in respect of the conversion of Securities by delivery of repurchased shares of
Common Stock or Special Stock which are held in the treasury of the Issuer.
If any shares of Common Stock or Special Stock to be reserved for the
purpose of conversion of Securities hereunder require registration with or
approval of any governmental authority under any Federal or State law before
such shares may be validly issued or delivered upon conversion, then the Issuer
covenants that it will in good faith and as expeditiously as possible endeavor
to secure such registration or approval, as the case may be, PROVIDED, HOWEVER,
that nothing in this Section shall be deemed to affect in any way the
obligations of the Issuer to convert Securities into Common Stock or Special
Stock as provided in this Article 13.
Before taking any action which would cause an adjustment reducing the
Conversion Price or the Special Conversion Price below the then par value, if
any, of the Common Stock, the Issuer will take all corporate action which may,
in the Opinion of Counsel, be necessary in order that the Issuer may validly and
legally issue fully paid and non-assessable shares of Common Stock at such
adjusted Conversion Price or Special Conversion Price.
The Issuer covenants that all shares of Common Stock or Special Stock
which may be issued upon conversion of Securities will upon issue be fully paid
and non-assessable by the Issuer and free of preemptive rights.
Section 13.10 DISCLAIMER OF RESPONSIBILITY FOR CERTAIN MATTERS.
Neither the Trustee nor any agent of the Trustee shall at any time be under any
duty or responsibility to any Holder of Securities to determine whether any
facts exist which may require any adjustment of the Conversion Price or the
Special Conversion Price, or with respect to the Officers' Certificate referred
to in Section 13.5 hereof, or with respect to the nature or extent of any such
adjustment when made, or with respect to the method employed, or herein or in
any supplemental indenture (or whether such supplemental indenture is required)
provided to be employed, in making the same, or whether the Effective Time of
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the Merger has occurred. Neither the Trustee nor any agent of the Trustee
shall be accountable with respect to the validity or value (or the kind or
amount) of any shares of Common Stock or Special Stock, or of any securities
or property (including cash), which may at any time be issued or delivered
upon the conversion of any Security; and neither the Trustee nor any
conversion agent makes any representation with respect thereto. Neither the
Trustee nor any agent of the Trustee shall be responsible for any failure of
the Issuer to issue, register the transfer of or deliver any shares of Common
Stock or Special Stock or stock certificates or other securities or property
(including cash) upon the surrender of any Security for the purpose of
conversion or, subject to Sections 5.1 and 5.2 hereof, to comply with any of
the covenants of the Issuer contained in this Article.
Section 13.11 RETURN OF FUNDS DEPOSITED FOR REDEMPTION OF CONVERTED
SECURITIES. Any funds which at any time shall have been deposited by the Issuer
or on its behalf with the Trustee or any other Paying Agent for the purpose of
paying the Principal of and interest on any of the Securities and which shall
not be required for such purposes because of the conversion of such Securities,
as provided in this Article 13, shall after such conversion be repaid to the
Issuer by the Trustee or such other Paying Agent.
ARTICLE 14
RIGHT TO REQUIRE REDEMPTION
Section 14.1 RIGHT TO REQUIRE REDEMPTION. If at any time there shall
occur any Redemption Event of the Issuer, then each Holder shall have the right,
at such Holder's option, to require the Issuer to redeem, and upon the exercise
of such right the Issuer shall redeem, all or any part of such Holder's
Securities that is $1,000 or any integral multiple thereof, on the date (the
"Repurchase Date") that is 45 days after the date of the Issuer Notice (as
defined below) at a redemption price in cash equal to 101% of the Principal
amount of such Securities to be redeemed, plus accrued and unpaid interest
thereon to the Repurchase Date (the "Repurchase Price").
Section 14.2 NOTICES; METHOD OF EXERCISING REDEMPTION RIGHT, ETC.
(a) Unless the Issuer shall have theretofore called for redemption of
all the Securities then Outstanding pursuant to Article 11 hereof, within
15 days after the occurrence of a Redemption Event, the Issuer or, at the
request of the Issuer, the Trustee, shall mail to all Holders of record of
the Securities a notice (the "Issuer Notice") of the occurrence of the
Redemption Event and of the redemption right set forth herein arising as a
result thereof in the manner provided in Section 10.4 hereof. The Issuer
shall also deliver a copy of the Issuer Notice to the
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Trustee prior to or promptly after the mailing of such Issuer Notice.
Each Issuer Notice of a redemption right shall state:
(1) the Repurchase Date;
(2) the date by which the redemption right must be
exercised;
(3) the Repurchase Price;
(4) a description of the procedure which a Holder must
follow to exercise a redemption right including a form of the
irrevocable written notice referred to in Section 14.2 hereof; and
(5) the Conversion Price (as defined in Section 13.5
hereof) and Special Conversion Price (as defined in Section 13.5
hereof) then in effect, the date on which the right to convert the
Principal amount of the Securities to be redeemed will terminate and
the place or places where such Securities may be surrendered for
conversion.
No failure of the Issuer to give the foregoing notices or any defect
therein shall limit any Holder's right to exercise a redemption right or affect
the validity of the proceedings for the redemption of Securities.
(b) To exercise a redemption right, a Holder shall deliver to the
Trustee on or before the 15th Business Day after the date of the Issuer
Notice (i) irrevocable written notice of the Holder's exercise of such
rights, which notice shall set forth the name of the Holder, the amount of
the Securities to be redeemed, a statement that an election to exercise the
redemption right is being made thereby, and (ii) the Securities with
respect to which the redemption right is being exercised, duly endorsed for
transfer to the Issuer. Securities held by a securities depository may be
delivered in such other manner as may be agreed to by such securities
depository, the Issuer and the Trustee. Such written notice shall be
irrevocable. Subject to the provisions of paragraph (d) below, Securities
surrendered for redemption together with such irrevocable written notice
shall cease to be convertible from the date of delivery of such notice. If
the Repurchase Date falls after the record date and before the following
Interest Payment Date, any Securities to be redeemed must be accompanied by
payment of an amount equal to the interest thereon which the registered
Holder thereof is to receive on such Interest Payment Date, and,
notwithstanding such redemption, such interest payment will be made by the
Issuer to the registered Holder thereof on the applicable record date;
provided that any semi-annual
66
<PAGE>
payment of interest becoming due on the Repurchase Date shall be payable
to the holders of such Securities registered as such on the relevant record
date subject to the terms Section 2.4 hereof.
(c) In the event a redemption right shall be exercised in accordance
with the terms hereof, the Issuer shall pay or cause to be paid the
Repurchase Price in cash, to the Holder on the Repurchase Date.
(d) If any Security surrendered for redemption shall not be so
redeemed on the Repurchase Date, such Security shall be convertible at any
time from the Repurchase Date until redeemed and, until redeemed, continue
to bear interest to the extent permitted by applicable law from the
Repurchase Date at the same rate borne by such Security. The Issuer shall
pay to the Holder of such Security the additional amounts arising from this
Section 14.2 at the time that it pays the Repurchase Price, and if
applicable such Security shall remain convertible into Common Stock
pursuant to Section 13.1(a) hereof, or Common Stock or Special Stock
pursuant to Section 13.1(b) hereof, until the Repurchase Price plus any
additional amounts owing on such Security shall have been paid or duly
provided for.
(e) Any Security which is to be redeemed only in part shall be
surrendered at any office or agency of the Issuer designated for that
purpose pursuant to Section 3.2 hereof (with, if the Issuer or the Trustee
so requires, due endorsement by, or a written instrument of transfer in
form satisfactory to the Issuer and the Trustee duly executed by, the
Holder thereof or his attorney duly authorized in writing), and the Issuer
shall execute, and the Trustee shall authenticate and deliver to the Holder
of such Security without service charge, a new Security or Securities, of
any authorized denomination as requested by such Holder, in aggregate
Principal amount equal to and in exchange for the unredeemed portion of the
Security so surrendered.
67
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of May __, 1996.
ALLIANCE GAMING CORPORATION
By:_________________________
Name:
Title:
Attest:
By:________________________
Name:
Title:
THE BANK OF NEW YORK,
as Trustee
By:_________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
68
<PAGE>
EXHIBIT A
[FORM OF FACE OF SECURITY]
7 1/2% Convertible Senior Subordinated Debenture due 2003
This Security will be automatically converted into [Common Stock]
[Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E] of the
Issuer if the Merger is consummated prior to _____________, 1996. See the
reverse of this Security.
CUSIP #
$_______
No.
Alliance Gaming Corporation
promises to pay to __________________________________________ or registered
assigns, the principal sum of ______________________ Dollars on September 15,
2003.
Interest Payment Dates: March 15 and September 15.
Record Dates: March 1 and September 1.
ALLIANCE GAMING CORPORATION
By:____________________________
_________________, President
By:____________________________
_________________, Secretary
Authenticated: Dated: __________________
THE BANK OF NEW YORK,
as Trustee
By:_________________________
Authorized Signatory
A-1
<PAGE>
[FORM OF REVERSE OF SECURITY]
7 1/2% Convertible Senior Subordinated Debenture due 2003
In addition, the Securities shall bear any additional legends which
are required pursuant to applicable law. Capitalized terms used herein shall
have the meanings ascribed to them in the Indenture unless otherwise indicated.
