<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1996
REGISTRATION NO. 333-02147
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 88-0104066
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
4380 BOULDER HIGHWAY, LAS VEGAS, NEVADA 89121
(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
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------
COPIES TO:
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<S> <C>
LAWRENCE LEDERMAN, Esq. NICHOLAS P. SAGGESE, Esq.
ARNOLD B. PEINADO, III, Esq. Skadden, Arps, Slate, Meagher & Flom
Milbank, Tweed, Hadley & McCloy 300 South Grand Avenue
1 Chase Manhattan Plaza Los Angeles, California 90071
New York, New York 10005 (213) 687-5000
(212) 530-5000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If the registrant elects to deliver its latest annual report to
security-holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this form, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration number for
the same offering. / / ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) PRICE (1) FEE (2)
<S> <C> <C> <C> <C>
% Senior Secured Notes due 2003.......... $140,000,000 100% $140,000,000 $48,276
<FN>
(1) Estimated solely for purposes of calculating the registration fee.
(2) $25,862 was previously paid for the registration of $75,000,000 aggregate
principal amount of senior secured notes with the initial filing of this
Registration Statement.
</TABLE>
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
ALLIANCE GAMING CORPORATION
CROSS REFERENCE SHEET
SHOWING LOCATION OF INFORMATION IN PROSPECTUS REQUIRED BY FORM S-2
<TABLE>
<CAPTION>
FORM S-2 LOCATION OR HEADING
ITEM CAPTION IN PROSPECTUS
- --------- -------------------------------------------------- --------------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................... Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors; Selected
Historical Financial Information of Alliance;
Selected Historical Financial Information of BGII
4. Use of Proceeds................................... The Merger and Related Financings; Use of
Proceeds; Capitalization
5. Determination of Offering Price................... Underwriting
6. Dilution.......................................... *
7. Selling Security Holders.......................... *
8. Plan of Distribution.............................. Outside and Inside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be Registered........ Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of the Notes
10. Interest of Named Experts and Counsel............. *
11. Information with Respect to the Registrant........ Outside Front Cover Page of Prospectus; Prospectus
Summary; The Company; The Merger and Related
Financings; Use of Proceeds; Capitalization;
Unaudited Pro Forma Condensed Combined Financial
Information; Supplemental Analysis of Adjusted
Operating Cash Flow; Forecast of Operating Income
and Adjusted Operating Cash Flow; Selected
Historical Financial Information of Alliance;
Selected Historical Financial Information of
BGII; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Security Ownership of
Certain Beneficial Holders and Management;
Certain Relationships and Related Transactions;
Description of Certain Other Indebtedness;
Description of the Notes; Consolidated Financial
Statements of Alliance; Consolidated Financial
Statements of BGII
12. Incorporation of Certain Information by
Reference........................................ Incorporation by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... *
</TABLE>
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* Not Applicable.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND
EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE
ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH
SUCH OFFER SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 24, 1996
PROSPECTUS
, 1996
$140,000,000
ALLIANCE GAMING CORPORATION
% SENIOR SECURED NOTES DUE 2003
The % Senior Secured Notes (the "Notes") due 2003 are being offered (the
"Note Offering") by Alliance Gaming Corporation ("Alliance"). The Notes are
being issued as part of the financing of the merger (the "Merger") of a
wholly-owned subsidiary of Alliance with and into Bally Gaming International,
Inc. ("BGII"), pursuant to which BGII will become a wholly-owned subsidiary of
Alliance. See "The Merger and Related Financings" and "Use of Proceeds."
Concurrently with the Note Offering, Alliance is issuing $15,000,000 of its
15% Non-Voting Junior Pay-in-Kind Special Stock, Series B (together with up to
an additional 15% subject to an over-allotment option, the "Preferred Stock
Offering" and, together with the Note Offering, the "Offerings"). In addition,
Alliance previously agreed to issue $5,000,000 of its Common Stock to an
institutional investor in reliance on an exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
which issuance (the "Private Placement") will close simultaneously with and be
contingent upon the consummation of the Merger and the Offerings. Consummation
of the Note Offering is contingent upon consummation of the Merger.