1. INTEREST. Alliance Gaming Corporation (the "Issuer") promises
to pay interest on the Principal amount of this Security at 7 1/2% per annum
from the date of issuance until maturity. The Issuer will pay interest
semi-annually on March 15 and September 15 of each year or, if any such day
is not a Business Date, on the next succeeding Business Date (each an
"Interest Payment Date"). Interest on the Securities will accrue from the
most recent date on which interest has been paid, or, if no interest has been
paid, from the date of issuance; PROVIDED that if there is no existing
Default in the payment of interest, and if this Security is authenticated
between a record date referred to on the face hereof and the next succeeding
Interest Payment Date, interest shall accrue from such next succeeding
Interest Payment Date; PROVIDED, FURTHER, that the first Interest Payment
Date shall be September 15, 1996. The issuer shall pay interest (including
post-petition interest in any proceeding under Bankruptcy Law) on overdue
Principal and premium, if any, from time to time on demand at the same rate
per annum on the Securities then in effect; it shall pay interest (including
post-petition interest in any proceeding under Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace periods),
from time to time on demand at the same rate to the extent lawful. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Issuer will pay interest on the Securities
(except defaulted interest) to the Persons who are registered Holders of
Securities at the close of business on the March 1 or September 1 next preceding
the Interest Payment Date, even if such Securities are canceled or converted
after such record date and on or before such Interest Payment Date. All
payments in respect of the Securities will be made by check mailed to the
Holders of the Securities at their addresses set forth in the register of
Holders of Securities.
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New York, the
Trustee under the Indenture, will act as Paying Agent and Registrar. The Issuer
may change any Paying Agent or Registrar without notice to any Holder. The
Issuer or any of its subsidiaries may act in any such capacity.
A-2
<PAGE>
4. INDENTURE. The Issuer issued the Securities under an Indenture
dated as of ___________, 1996 ("Indenture") between the Issuer and the Trustee.
The terms of the Securities include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (15 U.S. Code Sections 77aaa-77bbbb). The Securities are subject to all
such terms, and Holders are referred to the Indenture and such Act for a
statement of such terms. The Securities are general unsecured obligations of
the Issuer limited to $85,000,000 in aggregate Principal amount.
5. SUBORDINATION. The Issuer's payment of the Principal of,
interest on and redemptions at the option of the Holders of the Securities
is subordinated to the prior payment in full of the Issuer's Senior
Indebtedness. Each Holder of Securities by his or her acceptance hereof
covenants and agrees that all payments of the Principal of, interest on and
redemptions at the option of the Holders of the Securities by the Issuer
shall be subordinated in accordance with the provisions of Article 12 of the
Indenture, and each Holder accepts and agrees to be bound by such provisions.
6. CONVERSION RIGHTS; AUTOMATIC CONVERSION IN CERTAIN EVENTS.
(a) Subject to the provisions of the Indenture, the Holder of this Security
has the right, at his option, at any time until and including, but not after the
close of business on, the second Business Day prior to September 15, 2003
(except that, (i) in case this Security or a portion hereof shall be called
for redemption and the Issuer shall not thereafter default in making due
provision for the payment of the redemption price, such right shall terminate
with respect to this Security or such portion hereof at the close of business on
the second Business Day prior to the date fixed for redemption and (ii) in the
case the holder of this Security exercises his right to require the Issuer to
redeem this Security or a portion hereof, such conversion right shall terminate
with respect to this Security or portion hereof on the date this Security is
presented for redemption together with written notice to the Issuer of the
holder's exercise of such right or, if the Issuer fails to redeem this Security
or portion hereof on the date set for such redemption, upon redemption), to
convert the principal of this Security, or any portion thereof which is $1,000
or a multiple of $1,000, into fully paid and non-assessable shares of Common
Stock of the Issuer, as said shares shall be constituted at the date of
conversion, at the conversion price of $8.33 in principal amount of
Securities for each share of such Common Stock, or at the adjusted
conversion price in effect at the date of conversion if an adjustment has
been made, determined as provided in the Indenture, upon surrender of this
Security to the Issuer at the office or agency of the Issuer maintained for the
purpose in the Borough of Manhattan, The City of New York, together with a fully
executed notice of optional conversion substantially in the form set forth at
the foot hereof that the holder elects so to convert this Security
(or any portion hereof which is a multiple of
A-3
<PAGE>
$1,000) and, if this Security is surrendered for conversion during the period
between the close of business on March 1 or September 1 in any year and the
opening of business on the following March 15 or September 15 and has not
been called for redemption on a redemption date within such period, shall be
accompanied by payment of an amount equal to the interest payable on such
March 15 or September 15 on the principal amount of the Security being
surrendered for conversion. Except as provided in the preceding sentence or
as otherwise expressly provided in the Indenture, no payment or adjustment
shall be made on account of interest accrued on this Security (or portion
thereof) so converted or on account of any dividend or distribution on any
such Common Stock issued upon conversion. If so required by the Issuer or
the Trustee, this Security, upon surrender for conversion as aforesaid, shall
be duly endorsed by, or be accompanied by instruments of transfer, in form
satisfactory to the Issuer, duly executed by, the holder or by his duly
authorized attorney. The conversion price from time to time in effect is
subject to adjustment as provided in the Indenture. No fractions of shares
will be issued on conversion pursuant to this paragraph 6(a), but an
adjustment in cash will be made for any fractional interest as provided
in the Indenture.
(b) Subject to the provisions of the Indenture, in the event that
prior to _________, 1996 the Merger (as defined in the Indenture) becomes
effective under Section 251 of the Delaware General Corporation Law, then at
the effective time of the Merger (except that, (i) in case this Security or a
portion hereof shall be called for redemption and the Issuer shall not
thereafter default in making due provision for the payment of the redemption
price, such provision for automatic conversion shall terminate with respect
to this Security or such portion hereof at the close of business on the
second Business Day prior to the date fixed for redemption and (ii) in the
case the holder of this Security exercises his right to require the Issuer to
redeem this Security or a portion hereof, such provision for automatic
conversion shall terminate with respect to this Security or portion hereof on
the date this Security is presented for redemption together with written
notice to the Issuer of the holder's exercise of such right or, if the Issuer
fails to redeem this Security or portion hereof on the date set for such
redemption, upon redemption), this Security shall be automatically, and
without any further action on the part of the Issuer, the Trustee or the
holder of this Security, converted into fully paid and non-assessable shares
of Common Stock, at the special conversion price of $5.56 in principal amount
of Securities for each share of Common Stock, or at the special conversion
price in effect at the Effective Time of the Merger if an adjustment has been
made, determined as provided in the Indenture (provided, however, that if so
specified on the face of this Security, then, in lieu of such shares of
Common Stock, this Security shall be automatically converted into fully paid
and non-assessable shares of Non-Voting Junior Convertible Pay-in-Kind
Special Stock, Series E (the "Special Stock"), of the Issuer, at the
conversion rate of ten shares of Special Stock for each $1,000 principal
amount of Securities), upon surrender of this Security to the Issuer at the
office or agency of the Issuer maintained for the purpose in the Borough of
Manhattan, together with a fully executed form of surrender for mandatory
conversion substantially in the form set forth at the foot hereof. Except as
otherwise expressly provided in the Indenture, no payment or adjustment shall
be made on account of interest accrued on this Security (or portion thereof)
so converted or on account of any dividend or distribution on any such Common
Stock issued upon conversion. If so required by the Issuer or the Trustee,
this Security, upon surrender for conversion as aforesaid, shall be duly
endorsed by, or be accompanied by instruments of transfer, in form
satisfactory to the Issuer, duly executed by, the holder or by his duly
authorized attorney. The special conversion price from time to time in effect
is subject to adjustment as provided in the Indenture. No fractions of shares
of Common Stock will be issued on conversion pursuant to this paragraph 6(b),
but an adjustment in cash will be made for any fractional shares of
Common Stock as provided in the Indenture. Fractional shares of Special Stock
will be issued, if and to the extent necessary, upon conversion pursuant
to this paragraph 6(b), and no adjustment in cash will be made for any
fractional shares of Special Stock.
(c) No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the Issuer,
which is absolute and unconditional, to pay the Principal of and interest on
this Security at the place, times, and rate, and in the currency, herein
prescribed.
7. OPTIONAL REDEMPTION. The Issuer may redeem all or any of the
Securities, in whole or in part, at any time, at a redemption price equal to the
percentages of the Principal amount thereof set forth below, plus accrued and
unpaid interest to the redemption date; provided, however, that until September
15, 1996 the Securities cannot be redeemed at the option of the Issuer unless
the closing price of the Issuer's Common Stock has equaled or exceeded 250% of
the then existing per share Conversion Price set forth in Paragraph 6, as
adjusted, for at least 20 out of any 30 consecutive Trading Days ending within
60 days before the notice of redemption is first mailed.
If redeemed during the twelve-month period beginning September 15 of
each year indicated:
<TABLE>
<CAPTION>
Year Percentage
<S> <C>
1995 105.63%
1996 104.69%
1997 103.75%
1998 102.81%
1999 101.88%
2000 100.94%
2001 and thereafter 100.00%;
</TABLE>
A-4
<PAGE>
provided that if the date fixed for redemption is a March 15 or September 15,
then the interest payable on such date shall be paid to the holder of record on
the next proceeding March 1 or September 1.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 20 days but not more than 60 days before the Redemption Date to each
Holder whose Securities are to be redeemed at its registered address.
Securities in denominations larger than $1,000 may be redeemed in part but only
in whole multiples of $1,000, unless all of the Securities held by a Holder are
to be redeemed. On and after the redemption date interest ceases to accrue on
Securities or portions thereof called for redemption.