Interest on the Notes is payable semi-annually in arrears on and
of each year, commencing , 1996. The Notes will mature on
, 2003. The Notes will be redeemable at the option of
Alliance, in whole or in part, at any time on or after , 2000
at the redemption prices set forth herein, plus accrued and unpaid interest, if
any, to the date of redemption, and will be redeemable at any time pursuant to a
Required Regulatory Redemption (as defined); provided, that at any time on or
before , 1997, the Company may also redeem the Notes in whole at a
redemption price equal to % of the aggregate principal amount thereof,
together with accrued and unpaid interest, if any, to the date of redemption,
with the net proceeds of a bank financing. In addition, at any time on or before
, 1998, the Company may redeem up to 35% of the original aggregate
principal amount of the Notes at a redemption price equal to % of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of redemption, with the net proceeds of an Equity Offering (as defined) of the
Company. Upon the occurrence of a Change of Control (as defined), Alliance is
required to make an offer to repurchase the Notes at a price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase. See "Description of the Notes."
The Notes will be secured by liens on certain assets of Alliance and its
Subsidiaries as described herein and by the equity interests in a direct
subsidiary of Alliance which will be created to hold the equity interests of
BGII and its subsidiaries. The Notes will rank PARI PASSU in right of payment
with existing and future senior indebtedness of Alliance, and senior to all
subordinated indebtedness of Alliance. After giving effect to the Merger, the
Offerings and the transactions contemplated thereby, at December 31, 1995, on a
pro forma basis, subsidiaries of Alliance would have had outstanding
approximately $ million of senior indebtedness, substantially all of which was
secured indebtedness.
SEE "RISK FACTORS" COMMENCING ON PAGE 18 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS IN CONNECTION WITH AN
INVESTMENT IN THE NOTES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
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.
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<CAPTION>
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Note........................................... $ $ $
Total(3)........................................... $ $ $
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</TABLE>
(1) PLUS ACCRUED INTEREST, IF ANY, FROM THE DATE OF ISSUANCE.
(2) ALLIANCE AND ITS SUBSIDIARIES HAVE AGREED TO INDEMNIFY THE UNDERWRITERS
AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT.
SEE "UNDERWRITING."
(3) BEFORE DEDUCTING EXPENSES PAYABLE BY ALLIANCE, ESTIMATED AT $ .
The Notes are offered by the several Underwriters when, as and if delivered
to and accepted by the Underwriters, and subject to various prior conditions,
including their right to reject orders in whole or in part. It is expected that
delivery of the Notes will be made in New York, New York on or about ,
1996.
JEFFERIES & COMPANY, INC. LADENBURG, THALMANN & CO. INC.
<PAGE>
IN CONNECTION WITH THE OFFERING OF THE SECURITIES OFFERED HEREBY, THE
UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN
THE MARKET PRICE OF SUCH SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET SYSTEM, IN THE OPEN MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
[ART WORK]
INCORPORATION BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(the "Commission") by Alliance pursuant to the Securities Exchange Act of 1934,
as amended (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;
(2) Alliance's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1995 and December 31, 1995, respectively.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents (other than exhibits to documents
unless such exhibits are specifically incorporated by reference) are available,
without charge, to any person to whom this Prospectus is delivered, on written
or oral request, to Alliance Gaming Corporation, 4380 Boulder Highway, Las
Vegas, Nevada 89121 (telephone number (702) 435-4200), Attention: John W.
Alderfer, Senior Vice President-- Finance and Administration, Chief Financial
Officer and Treasurer.
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS OR IN DOCUMENTS AND FINANCIAL
STATEMENTS INCORPORATED IN THIS PROSPECTUS BY REFERENCE. UNLESS OTHERWISE
INDICATED OR THE CONTEXT OTHERWISE REQUIRES, (I) THE TERM "ALLIANCE", AS USED IN
THIS PROSPECTUS, MEANS ALLIANCE GAMING CORPORATION AND ITS SUBSIDIARIES, TAKEN
AS A WHOLE, PRIOR TO THE MERGER, (II) THE TERM THE "COMPANY", AS USED IN THIS
PROSPECTUS, 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 OFFERINGS AND THE PRIVATE PLACEMENT, (III) THE TERM "BGII" MEANS
BALLY GAMING INTERNATIONAL, INC. AND ITS SUBSIDIARIES, TAKEN AS A WHOLE, PRIOR
TO THE MERGER AND (IV) THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE OVER-ALLOTMENT OPTION IN THE PREFERRED STOCK OFFERING. PROSPECTIVE INVESTORS
ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES AND THAT IS
SUBJECT TO THE ASSUMPTIONS SET FORTH IN CONNECTION THEREWITH AND THE INFORMATION
CONTAINED HEREIN.