9. RIGHT TO REQUIRE REDEMPTION UPON CERTAIN EVENTS. If a Redemption
Event (as defined below) occurs, each Holder of the Securities shall have the
right, subject to certain conditions, at the Holder's option, to require the
Issuer to redeem all of such Holder's Securities, or any portion thereof that is
an integral multiple of $1,000, on the date (the "Redemption Date") that is 45
days after the date of the Issuer Notice (as defined below), for cash at a price
equal to 101% of the Principal amount of such Securities to be redeemed (the
"Redemption Price").
Within 15 Business Days after the occurrence of a Redemption Event,
the Issuer is obligated to mail to all holders of record of the Securities a
notice (the "Issuer Notice") of the occurrence of such Redemption Event and of
the redemption right arising as a result thereof. The Issuer must deliver a
copy of the Issuer Notice to the Trustee. To exercise the redemption right a
holder of such Securities must deliver on or before the 15th Business Day after
the date of the Issuer Notice irrevocable written notice to the Trustee of the
holder's exercise of such right, together with the Securities with respect to
which the right is being exercised, duly endorsed for transfer to the Issuer.
A Redemption Event will be deemed to have occurred at such time as:
(i) there is a Change of Control (as defined in the Indenture)
of the Issuer, or
(ii) the Issuer's Common Stock (or other common stock into which
the Securities are then convertible) is not listed for trading on a United
States national securities exchange or admitted for trading in the
NASDAQ/NMS or the National Association of Securities Dealers Automated
Quotation listing of Small Capitalization Stocks.
10. DISPOSITION IN EVENT OF UNSUITABILITY. If a Holder or beneficial
owner of a Security or any underlying Common
A-5
<PAGE>
Stock or Special Stock is required by the Nevada Gaming Commission to be found
suitable, the Holder or beneficial owner must apply for a finding of
suitability within 30 days after the Nevada Gaming Commission's request. If a
Holder or beneficial owner is required to be found suitable and is not found
suitable by the Nevada Gaming Commission, at the option of the Issuer, (i) the
Holder or beneficial owner shall, upon request of the Issuer, dispose of his
or her Securities and underlying Common Stock and Special Stock within 30 days
or within that time prescribed by the Nevada Gaming Commission, whichever is
earlier, or (ii) the Issuer may, at its option, redeem the Holder's or
beneficial owner's Securities at the lesser of (x) the principal amount
thereof or (y) the price at which the Securities were acquired by the Holder
or beneficial owner, together with, in each case, accrued interest to the date
of the finding of unsuitability by the Nevada Gaming Commission.
11. DENOMINATIONS, TRANSFER, EXCHANGE. The Securities are in
registered form without coupons in denominations of $1,000 and integral
multiples of $1,000. The transfer of Securities may be registered and
Securities may be exchanged as provided in the Indenture. The Registrar and the
Trustee may required a Holder, among other things, to furnish appropriate
endorsements and transfer documents and the Issuer may require a Holder to pay
any taxes and fees required by law or permitted by the Indenture. The Issuer
need not exchange or register the transfer of any Security or portion of a
Security selected for redemption, except for the unredeemed portion of any
Security being redeemed in part. Also, it need not exchange or register the
transfer of any Securities for a period of 15 days before a selection of
Securities to be redeemed or during the period between a record date and the
corresponding Interest Payment Date.
12. PERSONS DEEMED OWNERS. The registered Holder of a Security may
be treated as its owner for all purposes.
13. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the
Indenture or the Securities may be amended or supplemented and any existing
Default under, or compliance with any provision of, the Indenture may be waived
with the written consent of the Holders of at least a majority in Principal
amount of the Securities then outstanding (including consents obtained in
connection with a tender offer or exchange offer for Securities). Without the
consent of any Holder, the Issuer and the Trustee may amend or supplement the
Indenture or the Securities to cure any ambiguity, defect or inconsistency; to
provide for uncertificated Securities in addition to or in place of certificated
Securities; to comply with Section 8.1 of the Indenture; to make any change that
would provide any additional rights or benefits to the Holders or that does not
adversely affect the rights under the Indenture of any Holder to make changes
required by the TIA; or to appoint a successor Trustee.
A-6
<PAGE>
Without the consent of each Holder affected, an amendment or waiver
may not (with respect to any Securities held by a nonconsenting Holder): (i)
reduce the Principal amount of Securities whose Holders must consent to an
amendment, supplement or waiver; (ii) reduce the Principal of or change the
fixed maturity of any Security or alter the provisions with respect to the
redemption or purchase price in connection with repurchases under Section
11.1 of the Indenture; (iii) reduce the rate of or change the time for
payment of interest on any Security; (iv) waive a Default or Event of Default
in the payment of the Principal of, or interest on Securities or that
resulted from a failure to comply with Article 14 of the Indenture (except a
rescission of acceleration of the Securities by Holders of at least a
majority in Principal amount of the Securities); (v) make any change in
Section 4.10 of the Indenture; or (vi) waive a redemption payment with
respect to any Security. In addition, no amendment may adversely affect the
rights under Section 12 of the Indenture of any holder of outstanding Senior
Indebtedness without such holder's consent.
The right of any Holder to participate in any consent required or
sought pursuant to any provision of the Indenture (and the obligation of the
Issuer to obtain any such consent otherwise required from such Holder) may be
subject to the requirement that such Holder shall have been the Holder of record
of any Securities with respect to which such consent is required or sought as of
a date identified by the Trustee in a notice furnished to Holders in accordance
with the terms of this Indenture.
14. DEFAULTS AND REMEDIES. An Event of Default is: default for 30
days in payment of interest on the Securities; default in payment of
Principal of the Securities; failure by the Issuer for 60 days after notice
to it to comply with any of its other agreements in the Indenture or the
Securities; certain defaults under and acceleration prior to maturity of
other indebtedness; certain final judgments which remain undischarged; and
certain events of bankruptcy or insolvency. If an Event of Default occurs
and is continuing, the Trustee or the holders of at least 25% in Principal
amount of the then outstanding Securities may declare all the Securities to
be due and payable immediately, except that in the case of an Event of
Default arising from certain events of bankruptcy or insolvency, all
outstanding Securities become due and payable immediately without further
action or notice. Securityholders may not enforce the Indenture or the
Securities except as provided in the Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the
Securities. Subject to certain limitations, holders of a majority in
Principal amount in the then outstanding Securities may direct the Trustee in
its exercise of any trust or power. The Trustee may withhold from
Securityholders notice of any continuing default (except a default in payment
of Principal or interest) if it determines that withholding notice is in their
A-7
<PAGE>
interests. The Issuer must furnish an annual compliance certificate to the
Trustee.
15. TRUSTEE DEALINGS WITH ISSUER. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Issuer or its Affiliates, and may otherwise deal with the
Issuer or its Affiliates, as if it were not Trustee.
16. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator, manager, agent or stockholder of the Issuer, as such, shall not
have any liability for any obligations of the Issuer under the Securities or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder by accepting a Security waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Securities.
17. AUTHENTICATION. This Security shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.
18. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/[G][T]/M/A (= Uniform
[Gifts] [Transfers] to Minors Act).
19. GOVERNING LAW. This Security shall be deemed to be a contract
under, and shall be governed by and conserved under the laws of the State of
New York, except as otherwise required by mandatory provisions of Nevada law,
including with limitation, the Nevada Gaming Control Act and the regulations
promulgated thereunder.
The Issuer will furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to:
Alliance Gaming Corporation
4830 Boulder Highway
Las Vegas, NV 89121
Attention: Corporate Secretary
A-8
<PAGE>
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
______________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint ___________________________ agent to transfer this
Security on the books of the Issuer. The agent may substitute another to act
for him.
______________________________________________________________________________
Date: _____________________
Signature(s):
______________________________
(Sign exactly as your name(s)
appear(s) on the face of this
Security)
Signature Guaranteed by:
____________________________
IMPORTANT NOTICE: The signature guarantee provided on this Notice must comply
with the regulations of one of the nationally recognized medallion signature
guarantee programs.
A-9
<PAGE>
[FORM OF OPTIONAL CONVERSION NOTICE]
To: Alliance Gaming Corporation
The undersigned owner of this Security hereby: (1) irrevocably
exercises the option to convert this Security, or the portion hereof below
designated, pursuant to Section 13.1(a) of the Indenture referred to in this
Security for shares of Common Stock of Alliance Gaming Corporation in accordance
with the terms of such Indenture and (ii) directs that such shares of Common
Stock deliverable upon the conversion, together with any payment for fractional
shares and any Security(ies) representing any unconverted Principal amount
hereof, be issued and delivered to the registered holder hereof unless a
different name has been indicated below. If shares are to be delivered
registered in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto. Any amount required
to be paid by the undersigned on account of interest accompanies this Security.
Dated:__________________
______________________________
Signature(s)
(Sign exactly as your name(s)
appear(s) on the Security)
Signature Guaranteed by:
__________________________
IMPORTANT NOTICE: The signature guarantee provided on this Notice must comply
with the regulations of one of the nationally recognized medallion signature
guarantee programs.
If the stock certificate is to be issued in a name other than the registered
holder on the reverse hereof, the assignment below must be completed.
______________________________
Social Security or other
Taxpayer Identifying Number
_____________________________
(Name)
_____________________________
(Street Address)
_____________________________
(City, State and Zip Code)
(Please print name and address)
Principal amount to be Converted (if
less than all):
$___________________________
A-10
<PAGE>
[FORM OF SURRENDER FOR MANDATORY CONVERSION]
To: Alliance Gaming Corporation
The undersigned owner of this Security hereby: (i) surrenders this
Securities for conversion, in accordance with Section 13.1(b) of the Indenture
referred to in this Security, into shares of Common Stock (or, if and to the
extent indicated below, into shares of Special Stock) of Alliance Gaming
Corporation in accordance with the terms of such Indenture and (ii) directs that
the shares of Common Stock or Special Stock deliverable upon the conversion,
together with any payment for fractional shares, be issued and delivered to the
registered holder hereof unless a different name has been indicated below. If
shares are to be delivered are registered in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto.
Dated:______________
___________________________________________________
Signature(s)
(Sign exactly as your name(s) appear(s) on the
Security)
Signature Guaranteed by:
______________________________
IMPORTANT NOTICE: The signature guarantee provided on this Notice must comply
with the regulations of one of the nationally recognized medallion signature
guarantee programs.
If the stock certificate(s) is (are) to be issued in a name other than the
registered holder on the reverse hereof, the assignment below must be completed.
______________________________________________________
Social Security or other Taxpayer Identifying Number
_________________________
(Name)
_________________________
(Street Address)
_________________________
(City, State and Zip Code)
(Please print name and address)
A-11
<PAGE>
EXHIBIT 12
ALLIANCE GAMING CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA COMBINED
FINANCIAL INFORMATION
NINE MONTHS ENDED --------------------------
NINE MONTH
FISCAL YEARS ENDED JUNE 30, MARCH 31 YEAR ENDED PERIOD ENDED
----------------------------------------------------- -------------------- JUNE 30, MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net loss.......... $ (15,816) $ (4,680) $ (3,650) $ (13,128) $ (10,752) $ (6,793) $ (14,829) $ (3,719) $ (2,255)
Income taxes...... (5,958) -- -- 241 265 394 581 2,555 2,055
Imputed interest
on rents(1)...... 16,485 16,647 19,966 21,700 22,287 16,548 17,070 21,843 10,945
Interest and debt
discount
amortization..... 4,663 4,505 5,046 6,830 8,133 5,844 6,341 23,229 17,413
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
Earnings (loss)
as defined for
ratio.......... $ (626) $ 16,472 $ 21,362 $ 15,643 $ 19,933 $ 15,993 $ 9,163 $ 43,908 $ 28,158
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
Fixed Charges:
Imputed interest
on rents(1)...... $ 16,485 $ 16,647 $ 19,966 $ 21,700 $ 22,287 16,548 17,070 $ 21,843 $ 10,945
Interest and debt
discount
amortization..... 4,663 4,505 5,046 6,830 8,133 $ 5,844 $ 6,341 23,229 17,413
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
Fixed charges as
defined for
ratio.......... $ 21,148 $ 21,152 $ 25,012 $ 28,530 $ 30,420 $ 22,392 $ 23,411 $ 45,072 $ 28,358
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
Ratio of earnings to
fixed charges...... -- -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
Amounts by which
earnings were
inadequate to cover
fixed charges...... $ (21,774) $ (4,680) $ (3,650) $ (12,887) $ (10,487) $ (6,399) $ (14,248) $ (1,164) $ (200)
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
Pro forma fixed
charge for
Preferred Stock
dividend........... -- -- -- -- -- -- -- (8,039) 5,916
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
Amount by which pro
forma earnings were
inadequate to cover
fixed charges and
Preferred Stock
dividend........... -- -- -- -- -- -- -- $ (9,203) $ 6,116
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
--------- --------- --------- --------- --------- --------- --------- ----------- -------------
<CAPTION>
NINE MONTH
PERIOD ENDED
MARCH 31,
1996
-------------
<S> <C>
Earnings:
Net loss.......... $ (11,329)
Income taxes...... 1,508
Imputed interest
on rents(1)...... 10,721
Interest and debt
discount
amortization..... 16,922
-------------
Earnings (loss)
as defined for
ratio.......... $ 17,822
-------------
-------------
Fixed Charges:
Imputed interest
on rents(1)...... $ 16,922
Interest and debt
discount
amortization..... 10,721
-------------
Fixed charges as
defined for
ratio.......... $ 27,643
-------------
-------------
Ratio of earnings to
fixed charges...... --
-------------
-------------
Amounts by which
earnings were
inadequate to cover
fixed charges...... $ (9,821)
-------------
-------------
Pro forma fixed
charge for
Preferred Stock
dividend........... (5,916)
-------------
Amount by which pro
forma earnings were
inadequate to cover
fixed charges and
Preferred Stock
dividend........... $ (15,737)
-------------
-------------
</TABLE>
- ------------------------
(1) Imputed interest on rents is calculated by taking 33% of total rents in each
period presented.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Alliance Gaming Corp.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the registration statement. As noted
under the captions "Forecast of Operations" and "Experts", KPMG Peat Marwick LLP
has not examined the Forecast presented under "Forecast of Operations" and,
accordingly we do not express an opinion or any other form of assurance with
respect thereto.
KPMG PEAT MARWICK LLP
Las Vegas, Nevada
May 7, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report, dated February 13, 1996, on our audits of the consolidated financial
statements of Bally Gaming International, Inc. We also consent to the reference
to our firm under the caption "Experts." As noted under the captions "Forecast
of Operations" and "Experts," Coopers & Lybrand L.L.P. neither examined nor
compiled nor had any other involvement with the preparation of the accompanying
prospective financial information included in this registration statement and,
accordingly, we do not express an opinion or any other form of assurance with
respect thereto, nor do we assume any responsibility for such prospective
financial information.
COOPERS & LYBRAND L.L.P.
Las Vegas, Nevada
May 7, 1996
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
OF
ALLIANCE GAMING CORPORATION
PURSUANT TO THE PROSPECTUS DATED MAY 9, 1996 OF
ALLIANCE GAMING CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 6,
1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 7 1/2% CONVERTIBLE
SUBORDINATED DEBENTURES DUE 2003 MAY BE WITHDRAWN AT
ANY TIME PRIOR TO THE EXPIRATION DATE.
TO:
THE BANK OF NEW YORK, EXCHANGE AGENT
BY MAIL OR BY HAND:
The Bank of New York
101 Barclay Street, Corporate Trust Operations, 7E
New York, New York 10286
Attention: Enrique Lopez
Telephone: (212) 815-2742
BY FACSIMILE:
(212) 571-3080
TOLL FREE NUMBER:
1-800-254-2826
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OR TELEX, OTHER THAN AS SET FORTH ABOVE
WILL NOT CONSTITUTE A VALID DELIVERY.
The instructions accompanying this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed. Except as otherwise
provided herein, all signatures on this Letter of Transmittal must be guaranteed
in accordance with the procedures set forth herein. See Instruction 1.
This Letter of Transmittal is to be used only if 7 1/2% Convertible
Subordinated Debentures due 2003 (the "Securities" or the "Old Convertible
Debentures") of Alliance Gaming Corporation ("Alliance") are to be physically
delivered to the Exchange Agent or delivered by book-entry transfer to the
Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant to
the book-entry transfer procedures set forth in the Prospectus of Alliance dated
May 9, 1996 (as the same may be amended or supplemented from time to time, the
"Prospectus") under the heading "The Exchange Offer -- Procedures for Tendering
- -- Book-Entry Transfer". See Instruction 2. Delivery of documents to DTC does
not constitute delivery to the Exchange Agent.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW CONVERTIBLE DEBENTURES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
CONVERTIBLE DEBENTURES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
Holders whose Securities are not immediately available or who cannot deliver
their Securities and all other required documents to the Exchange Agent, or who
cannot complete the procedure for book-entry transfer, on or prior to the
Expiration Date, may nevertheless tender their Securities in accordance with the
guaranteed delivery procedures set forth in the Prospectus under the heading
"The Exchange Offer -- Procedures for Tendering -- Guaranteed Delivery. See
Instruction 2.
All capitalized terms used herein and not otherwise defined herein are used
herein with the meanings ascribed to them in the Prospectus.
<PAGE>
HOLDERS WHO WISH TO TENDER THEIR SECURITIES MUST, AT A MINIMUM, PROVIDE
THEIR NAMES AND ADDRESSES AND COMPLETE COLUMNS (1) AND (2) IN THE BOX HEREIN
ENTITLED "DESCRIPTION OF SECURITIES TENDERED" AND SIGN IN THE APPROPRIATE BOX
BELOW. If only columns (1) and (2) are completed, the holder will be deemed to
have tendered all the Securities listed in the table and all New Convertible
Debentures issued in exchange for the Securities will be automatically converted
into Common Stock if the Automatic Conversion occurs. If a holder wishes to
tender less than all of such Securities, column (3) must be completed in full,
and such holder should refer to Instruction 4. If a holder wishes the New
Convertible Debentures issued upon exchange of his Securities to be converted
into Series E Preferred Stock in the event of the Automatic Conversion, column
(3) must be completed in full, and such holder should refer to instruction 8.
<TABLE>
<S> <C>
/ / CHECK HERE IF TENDERED SECURITIES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE
EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
Account Number Transaction Code Number
/ / CHECK HERE IF TENDERED SECURITIES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
</TABLE>
Name(s) of Registered Holder(s): _________________________________________
Window Ticket No. (if any): ______________________________________________
Date of Execution of Notice of Guaranteed Delivery: ______________________
<TABLE>
<S> <C>
Name of Institution which Guaranteed Delivery:
If delivered by book-entry transfer, provide the following information:
DTC Account Number: Transaction Code Number:
</TABLE>
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned has made with respect to the
Exchange Offer.