THE COMPANY
BACKGROUND
Alliance is a diversified gaming company that currently operates through its
subsidiaries approximately 6,000 electronic gaming machines (primarily video
poker machines and slot machines) and also owns and operates a small casino in
each of Vicksburg, Mississippi and Sparks/Reno, Nevada. Alliance is the largest
gaming machine management operator in Nevada and is the exclusive operator of
video poker devices at the only racetrack and ten associated off-track betting
parlors ("OTBs") in the greater New Orleans area.
As part of its long-term growth strategy, Alliance entered into an Agreement
and Plan of Merger in October 1995, as amended in January 1996 (the "Merger
Agreement"), with BGII pursuant to which BGII will become a wholly-owned
subsidiary of Alliance. BGII, through subsidiaries in the United States and
Germany, is a leading designer, manufacturer and distributor of electronic
gaming machines. BGII also designs, assembles and sells computerized monitoring
systems for slot and video gaming machines which provide casino operators with
on-line real time player tracking, security and maintenance capabilities.
BGII is currently the second largest manufacturer of casino-style electronic
gaming machines in North America and since 1993 has made significant inroads in
recapturing a portion of its once dominant market share of the late 1970s. Unit
sales of electronic gaming machines by BGII's domestic subsidiary have
approximately doubled from the level of unit sales in 1993. Although BGII sells
electronic gaming machines to most of the major participants in the United
States casino industry, the Company hopes to continue to increase its
penetration in such casinos by capitalizing on Alliance's and BGII's
managements' relationships within the gaming industry together with the
performance capabilities of its current products.
Alliance believes that the Merger represents an opportunity to acquire an
established electronic gaming machine manufacturer with a well-recognized
presence in the gaming industry and a significant base of assets and experience.
Management estimates that the installed base of casino-style electronic gaming
machines (for these purposes, primarily slot and video machines) is
approximately 650,000 units, of which approximately 50% are located in North
America, and that annual sales in North America have grown from approximately
30,000 units in 1991 to approximately 89,000 units in 1995, reflecting a period
of accelerated growth in the number and size of casinos in North America.
Historically, growth in the gaming machine market has been principally fueled by
sales to new casinos and to a lesser degree by replacement of machines (which
have an average replacement cycle of three to seven years) and the application
of new technology. In the future, management believes that annual sales growth
resulting from replacement requirements and the application of new technology
should outpace growth in demand generated by new casino openings, which growth
rate is expected to decline. Management believes that the Merger provides
Alliance with an avenue for entering a business historically characterized by
effective barriers to entry in that the BGII assets being acquired are difficult
to replicate and would require significant time and investment to develop
successfully.
1
<PAGE>
For the twelve-month period ended December 31, 1995, on a pro forma basis
after giving effect to the Merger and the related transactions described herein,
the Company would have had revenues and Adjusted Operating Cash Flow (as
defined: see the introduction to "Summary Financial Information") of
approximately $401.0 million and $47.3 million, respectively.
BUSINESS STRATEGY
The Company's strategic objective is to build a pre-eminent gaming
entertainment company to capitalize on what management believes to be gaming's
continuing growth within the entertainment industry. In addition to continuing
the development of the Company's existing business units, the Company's
strategic focus will be on BGII's domestic subsidiary, key elements of which
include:
- to capitalize on BGII's strong product line and current sales momentum as
represented by unit sales of electronic gaming machines by BGII's domestic
subsidiary which have approximately doubled from the level of unit sales
in 1993;
- to develop and market premier gaming entertainment products employing
available information technology currently in common use in other segments
of the entertainment industry, but not yet prevalent in the gaming
industry;
- to reduce costs through enhanced operating efficiencies while improving
the quality of products and services; and
- to capitalize on relationships and enter into alliances with technology
and entertainment companies, with a particular focus on the application of
technology in the gaming entertainment business.
The Company believes it has assembled a strong and experienced management
team to implement its strategy and capitalize on the opportunities in the gaming
industry. Steve Greathouse, Chairman of the Board of Directors, President and
Chief Executive Officer of Alliance, has over 20 years of experience in the
gaming industry and has strong relationships with many casino operators. Prior
to joining Alliance in 1994, Mr. Greathouse was President of the Harrah's Casino
Hotels Division of The Promus Companies Incorporated. Craig Fields, Vice
Chairman of the Board of Directors of Alliance, who will assume a senior
management position upon consummation of the Merger, has over 20 years of
experience with advanced information technology from his work with several
leading companies and government agencies including Perot Systems Corp. and the
United States Department of Defense. Dr. Fields has been active in developing
the Company's strategic focus on the application of technology to gaming
entertainment products. In addition, Hans Kloss, currently the President and
Chief Operating Officer of BGII and long-time managing director of BGII's German
operations, will join the senior management team and continue to oversee the
BGII operations. Since becoming President of BGII in 1993, Mr. Kloss has been
instrumental in implementing changes in BGII's United States-based operations
which have contributed to improvements in the results of such operations. See
"Management."