<TABLE>
<S> <C> <C> <C>
DESCRIPTION OF SECURITIES TENDERED
NAME(S) AND ADDRESS(ES) OF HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) ON SECURITIES)
SECURITIES TENDERED (ATTACH ADDITIONAL SCHEDULE, IF NECESSARY)
(1) (2) (3) (4)
Security Total Principal Principal Amount Principal Amount
Number(s)* Amount of Securities Tendered to Be Converted
(if less than all)** into Series E
Preferred Stock***
Total
*Need not be completed by holders tendering by book-entry transfer (see below).
**Completion of column (2) will constitute the tender by you of all Securities delivered unless
otherwise specified in column (3). See Instruction 4.
***Unless otherwise indicated in column (4), all New Convertible Debentures received in exchange
for Securities tendered hereby will be converted into Common Stock in the event the Automatic
Conversion occurs. See Instruction 8.
</TABLE>
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned hereby acknowledges receipt of the
Prospectus and this Letter of Transmittal relating to Alliance's offer to
exchange (the "Exchange Offer") up to $85 million principal amount of the 7 1/2%
Convertible Senior Subordinated Debentures due 2003 of Alliance (the "New
Convertible Debentures") for a like principal amount of the Old Convertible
Debentures, upon the terms and subject to the conditions set forth in the
Prospectus.
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to Alliance the principal amount of Securities
indicated above.
Subject to, and effective upon, the acceptance by Alliance of the principal
amount of Securities tendered hereby for exchange pursuant to the terms of the
Exchange Offer, the undersigned hereby sells, assigns and transfers to, or upon
the order of, Alliance, all right, title and interest in and to, and any and all
claims in respect of or arising or having arisen as a result of the
undersigned's status as a holder of, all Securities tendered hereby. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent as
the true and lawful agent and attorney-in-fact of the undersigned with respect
to such Securities, with full power of substitution (such power-of-attorney
being deemed to be an irrevocable power coupled with an interest) to (a) deliver
such Securities, or transfer ownership of such Securities on the account books
maintained by DTC, together, in either case, with all accompanying evidences of
transfer and authenticity, to or upon the order of Alliance, (b) present such
Securities for transfer on the books of the Alliance, and (c) receive all
benefits and otherwise exercise all rights of beneficial ownership of such
Securities, all in accordance with the terms of the Exchange Offer.
The undersigned hereby represents and warrants that (a) the undersigned has
full power and authority to tender, sell, assign and transfer the Securities
tendered hereby, and to give the waiver contained herein, and (b) when such
Securities are accepted for exchange by Alliance, Alliance will acquire good,
marketable and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances, and none of such Securities will be
subject to any adverse claim or right. The undersigned, upon request, will
execute and deliver all additional documents deemed by the Exchange Agent or
Alliance to be necessary or desirable to complete the sale, assignment and
transfer of the Securities tendered hereby and the giving of the waiver and
release contained herein.
The undersigned understands that tenders of Securities pursuant to any of
the procedures described in the Prospectus under the caption "The Exchange Offer
- -- Procedures for Tendering" and in the instructions hereto will constitute the
undersigned's acceptance of the terms and conditions of the Exchange Offer.
Alliance's acceptance of such Securities for exchange pursuant to the terms of
the Exchange Offer will constitute a binding agreement between the undersigned
and Alliance upon the terms and subject to the conditions of the Exchange Offer.
The undersigned understands that (a) except to the extent otherwise
indicated in column (4) of the box entitled "Description of Securities
Tendered", in the event the proposed merger between Bally Gaming International,
Inc. and a wholly-owned subsidiary of Alliance (the "Merger") is consummated
within 60 days after the issuance of the New Convertible Debentures in exchange
for the Securities tendered hereby, such New Convertible Securities will be
automatically converted (the "Automatic Conversion") into shares of Common Stock
of Alliance, par value $.10 per share ("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, (b) to the extent so indicated in column (4) of the
box entitled "Description of Securities Tendered", in the event the Automatic
Conversion occurs, the New Convertible Debentures issued in exchange for the
Securities tendered hereby will be automatically converted into ten shares of
10% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E, of
Alliance, par value $.10 per share ("Series E Preferred Stock"), for each $1,000
principal amount of New Convertible Debentures and (c) after the issuance of the
New Convertible Debentures pursuant to the Exchange Offer, the holder of such
New Convertible Debentures will not be able to change the election made by the
undersigned in accordance with this paragraph. See Instruction 8.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death or incapacity of the undersigned and every
obligation of the undersigned under this Letter of Transmittal shall be binding
upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives. SECURITIES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE
WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. See the information set
forth under the heading "The Exchange Offer -- Withdrawal of Tenders" in the
Prospectus.
<PAGE>
Unless otherwise indicated herein in the box entitled "Special Payment
Instructions" below, please issue the New Convertible Debentures, and any
Securities not tendered or not accepted for exchange, in the name(s) of the
registered holder(s) appearing in the box entitled "Description of Securities
Tendered" (and, in the case of Securities tendered by book-entry transfer, by
credit to the account at DTC). Similarly, unless otherwise indicated herein in
the box entitled "Special Delivery Instructions", please deliver the New
Convertible Debentures, together with any Securities not tendered or not
accepted for exchange (and accompanying documents, as appropriate), to the
address(es) of the registered holder(s) appearing in the box entitled
"Description of Securities Tendered". If both the "Special Payment Instructions"
box and the "Special Delivery Instructions" box are completed, please issue the
New Convertible Debentures, and any Securities not tendered or not accepted for
exchange, in the name(s) of, and deliver such New Convertible Debentures and any
such Securities to, the person(s) at the address(es) so indicated. Please return
any Securities tendered hereby and delivered by book-entry transfer, but which
are not accepted for exchange, by crediting the account at DTC. The undersigned
recognizes that Alliance has no obligation pursuant to the "Special Payment
Instructions" box or "Special Delivery Instructions" box provisions of this
Letter of Transmittal to transfer any Securities from the name of the registered
holder(s) thereof if Alliance does not accept any of such Securities for
exchange pursuant to the terms of the Exchange Offer.
<TABLE>
<S> <C>
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7) (SEE INSTRUCTIONS 1, 5, 6 AND 7)
TO BE COMPLETED ONLY IF SECURITIES TO BE COMPLETED ONLY IF SECURITIES NOT
NOT TENDERED OR NOT ACCEPTED FOR ACCEPTED FOR EXCHANGE, AND/OR NEW
EXCHANGE, AND/OR NEW CONVERTIBLE CONVERTIBLE DEBENTURES, ARE TO BE SENT
DEBENTURES, ARE TO BE ISSUED IN THE TO SOMEONE OTHER THAN THE UNDERSIGNED,
NAME OF SOMEONE OTHER THAN THE UNDER- OR TO THE UNDERSIGNED AT AN ADDRESS
SIGNED. OTHER THAN THAT SHOWN ABOVE.
Issue: / / Securities Deliver: / / Securities
/ / New Convertible Debentures to: / / New Convertible Debentures
to:
Name: Name:
(Please (Please Print)
Print) Address:
Address:
Zip Code
Zip Code
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF SECURITIES
REGARDLESS OF WHETHER SECURITIES ARE BEING PHYSICALLY
DELIVERED HEREWITH)
X
Signature(s) of Holder(s) or Authorized Signatory
Date:, 1996
Must be signed by the registered holder(s) of the Securities tendered
hereby exactly as their name(s) appear(s) on such Securities or, if
tendered by a participant in DTC, exactly as such participant's name
appears on a security position listing as the owner of the Securities,
or by person(s) authorized to become registered holder(s) by
endorsements and documents transmitted with this Letter of Transmittal.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, agent or other person acting
in a fiduciary or representative capacity, please provide the following
information and see Instruction 5.
Name(s):
(Please Print)
Capacity (full title):
Address:
(Including Zip Code)
Area Code and Telephone No.
SIGNATURE GUARANTEE (See Instructions 1 and 5 below)
(Name of Eligible Institution Guaranteeing Signatures)
(Address (including zip code) and Telephone Number (including area code)
of Eligible Institution)
(Authorized Signature)
(Printed Name)
(Title)
Date: , 1996
</TABLE>
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal
must be guaranteed by a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or by a commercial bank or trust company having an office or correspondent in
the United States or by any other "Eligible Guarantor Institution" as such term
is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended
(each of the foregoing being referred to herein as an "Eligible Institution")
unless (a) this Letter of Transmittal is signed by the registered holder of the
Securities tendered herewith (or by a participant in DTC whose name appears on a
security position listing as the owner of such Securities) and neither the
"Special Payment Instructions" box nor the "Special Delivery Instructions" box
of this Letter of Transmittal has been completed or (b) such Securities are
tendered for the account of an Eligible Institution. See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND SECURITIES; GUARANTEED DELIVERY
PROCEDURES. To validly tender Securities, a confirmation of any book-entry
transfer into the Exchange Agent's account with DTC of Securities tendered
electronically, or physical delivery of Securities as well as properly completed
and duly executed copy or facsimile of this Letter of Transmittal together with
any signature guarantees and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth on
the cover page hereof on or prior to the Expiration Date. If Securities are
forwarded to the Exchange Agent in multiple deliveries, a properly completed and
validly executed Letter of Transmittal must accompany each such delivery.
If a holder desires to tender Securities pursuant to the Exchange Offer and
(a) such Securities are not immediately available, (b) time will not permit this
Letter of Transmittal, such Securities or all other required documents to reach
the Exchange Agent prior to the Expiration Date or (c) such holder cannot
complete the procedures for book-entry transfer on or prior to the Expiration
Date, such holder may effect a tender of Securities in accordance with the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer -- Procedures for Tendering -- Guaranteed Delivery".