BUSINESS UNITS
Following the Merger, the Company will operate through four business units:
(i) casino-style electronic gaming machine manufacturing and systems, (ii)
German operations (consisting of the manufacture and distribution of
wall-mounted gaming machines and the distribution of other recreational and
amusement machines), (iii) gaming machine management operations and (iv) casino
operations.
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
2
<PAGE>
lesser extent, in Canada, the Far East, Latin America and the Caribbean. Systems
designs, assembles and sells, primarily to casino operators in the United
States, computerized player tracking, cash monitoring, accounting and security
data systems for electronic gaming machines. Since the introduction of its SDS
6000 system in the first quarter of 1993 and subsequent upgrades, Systems has
rapidly expanded its presence in casino properties. By the end of 1993, Systems
had 40,000 of its game monitoring units ("GMUs") installed in 33 casino
properties. This has since increased to 59,000 GMUs installed in 56 casino
properties as of April 1, 1996. For the twelve-month period ended December 31,
1995, EBITDA (as defined: see footnote (1) to "Summary Historical Financial
Information -- Alliance Gaming Corporation") for the gaming machine
manufacturing and systems unit was approximately $11.7 million.
GERMAN OPERATIONS. BGII's German subsidiaries, which operate under the name
Bally Wulff (collectively, "Wulff"), design, manufacture and distribute
coin-operated, wall-mounted, electronic gaming machines known as wall machines.
Management estimates that Wulff has approximately 25% of the installed base of
the wall machine market which exists almost exclusively in Germany and that
Wulff and the two other major competitors have a greater than 90% market share.
Wulff markets its own wall machines as well as wall machines and other
recreational and amusement machines manufactured by third parties, including
pool tables, air-hockey and pinball machines, jukeboxes and arcade games, to
operators of arcades, taverns, hotels and restaurants primarily in Germany. For
the twelve-month period ended December 31, 1995, EBITDA for the German
operations unit was approximately $15.2 million.
GAMING MACHINE MANAGEMENT OPERATIONS. Alliance's Nevada gaming machine
management operations, which are the largest in Nevada, involve the selection,
ownership, installation, operation and maintenance of video poker devices,
reel-type slot machines and other electronic gaming machines in local
establishments such as taverns, restaurants, supermarkets, drug stores and
convenience stores operated by third parties. Alliance enters into contracts
with these parties whereby Alliance either receives a portion of the revenue
generated by the machines or pays rent and receives all of the revenues
generated by the machines. In Nevada, Alliance operated approximately 5,357
units installed in 528 locations as of April 1, 1996. Alliance's customer and
machine base has remained relatively stable over the last five years. These
operations target local residents who generally frequent establishments close to
their homes. In December 1995, Alliance launched Gambler's Bonus, a proprietary
product which brings large casino gaming amenities to local establishments, such
as multi-location progressive jackpots, bigger jackpot payouts and traditional
players' club enhancements. Since launching Gambler's Bonus, the gaming machines
linked to Gambler's Bonus have experienced an increase in average net win per
day per machine. As of April 1, 1996, Alliance had the Gambler's Bonus system
installed in 23 locations representing approximately 360 machines, and
management expects to have Gambler's Bonus installed in approximately 88
locations or a total of 980 machines by June 1996. In 1992, Alliance expanded
its machine management operations to Louisiana, where it has an exclusive
10-year contract (seven years remaining, plus a five-year right of first refusal
thereafter) to operate approximately 700 video poker devices at the only
racetrack and 10 associated OTBs in the greater New Orleans area. For the
twelve-month period ended December 31, 1995, EBITDA for the gaming machine
management operations unit was $18.3 million.
CASINO OPERATIONS. Alliance owns and operates two small full-service
casinos. In Mississippi, the Company's Rainbow Casino is part of the Vicksburg
Landing facility which opened in July 1994 and is the only casino/family
entertainment complex of its kind in Mississippi. The Rainbow Casino currently
has approximately 589 electronic gaming machines and 28 table games. In addition
to the approximately 24,000-square foot Rainbow Casino, Vicksburg Landing opened
an 89-room hotel and a 10-acre indoor/ outdoor amusement park in May 1995.
Although the hotel and amusement park are not owned or operated by Alliance,
management believes that such facilities have contributed significantly to the
recent strong financial results of the Rainbow Casino. Alliance's Plantation
Station Casino located in Reno/Sparks, Nevada is a 20,000-square foot casino
which currently contains approximately 453 electronic gaming machines, keno and
10 table games in addition to a 300-seat restaurant owned by Alliance. For the
twelve-month period ended December 31, 1995, EBITDA for the casino operations
unit was $10.5 million.
Alliance is a Nevada corporation organized in 1968. The Company's principal
executive offices are located at 4380 Boulder Highway, Las Vegas, Nevada 89121,
and its telephone number is (702) 435-4200.
3
<PAGE>
THE MERGER AND RELATED FINANCINGS
Pursuant to the Merger Agreement and subject to the terms and conditions set
forth therein, Alliance will acquire all of the stock of BGII as set forth
below. In addition, the Company will generally assume BGII's obligations with
respect to each outstanding BGII stock option and warrant, subject to certain
modifications approved by BGII stockholders, and will retire approximately $67.6
million of outstanding debt of BGII (including prepayment premium and original
issue discount), plus accrued interest.
The Merger and related transactions will be financed through (i) the Private
Placement of an aggregate of $5.0 million of Common Stock, $0.10 par value per
share, of Alliance (the "Common Stock"), (ii) the Preferred Stock Offering of
$15.0 million of 15% Non-voting Junior Pay-in-Kind Special Stock, Series B,
liquidation value $100 per share (the "Preferred Stock"), and (iii) the Note
Offering. The Preferred Stock Offering and the Note Offering are contingent upon
and will close simultaneously with the Merger. See "The Merger and Related
Financings."
The Preferred Stock Offering and the Note Offering are each being made by
the Company exclusively pursuant to separate prospectuses. A financial
institution has agreed to purchase privately at the time of consummation of the
Merger $5.0 million of the equity of Alliance at a price equal to the lower of
$4.56 (the average trading price of the Common Stock for the five trading day
period immediately preceding the agreement) and the closing sales price of the
Common Stock on the day of pricing of the Offerings. This Private Placement
would be in the form of Common Stock to the extent of 4.9% of the total Common
Stock outstanding at the time, taking into account Common Stock to be issued in
the Merger, with the remainder to be in the form of non-voting special stock
convertible into Common Stock. The Company anticipates, and it is assumed for
all purposes herein, that all of the $5.0 million will be issued in the form of
Common Stock. The Private Placement will close simultaneously with the Merger.
In addition, Alliance has filed an exchange offer registration statement on
Form S-4 (the "Exchange Offer Registration Statement") with the Commission
pursuant to which Alliance will offer (the "Convertible Exchange Offer") to
exchange each $1,000 principal amount of Alliance's 7 1/2% Convertible
Subordinated Debentures due 2003 (the "Convertible Debentures") into $1,000
principal amount of Alliance's 7 1/2% Convertible Subordinated Debentures due
2002 (the "New Debentures"), which will have terms identical to the Convertible
Debentures except for maturity, the absence of certain transfer restrictions and
registration rights relating to the Convertible Debentures, and except that if
the Merger is consummated within 60 days following the issuance of the New
Debentures, then upon consummation of the Merger, the New Debentures will be
automatically converted into Common Stock at a conversion price of $5.56 (the
"Special Conversion Price") so that each $1,000 principal amount of New
Debentures will be converted into approximately 180 shares of Common Stock (the
"Automatic Conversion"). A holder of New Debentures may elect to forego receipt
of all or any portion of Common Stock that such holder would be entitled to
receive upon the occurrence of the Automatic Conversion, to receive in lieu
thereof one-tenth of a share of Alliance's Non-Voting Junior Convertible Special
Stock, $0.10 par value Series E (the "Series E Special Stock"), for each share
of Common Stock that such holder would otherwise have been entitled to receive.
Each share of Series E Special Stock will be convertible into ten shares of
Common Stock and will have the same rights and preferences as the Common Stock
except that the Series E Special Stock will have no voting rights and will have
a $0.10 par share liquidation preference. The Convertible Exchange Offer will
expire on June , 1996, unless extended. The consummation of the Convertible
Exchange Offer is not conditioned upon any minimum principal amount of
Convertible Debentures being tendered for exchange.