Pursuant to such procedure:
(a) such tender must be made by or through an Eligible Institution;
(b) on or prior to the Expiration Date, the Exchange Agent must have
received from such Eligible Institution, at the address of the Exchange
Agent set forth on the cover page hereof, a properly completed and validly
executed Notice of Guaranteed Delivery (by telegram, facsimile, mail or hand
delivery) in substantially the form provided by Alliance, setting forth the
name and address of the registered holder and the principal amount of
Securities being tendered and stating that the tender is being made thereby
and guaranteeing that, within three New York Stock Exchange trading days
after the date of the Notice of Guaranteed Delivery, this Letter of
Transmittal validly executed (or a facsimile hereof), together with the Old
Convertible Debentures (or confirmation of book-entry transfer of such Old
Convertible Debentures into the Exchange Agent's account with DTC), and any
other documents required by this Letter of Transmittal and these
instructions, will be deposited by such Eligible Institution with the
Exchange Agent; and
(c) this Letter of Transmittal or a facsimile hereof, properly completed
and validly executed, together with any required signature guarantees, the
Securities in proper form for transfer (or confirmation of book-entry
transfer into the Exchange Agent's account with DTC) and all other documents
required by this Letter of Transmittal must be received by the Exchange
Agent within three New York Stock Exchange trading days after the date of
such Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE SECURITIES AND ALL
OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE DTC SYSTEM, TO THE
EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE TENDERING HOLDER, AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
IF SUCH DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, THE MAILING SHOULD BE MADE
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT
TENDERS OF SECURITIES WILL BE ACCEPTED. BY EXECUTION OF THIS LETTER OF
TRANSMITTAL (OR A FACSIMILE HEREOF), ALL TENDERING HOLDERS WAIVE ANY RIGHT TO
RECEIVE ANY NOTICE OF THE ACCEPTANCE OF THEIR SECURITIES FOR EXCHANGE.
<PAGE>
3. INADEQUATE SPACE. If the space provided herein under "Description of
Securities Tendered" is inadequate, the certificate numbers of the Securities
and the principal amount of Securities tendered should be listed on a separate
schedule and attached hereto.
4. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER). Tenders of Securities will be accepted only in integral multiples of
$1,000 principal amount. The aggregate principal amount of all Securities
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If tenders of Securities are made with respect to less than
the entire principal amount of Securities delivered herewith, Securities in the
aggregate principal amount not tendered will be issued and sent to the
registered holder, unless otherwise specified in the "Special Payment
Instructions" or "Special Delivery Instructions" boxes in this Letter of
Transmittal.
5. SIGNATURES ON LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the
Securities tendered hereby, the signature(s) must correspond with the name(s) as
written on the face of such Securities without alteration, enlargement or any
other change whatsoever. If this Letter of Transmittal is signed by a
participant in DTC whose name is shown on a security position listing as the
owner of the Securities tendered hereby, the signature must correspond with the
name shown on the security position listing as the owner of the Securities.
If any Securities tendered hereby are owned of record by two or more
persons, all such persons must sign this Letter of Transmittal.
If any Securities tendered hereby are registered in the names of different
holders, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal, and any necessary accompanying documents, as there are
different registrations of such Securities.
If this Letter of Transmittal is signed by the registered holder of
Securities tendered hereby, no endorsements of such Securities or separate bond
powers are required, unless the New Convertible Debentures are to be issued to,
or Securities not tendered or not accepted for exchange are to be issued in the
name of, a person other than the registered holder(s), in which case the
Securities tendered hereby must be endorsed or accompanied by appropriate bond
powers, in either case signed exactly as the name(s) of the registered holder(s)
appear(s) on such Securities (and with respect to a participant in DTC whose
name appears on a security position listing as the owner of Securities, exactly
as the name(s) of the participant(s) appear(s) on such security position listing
as the owner of the Securities). Signatures on such Securities and bond powers
must be guaranteed by an Eligible Institution. See Instruction 1.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Securities tendered hereby, the Securities must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name(s) of the registered holder(s) appear(s) on such Securities.
Signatures on such Securities and bond powers must be guaranteed by an Eligible
Institution. See Instruction 1.
If this Letter of Transmittal or any Securities or bond powers are signed by
a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and proper evidence satisfactory to
Alliance of such person's authority so to act must be submitted with this Letter
of Transmittal.
6. TRANSFER TAXES. Except as otherwise provided in this Instruction 6,
Alliance will pay all transfer taxes with respect to the delivery and exchange
of Securities pursuant to the Exchange Offer. If, however, the New Convertible
Debentures, or Securities not tendered or not accepted for exchange, are to be
issued in the name of a person other than the registered holder(s), the amount
of any transfer taxes (whether imposed on the registered holder(s), such other
person or otherwise) payable on account of the transfer to such other person
will be payable by the tendering holder unless evidence satisfactory to Alliance
of the payment of such taxes, or exemption therefrom, is submitted. Except as
provided in this Instruction 6, it will not be necessary for transfer tax stamps
to be affixed to the Securities tendered hereby.
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If the New Convertible
Debentures, or Securities not tendered or not accepted for exchange, are to be
issued in the name of a person other than the person(s) signing this Letter of
Transmittal or to the person(s) signing this Letter of Transmittal but at an
address other than that shown in the box entitled "Description of Securities
Tendered", the appropriate boxes in this Letter of Transmittal must be
completed. All Securities tendered by book-entry transfer and not accepted for
exchange will be returned by crediting the account at DTC as the account from
which such Securities were delivered.
8. ELECTION TO RECEIVE SERIES E PREFERRED STOCK UPON AUTOMATIC
CONVERSION. If a holder tendering Securities pursuant to the Exchange Offer
desires to receive Series E Preferred Stock upon the Automatic Conversion with
respect to all or any part of the New Convertible Debentures issued in exchange
for such Securities, such holder must so indicate in column (4) of the box
entitled "Description of Securities
<PAGE>
Tendered". Except to the extent so indicated, in the event the Automatic
Conversion occurs, all of the New Convertible Debentures issued in exchange for
the Securities tendered hereby will be automatically converted into shares of
Common Stock. Elections to receive shares of Series E Preferred Stock upon the
Automatic Conversion will be accepted only in integral multiples of $1,000
principal amount.
9. TAXPAYER IDENTIFICATION NUMBER. Each tendering holder is required to
provide the Exchange Agent with the holder's correct taxpayer identification
number ("TIN"), generally, the holders' social security or federal employer
identification number, on Substitute Form W-9, which is provided under
"Important Tax Information" below, and to certify whether such person is subject
to backup withholding of federal income tax.
A holder must cross out item (2) in the Part III Certification box of
Substitute Form W-9 if such holder is subject to backup withholding. Failure to
provide the information on the Substitute Form W-9 may subject the tendering
holder to 31% federal income tax backup withholding on the reportable payments
made to the holder or other payee with respect to Securities exchanged pursuant
to the Exchange Offer. The box entitled "Applied For" in Part I of the form
should be checked if the tendering holder has not been issued a TIN and has
applied for a TIN or intends to apply for a TIN in the near future. If the
"Applied For" box is checked and the Exchange Agent is not provided with a TIN
within 60 days, thereafter the Exchange Agent will hold 31% of all reportable
payments until a TIN is provided to the Exchange Agent.
10. CONFLICTS. In the event of any conflict between the terms of the
Prospectus and the terms of this Letter of Transmittal, the terms of the
Prospectus will control.
11. IRREGULARITIES. All questions as to the form of all documents, the
validity (including time of receipt) and acceptance of tenders of the Securities
will be determined by Alliance, in its reasonable discretion, and Alliance's
determination shall be final and binding. Alternative, conditional or contingent
tenders of Securities will not be valid. Alliance reserves the absolute right to
reject any or all tenders of Securities that are not in proper form or the
acceptance of which, in Alliance's opinion, would be unlawful. Alliance also
reserves the absolute right to waive any defects, irregularities or conditions
of tender as to particular Securities. If Alliance waives its right to reject a
defective, irregular or conditional tender of Securities, the holder will be
entitled to New Convertible Debentures in exchange for such Securities.
Alliance's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in this Letter of Transmittal) will be final and
binding. Any defect or irregularity in connection with tenders of Securities
must be cured within such time as Alliance determines, unless waived by
Alliance. Tenders of Securities shall not be deemed to have been made until all
defects and irregularities have been waived by Alliance or cured. None of
Alliance, the Dealer Managers, the Exchange Agent, the Information Agent, the
trustee under the indenture for the Securities (the "Trustee") or any other
person will be under any duty to give notice of any defects or irregularities in
tenders of Securities, or will incur any liability to holders for failure to
give any such notice.
12. WAIVER OF CONDITIONS. Alliance reserves the absolute right, in its
sole discretion, to waive any or all of the conditions to the Exchange Offer
(except for any required approvals of the Nevada Gaming Commission and the
Mississippi Gaming Commission).
13. MUTILATED, LOST OR MISSING CERTIFICATES. If a holder desires to tender
Securities pursuant to the Exchange Offer but such Securities have been
mutilated, lost, stolen or destroyed, such holder should write to or telephone
the Trustee, at the address or telephone number listed in the Prospectus, about
procedures for obtaining replacements for such Securities or arranging for
indemnification or any other matter that requires handling by the Trustee.
14. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Any questions or request
for assistance or additional copies of the Prospective, this Letter of
Transmittal and/or the Notice of Guaranteed Delivery may be directed to the
Information Agent at its telephone number and address set forth below.
<PAGE>
IMPORTANT TAX INFORMATION
Under the federal income tax law, a holder whose tendered Securities are
accepted for exchange is required by law to provide the Exchange Agent (as
payer) with such holder's correct TIN on Substitute Form W-9 below. If such
holder is an individual, the TIN is his or her social security number. If the
Exchange Agent is not provided with the correct TIN, a $50 penalty may be
imposed by the Internal Revenue Service, and delivery of New Convertible
Debentures may be subject to backup withholding.
Certain holders (including, among others, corporations) are not subject to
these backup withholdings and reporting requirements. Exempt holders should
indicate their exempt status on Substitute Form W-9. In order for a foreign
individual to qualify as an exempt recipient, such individual must submit a
properly completed IRS Form W-8, signed under penalties of perjury, attesting to
such individual's exempt status. A Form W-8 can be obtained from the Exchange
Agent. See the enclosed "Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9" for additional instructions.
If backup withholding applies, the Exchange Agent is required to withhold
31% of any reportable payments made to the holder or other payee. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on reportable payments made with respect to
Securities accepted for exchange pursuant to the Exchange Offer, the holder is
required to notify the Exchange Agent of such holder's correct TIN by completing
the form below, certifying that the TIN provided on the Substitute Form W-9 is
correct (or that such holder is awaiting a TIN) and that (a) such holder is
exempt from backup withholding, (b) such holder has not been notified by the
Internal Revenue Service that he is subject to backup withholding as a result of
a failure to report all interest or dividends or (c) the Internal Revenue
Service has notified such holder that such holder is no longer subject to backup
withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the holder of the
Securities tendered hereby. If the Securities are held in more than one name or
are not held in the name of the actual owner, consult the enclosed "Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
<PAGE>
SUBSTITUTE FORM W-9
REQUEST FOR TAXPAYER IDENTIFICATION NUMBER AND CERTIFICATION
PAYER'S NAME: THE BANK OF NEW YORK
<TABLE>
<S> <C>
PAYEE INFORMATION
(Please print or type)
Individual or business name (if joint account, list first and circle the name of person or
entity whose number you furnish in Part I below):
Check appropriate box: / / Individual/Sole proprietor
/ / Corporation / / Partnership / / Other
Address (number, street, and apt. or suite no.):
City, state, and ZIP code:
PART I TAXPAYER IDENTIFICATION NUMBER ("TIN") PART II PAYEES EXEMPT
Enter you TIN below. For individuals, this is your social security FROM BACK WITHHOLDING
number. For other entities, it is your employer identification Check box (see page 2
number. Refer to the chart on page 1 of the Guidelines for of the Guidelines for
Certification of Taxpayer Identification Number on Substitute Form further clarification.
W-9 (the "Guidelines") for further clarification. If you do not Even if you are exempt
have a TIN, see instructions on how to obtain a TIN on page 2 of from backup
the Guidelines, check the appropriate box below indicating that you withholding, you
have applied for a TIN and, in addition to the Part III should still complete
Certification, sign the attached Certification of Taxpayer Awaiting and sign the
Identification Number. certification below):
Social security number:
/ / / / / / - / / / / / / - / / / / / / / / EXEMPT
/ / Applied For
Employer identification number:
/ / / / - / / / / / / / / / / / / / /
PART III CERTIFICATION
Certification Instructions: You must cross out item 2 below if you have been notified by the
Internal Revenue Service (the "IRS") that you are currently subject to backup withholding
because of underreporting interest or dividends on your tax return (see page 2 of the
Guidelines for further clarification).
Under penalties of perjury, I certify that:
1. The number shown on this form is my correct taxpayer identification number (or I am
waiting for a number to be issued to me), and
2. I am not subject to backup withholding because: (a) I am exempt from backup withholding,
or (b) I have not been notified by the IRS that I am subject to backup withholding as a
result of a failure to report all interest or dividends or (c) the IRS has notified me
that I am no longer subject to backup withholding.
Signature Date
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE OFFER.
PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER OF SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATION IF YOU CHECKED THE BOX
"APPLIED FOR" IN PART I OF SUBSTITUTE FORM W-9
<TABLE>
<S> <C>
CERTIFICATE OF TAXPAYER AWAITING IDENTIFICATION NUMBER
I certify, under penalties of perjury, that a TIN has not been issued to
me, and either (a) I have mailed or delivered an application to receive a
TIN to the appropriate IRS Center or Social Security Administration Office,
or (b) I intend to mail or deliver an application in the near future. I
understand that I must provide a TIN to the payer within 60 days of
submitting this Substitute Form W-9 and that if I do not provide a TIN to
the payer within 60 days, the payer is required to withhold 31% of all
reportable payments thereafter to me until I furnish the payer with a TIN.
------------------------------------
Signature
------------------------------------
Date
</TABLE>
<PAGE>
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
GEORGESON
& COMPANY INC.
Wall Street Plaza
New York, NY 10005
Toll Free (800) 223-2064
Banks and Brokerage
Firms please call collect:
(212) 440-9800
<PAGE>
ALLIANCE GAMING CORPORATION
OFFER FOR ALL OUTSTANDING
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
IN EXCHANGE FOR
7 1/2% SENIOR CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
CUSIP NO. 01859P
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 6,
1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 7 1/2% CONVERTIBLE
SUBORDINATED DEBENTURES DUE 2003 MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE.
May 9, 1996
TO BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES:
We are enclosing herewith the material listed below relating to the offer
(the "Exchange Offer") by Alliance Gaming Corporation ("Alliance") to exchange
up to $85 million principal amount of Alliance's 7 1/2% Convertible Senior
Subordinated Debentures due 2003 (the "New Convertible Debentures") for a like
principal amount of Alliance's 7 1/2% Convertible Subordinated Debentures due
2003 (the "Securities"). Consummation of the Exchange Offer is subject to, among
other things, satisfaction of the conditions set forth in the Prospectus
referred to below under the heading "The Exchange Offer -- Conditions to the
Exchange Offer".
We are asking you to contact your clients for whom you hold Securities
registered in your name or in the name of your nominee. In addition, we are
asking you to contact your clients who, to your knowledge, hold Securities
registered in their own name.
Enclosed for your information and use are copies of the following documents:
1. Alliance's Prospectus dated May 9, 1996 (as the same may be further
amended or supplemented from time to time, the "Prospectus");
2. A BLUE Letter of Transmittal (the "Letter of Transmittal") for your
use in connection with the tender of Securities and for the information of
your clients;
3. A YELLOW form of letter that may be sent to your clients for whose
accounts you hold Securities registered in your name or the name of your
nominee, with space provided for obtaining the clients' instructions with
regard to the Exchange Offer;
4. A GREEN form of Notice of Guaranteed Delivery;
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
6. A return envelope addressed to the Exchange Agent.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE
THAT THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
JUNE 6, 1996, UNLESS EXTENDED. SECURITIES TENDERED PURSUANT TO THE EXCHANGE
OFFER MAY BE WITHDRAWN, SUBJECT TO THE PROCEDURES DESCRIBED IN THE PROSPECTUS,
AT ANY TIME PRIOR TO THE EXPIRATION DATE.
In all cases, New Convertible Debentures will be issued in exchange for
Securities accepted for exchange pursuant to the Exchange Offer only after
timely receipt by the Exchange Agent of such Securities
<PAGE>
(or confirmation of book-entry transfer of such Securities into the Exchange
Agent's account at the Depositary Trust Company), a Letter of Transmittal (or
facsimile thereof), properly completed and validly executed, and any other
required documents.
If holders of Securities wish to tender, but it is impracticable for them to
forward their Securities or other required documents prior to the Expiration
Date, a tender may be effected by following the guaranteed delivery procedures
described in the Prospectus under the heading "The Exchange Offer -- Procedures
for Tendering -- Guaranteed Delivery".
Procedures for tendering Securities are set forth in the Prospectus under
the caption "The Exchange Offer -- Procedures for Tendering". Holders of
Securities who wish to tender their Securities must use either the Letter of
Transmittal or a facsimile thereof or such Securities must be transferred
pursuant to the procedures for book-entry transfer set forth in the Prospectus
under the heading "The Exchange Offer -- Procedures for Tendering -- Book-Entry
Transfer". In addition, holders of Securities who are following the procedures
for guaranteed delivery set forth in the Prospectus must use the Notice of
Guaranteed Delivery distributed with the Prospectus.
Alliance will not pay any fees or commissions to any broker, dealer or other
person in connection with the solicitation of tenders of Securities pursuant to
the Prospectus. However, Alliance will reimburse you for customary mailing and
handling expenses incurred by you in forwarding any of the enclosed materials to
your clients. Alliance will pay or cause to be paid any transfer taxes payable
with respect to the transfer of Securities to it, except as otherwise provided
in Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer should be
addressed to, and additional copies of the enclosed materials may be obtained
from Georgeson & Company, Inc., the Information Agent, at its address and
telephone number set forth on the back cover page of the Prospectus.
Very truly yours,
DEUTSCHE MORGAN GRENFELL
JEFFERIES & COMPANY, INC.
LADENBURG, THALMANN & CO., INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF ALLIANCE, THE DEALER MANAGERS, THE INFORMATION
AGENT OR THE EXCHANGE AGENT, OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU
OR ANY OTHER PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF
ANY OF THEM IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE ENCLOSED
DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
<PAGE>
ALLIANCE GAMING CORPORATION
OFFER FOR ALL OUTSTANDING
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
IN EXCHANGE FOR
7 1/2% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2003
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK TIME, ON JUNE 6,
1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 7 1/2% CONVERTIBLE
SUBORDINATED DEBENTURES DUE 2003 MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE.