The Merger, the Offerings, the Private Placement, the Convertible Exchange
Offer and the specified uses of proceeds therefrom are collectively referred to
herein as the "Transaction."
4
<PAGE>
SOURCES AND USES OF FUNDS
The following table sets forth the anticipated sources and uses of funds to
be used to consummate the Merger and related transactions, based on the
Company's cash and debt balances as of December 31, 1995. The actual balances
and number of shares outstanding will vary based on the date of consummation of
the Transaction.
(IN MILLIONS)
<TABLE>
<S> <C> <C> <C>
ANTICIPATED SOURCES OF FUNDS ANTICIPATED USES OF FUNDS
CASH SOURCES: CASH USES:
</TABLE>
<TABLE>
<S> <C> <C> <C>
Notes................................... $ 140.0 Cash to BGII Stockholders(a)............ $ 77.2
Retire BGII Debt (includes prepayment
premium and original issue
Preferred Stock......................... 15.0 discount)(b)............................ 67.6
Employee Contract Termination Costs and
Common Stock (Private Placement)........ 5.0 Performance Unit Awards(c).............. 7.6
Available Cash.......................... 12.4 Fees and Expenses(d).................... 20.0
--------- ---------
Total Cash Sources.................. 172.4 Total Cash Uses......................... 172.4
--------- ---------
NON-CASH SOURCES: NON-CASH USES:
Preferred Stock to BGII
Preferred Stock......................... 35.7 Stockholders(e)......................... 35.7
Common Stock............................ 2.9 Common Stock to BGII Stockholders(f).... 2.9
Common Stock Issued in Partial Common Stock Issued in Partial
Satisfaction of Employee Contract Satisfaction of Employee Contract
Termination Costs and Performance Unit Termination Costs and Performance Unit
Awards(c).............................. 4.0 Awards(c)............................... 4.0
--------- ---------
Total Non-Cash Sources................ 42.6 Total Non-Cash Uses..................... 42.6
--------- ---------
Total Sources....................... $ 215.0 Total Uses.............................. $ 215.0
--------- ---------
--------- ---------
</TABLE>
- --------------------------
(a) Represents the cash consideration to be paid to BGII stockholders in the
Merger consisting of $7.83 per share of BGII common stock plus interest
accruing at a rate of 5.5% per annum from May 3, 1996 to the Effective Time
(as defined; but not later than June 18, 1996 for the purposes hereof),
calculated in accordance with the terms of the Merger Agreement.
(b) Represents retirement of the following debt of BGII outstanding at December
31, 1995:
(i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a
prepayment premium of 101% plus original issue discount of $0.3 million;
(ii) $15.9 million under Wulff bank lines of credit;
(iii) $9.4 million under Bally Gaming Inc.'s bank revolving line of credit;
and
(iv) Other notes payable of BGII, aggregating $1.9 million.
Accrued and unpaid interest on such debt is not reflected as such amounts
are not considered material.
(c) Includes $5.0 million payable in cash to Richard Gillman, Chairman of the
Board and Chief Executive Officer of BGII, and $1.3 million payable to Neil
Jenkins, Executive Vice President and Secretary of BGII, consisting of $0.8
million in cash and $0.5 million in Common Stock, all pursuant to agreements
with Alliance in connection with the termination of their respective
employment agreements and performance unit awards. Additionally, Hans Kloss,
President and Chief Operating Officer of BGII and Managing Director of
Wulff, who will remain with the Company, will receive a total of $4.5
million consisting of $1.5 million in cash and $3.0 million in Common Stock,
and Robert Conover, President of Systems, who will remain with the Company,
will receive a total of $0.7 million consisting of $0.2 million in cash and
$0.5 million in Common Stock, in connection with their employment agreements
and performance unit awards. The Common Stock portion of each of such
payments will be valued at the Alliance Average Trading Price (as defined)
but in no event more than $6.00 nor less than $4.25 per share. See "The
Merger and Related Financings."
(d) Total estimated Alliance and BGII Transaction-related fees and expenses are
$32.0 million, of which $12.0 million has been paid through December 31,
1995.
(e) Represents the Preferred Stock consideration to be paid to BGII stockholders
in the Merger consisting of $3.57 per share of BGII common stock plus
dividends accruing at a rate of 15% per annum from May 3, 1996 to the
Effective Time, calculated in accordance with the terms of the Merger
Agreement to equate to the value per share of Preferred Stock obtained in
the Preferred Stock Offering.
(f) Represents the Common Stock consideration to be paid to BGII stockholders in
the Merger consisting of $0.30 per share of BGII common stock valued at the
Alliance Average Trading Price (as defined).
5
<PAGE>
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.
[graph
(1) Not wholly-owned. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
6
<PAGE>
THE NOTE OFFERING
<TABLE>
<S> <C>
Issuer............................ Alliance Gaming Corporation.
Principal Amount.................. $140,000,000.
Maturity Date..................... , 2003.
Interest.......................... The Notes will bear interest at % per annum, payable
semi-annually in arrears on and ,
commencing . Interest is calculated on the
basis of a 360-day year consisting of twelve 30-day
months.
Security.......................... Subject to certain limited exceptions, the Notes will be
secured by a security interest in the following: (i) an
exclusive pledge of all equity interests in a direct
subsidiary of Alliance which will be created to hold the
equity interests of BGII and its subsidiaries and (ii)
an exclusive lien on certain of the Company's unencum-
bered assets, which currently include the assets
comprising Alliance's Nevada gaming machine management
and casino operations, but not including assets of the
Company's Mississippi casino, its Louisiana gaming
machine management operations (which are conducted
through partially-owned entities), its gaming machine
manufacturing and systems operations or of its German
operations.
Mandatory Redemption.............. None.
Optional Redemption............... The Notes will be redeemable in cash at the option of
the Company, in whole or in part, at any time on or
after , at the redemption prices set forth
herein, together with accrued and unpaid interest
through the redemption date; provided, that at any time
on or before , 1997, the Company may also
redeem the Notes in whole at a redemption price equal to
% of the aggregate principal amount thereof, together
with accrued and unpaid interest, if any, to the date of
redemption, with the net proceeds of a bank financing.
Further, at any time on or before , 1998, the
Company may redeem up to 35% of the original aggregate
principal amount of the Notes at a redemption price
equal to % of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
redemption, with the net proceeds of an Equity Offering
(as defined) of the Company. In addition, the Notes are
subject at any time to a Required Regulatory Redemption
(as defined).
Change of Control................. Upon the occurrence of a Change in Control (as defined),
the Company is required to offer to repurchase all
outstanding Notes at a purchase price equal to 101% of
the principal amount thereof, together with accrued and
unpaid interest to the date of repurchase.
Certain Covenants................. The Indenture will contain certain covenants which,
among other things, will restrict and regulate the
Company's and its Subsidiaries' ability to (i) incur
additional Indebtedness or issue Disqualified Capital
Stock; (ii) make Restricted Payments; (iii) create
encumbrances on the ability of the Company's
Subsidiaries to pay dividends or make other
distributions; (iv) permit the existence of Liens on
assets of the Company and its Subsidiaries; (v) use the
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
proceeds from certain asset sales by the Company and its
Subsidiaries; (vi) enter into transactions with
affiliates of the Company or pay any amounts pursuant to
any management agreements with Kirkland, KIC (each as
defined) or their respective affiliates, under certain
circumstances; (vii) merge, consolidate or sell all or
substantially all of its assets; (viii) engage in new
lines of business; and (ix) issue or sell Equity
Interests of any of the Company's Subsidiaries.
Events of Default................. Events of Default will include (i) default in payment of
interest when due for a period of 30 days; (ii) default
in payment of principal or premium, if any, when due;
(iii) default in the performance or breach of certain
specified covenants, including those relating to merger,
consolidation or sale of assets, failure to make or
consummate a Change of Control Offer (as defined) or an
Asset Sale Offer (as defined) as required; (iv) default
in the performance or breach of other covenants of the
Company and its Subsidiaries in the Indenture for 30
days after notice; (v) certain events of bankruptcy,
insolvency or reorganization relating to the Company or
its Significant Subsidiaries (as defined); (vi) a
default in other indebtedness of the Company or its
Subsidiaries with an aggregate principal amount of
$ million; (vii) final unsatisfied judgements not
covered by insurance aggregating in excess of $ million
not otherwise stayed, bonded or discharged within 60
days; and (viii) certain events of default under the
Collateral Agreements (as defined).