May 9, 1996
TO OUR CLIENTS:
Enclosed for your consideration is the Prospectus dated May 9, 1996 (as the
same may be further amended or supplemented from time to time, the "Prospectus")
and a related form of Letter of Transmittal and instructions thereto (the
"Letter of Transmittal") relating to the offer (the "Exchange Offer") by
Alliance Gaming Corporation ("Alliance") to exchange up to $85 million principal
amount of Alliance's 7 1/2% Convertible Senior Subordinated Debentures due 2003
(the "New Convertible Debentures") for a like principal amount of Alliance's
7 1/2% Convertible Subordinated Debentures due 2003 (the "Securities").
WE ARE THE REGISTERED HOLDER OF SECURITIES HELD BY US FOR YOUR ACCOUNT. A
TENDER OF ANY SUCH SECURITIES CAN BE MADE ONLY BY US AS THE REGISTERED HOLDER
AND PURSUANT TO YOUR INSTRUCTIONS. THE BLUE LETTER OF TRANSMITTAL IS FURNISHED
TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SECURITIES
HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender any
or all of the Securities held by us for your account pursuant to the terms and
conditions set forth in the Prospectus and the Letter of Transmittal. We urge
you to read the Prospectus and the Letter of Transmittal carefully before
instructing us to tender your Securities.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to tender Securities on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 12:00
midnight, New York City time, on June 6, 1996, unless extended. Securities
tendered pursuant to the Exchange Offer may be withdrawn, subject to the
procedures described in the Prospectus, at any time prior to the Expiration
Date.
The Prospectus contains important information you should consider carefully.
Among other things, your attention is directed to the following:
1. The Exchange Offer is for all outstanding Securities.
2. Holders whose Securities are accepted for exchange in the Exchange Offer
will receive on the next interest payment date for the Securities payment in
respect of interest (provided such holders' New Convertible Debentures have
not theretofore converted) and (to the extent such holder was entitled
thereto) liquidated damages on the Securities, in each case accrued to the
date of issuance of the New Convertible Debentures.
3. Consummation of the Exchange Offer is subject to, among other things,
satisfaction of the conditions set forth in the Prospectus under the heading
"The Exchange Offer -- Conditions to the Exchange Offer".
4. Any transfer taxes incident to the transfer of Securities from the tendering
holder to Alliance will be paid by Alliance, except as provided in the
Prospectus and the instructions to the Letter of Transmittal.
5. In the event the proposed merger between Bally Gaming International, Inc.
and a wholly-owned subsidiary of Alliance (the "Merger") is consummated
within 60 days after the issuance of the New Convertible Debentures, then at
the effective date of the Merger, the New Convertible Debentures will be
automatically converted into Common Stock, par value $.10 per share, of
Alliance or, if a holder tendering Securities in the Exchange Offer so
elects at the time such Securities are tendered, the New Convertible
Debentures received in exchange for such Securities will be automatically
converted into 10% Non-Voting Junior Convertible Pay-in-Kind Special Stock,
Series E, par value $.10 per share, of Alliance.
If you wish to have us tender any or all of the Securities held by us for
your account, please so instruct us by completing, executing and returning to us
the instruction form that follows.
<PAGE>
INSTRUCTIONS REGARDING THE EXCHANGE OFFER
WITH RESPECT TO THE 7 1/2% CONVERTIBLE
SUBORDINATED DEBENTURES DUE 2003
OF ALLIANCE GAMING CORPORATION
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of Alliance Gaming
Corporation.
This will instruct you whether to tender the principal amount of Securities
indicated below held by you for the account of the undersigned pursuant to the
terms and conditions set forth in the Prospectus and the Letter of Transmittal.
<TABLE>
<S> <C>
Box 1 / / Please tender the Securities held by you for my account.
Box 2 / / Please do not tender any Securities held by you for my account.
Date: , 1996
Signature(s)
Please print name(s) here
Please type or print address
Principal Amount of Securities to be
Tendered:
$*
Area Code and Telephone Number
Principal Amount of New Convertible Taxpayer Identification or
Debentures to be Converted into Series E Social Security Number
Preferred Stock in Event of Automatic
Conversion:
$**
My Account Number With You
* UNLESS OTHERWISE INDICATED, SIGNATURE(S) HEREON BY BENEFICIAL OWNER(S) SHALL CONSTITUTE
AN INSTRUCTION TO THE NOMINEE TO TENDER ALL SECURITIES OF SUCH BENEFICIAL OWNER(S).
** UNLESS OTHERWISE INDICATED, ALL NEW CONVERTIBLE DEBENTURES RECEIVED IN EXCHANGE FOR
SECURITIES TENDERED IN THE EXCHANGE OFFER WILL BE CONVERTED INTO COMMON STOCK IN THE
EVENT OF THE AUTOMATIC CONVERSION.
</TABLE>
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF
7 1/2% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2003
OF
ALLIANCE GAMING CORPORATION
This Notice of Guaranteed Delivery or a form substantially equivalent hereto
must be used to accept Alliance Gaming Corporation's ("Alliance") offer (the
"Exchange Offer") to exchange up to $85 million principal amount of Alliance's
7 1/2% Convertible Senior Subordinated Debentures due 2002 (the "New Convertible
Debentures") for a like principal amount of Alliance's 7 1/2% Convertible
Subordinated Debentures due 2003 (the "Securities"), if (a) certificates
representing the Securities are not immediately available, (b) the procedures
for book-entry transfer cannot be completed prior to the Expiration Date (as
defined) or (c) time will not permit the Securities and all other required
documents to each the Exchange Agent prior to the Expiration Date. This form may
be delivered by an Eligible Institution by mail or hand delivery or transmitted,
via facsimile, telegram or telex to the Exchange Agent as set forth below. All
capitalized terms used herein but not otherwise defined herein shall have the
meanings ascribed to them in the Prospectus dated May 9, 1996 of Alliance (as
the same may be amended or supplemented from time to time, the "Prospectus").
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 6,
1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 7 1/2% CONVERTIBLE
SUBORDINATED DEBENTURES DUE 2003 MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE.
To:
THE BANK OF NEW YORK, EXCHANGE AGENT
BY MAIL OR BY HAND:
The Bank of New York
101 Barclay Street, Corporate Trust Operations, 7E
New York, New York 10286
Attention: Enrique Lopez
Telephone: (212) 815-2742
BY FACSIMILE:
(212) 571-3080
TOLL FREE NUMBER:
1-800-254-2826
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OR TELEX, OTHER THAN AS
SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to Alliance Gaming Corporation
("Alliance"), upon the terms and subject to the conditions set forth in the
Prospectus and the Letter of Transmittal, receipt of which is hereby
acknowledged, the principal amount of Securities set forth below, pursuant to
the guaranteed delivery procedures set forth in the Prospectus under the heading
"The Exchange Offer -- Procedures for Tendering -- Guaranteed Delivery."
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representation of the undersigned.
<TABLE>
<S> <C>
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Holder(s) or
Authorized Signatory: Address(es):
Name(s) of Registered Holder(s): Area Code and Telephone No.:
If Securities will be delivered by book-
entry transfer, provide the account num-
ber at The Depository Trust Company:
Account No.:
Certificate No(s). of Securities (if
available):
Principal Amount of Securities Tendered:
$
Principal Amount of New Convertible Debentures to be
Converted into Series E Preferred Stock in Event of
Automatic Conversion:
$ *
Date:
* Unless otherwise specified, all New Convertible Debentures received in exchange for Securities
tendered in the Exchange Offer will be converted into Common Stock in the event the Automatic
Conversion occurs.
</TABLE>
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Securities exactly as their name(s) appear(s) on the certificates
representing such Securities or on a security position listing as the owner(s)
of the Securities, or by person(s) authorized to become registered holder(s) by
endorsements and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, guardian, attorney-in-fact, officer of a
corporation, executor, administrator, agent or other representative, such person
must provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capacity:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Address(es):
- --------------------------------------------------------------------------------
Do not send Securities with this form. Securities should be sent to the
Exchange Agent, together with a properly completed and validly executed Letter
of Transmittal.
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc. or a commercial bank
or trust company having an office or a correspondent in the United States or
another "Eligible Guarantor Institution" as defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, hereby guarantees that, within
three New York Stock Exchange trading days from the date of this Notice of
Guaranteed Delivery, a properly completed and validly executed Letter of
Transmittal (or a facsimile thereof), together with Securities tendered hereby
in proper form for transfer (or confirmation of the book-entry transfer of such
Securities into the Exchange Agent's account at a Book-Entry Transfer Facility,
pursuant to the procedure for book-entry transfer set forth in the Prospectus
under the heading "The Exchange Offer -- Procedures for Tendering -- Book-Entry
Transfer"), and all other required documents will be deposited by the
undersigned with the Exchange Agent at one of its addresses set forth above.
<TABLE>
<S> <C>
Name of Firm: --------------------------------------- -----------------------------------
Authorized Signature
Address: --------------------------------------------- Name: -----------------------------
Title:
- ----------------------------------------------------- ------------------------------
Area Code and Telephone No.: ------------------------
Date: -----------------------------------------------
</TABLE>
DO NOT SEND SECURITIES WITH THIS FORM. ACTUAL SURRENDER OF SECURITIES MUST
BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND VALIDLY
EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