Modification of Indenture......... Amendments to the Indenture will be permitted with the
consent of the holders of not less than a majority of
the principal amount of the outstanding Notes; PROVIDED,
however, that the consent of all holders affected
thereby will be required to release any of the
collateral from the Liens created by the Collateral
Agreements, other than in accordance with terms thereof,
or to make certain changes, including those that would
change the time of payment of interest or principal or
reduce the principal amount or interest rate payable on
any Note or that would reduce the percentage in
principal amount of outstanding Notes, the consent of
whose holders is required for any such modification or
waiver; PROVIDED further, that the holders of at least
two-thirds in aggregate principal amount will be
required to approve any change in the obligations of the
Company to make an offer to repurchase holders' Notes
upon a Change of Control. Certain changes may be made
without the consent of holders of the Notes, including
for example to cure any ambiguities in the documents
that do not materially adversely affect the rights of
the holders.
Risk Factors...................... For a discussion of certain factors that should be
considered in connection with an investment in the
Notes, see "Risk Factors."
</TABLE>
8
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth a Summary Forecast of Operating Income and
Adjusted Operating Cash Flow (the "Summary Forecast") based on the expected
combined operating data for the Company for the twelve-month period ending
December 31, 1996, to the best of management's knowledge and belief. The Summary
Forecast, which consists of forward-looking statements, is qualified by, and
subject to, the assumptions set forth below and the other information contained
in this Prospectus, and should be read in conjunction with the "Forecast of
Operating Income and Adjusted Operating Cash Flow," including the Summary of
Significant Assumptions and Accounting Policies for the Forecast.
The following Summary Historical Financial Information tables set forth
summary consolidated financial information of Alliance, and has been derived
from the audited consolidated financial statements of Alliance, including the
notes thereto, for the fiscal years ended June 30, 1993, 1994 and 1995, and the
unaudited interim condensed consolidated financial statements of Alliance,
including the notes thereto, as of December 31, 1995 and for the six month
periods ended December 31, 1994 and 1995, which are included elsewhere in this
Prospectus. The following Summary Historical Financial Information tables also
set forth summary consolidated financial information of BGII, which has been
derived from the audited consolidated financial statements of BGII, including
the notes thereto, as of December 31, 1995 and for the years ended December 31,
1993, 1994 and 1995, which are included elsewhere in this Prospectus.
The following tables also set forth Summary Unaudited Pro Forma Condensed
Combined Financial Information. The Pro Forma Statements of Operations Data
present results of operations of the Company assuming the Transaction occurred
on July 1, 1994 for the statements for the twelve months ended June 30, 1995 and
December 31, 1995 and for the six months ended December 31, 1995, and on July 1,
1993 for the statements for the six months ended December 31, 1994, and further
assuming that the Rainbow Casino operations were consolidated. The detailed
presentation of revenues is derived from internally prepared supporting
schedules not otherwised presented or incorporated herein. The Pro Forma Balance
Sheet Data present the financial position of the Company assuming the
Transaction occurred on December 31, 1995. The Summary Unaudited Pro Forma
Condensed Combined Financial Information does not purport to present the
financial position or results of operations of the Company had the Transaction
and events assumed therein occurred on the dates specified, nor is it
necessarily indicative of the results of operations of the Company as they may
be in the future or as they may have been had the Transaction and the
consolidation of the Rainbow Casino operating results been consummated on the
dates described above. The Summary Unaudited Pro Forma Condensed Combined
Financial Information is based on certain assumptions and adjustments described
in the Notes to Unaudited Pro Forma Condensed Combined Financial Information and
should be read in conjunction therewith.
The following tables also set forth Summary Supplemental Analysis of
Adjusted Operating Cash Flow (as defined), which is based on combining Alliance
and BGII historical information. Alliance management has made certain
adjustments to the combined operating income and has made further adjustments
thereto to arrive at a measure of adjusted operating cash flow ("Adjusted
Operating Cash Flow"). As is more fully described below, such adjustments
consist of the elimination of certain charges that management has determined to
be non-recurring or unusual, as well as adjustments made to reflect the most
recent operating results of the Rainbow Casino by annualizing the most recent
six month operating results after considering seasonality, which was immaterial,
and presenting such results as if they had occurred for each period presented.
In making these adjustments, management considered all items it deemed to be
non-recurring, revenues as well as expenses.
The tables should be read in conjunction with "Unaudited Pro Forma Condensed
Combined Financial Information," "Supplemental Analysis of Adjusted Operating
Cash Flow," "Forecast of Operating Income and Adjusted Operating Cash Flow,"
"Selected Historical Financial Information of Alliance," "Selected Historical
Financial Information of BGII," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the audited consolidated
financial statements of Alliance, including the notes thereto, the unaudited
interim condensed consolidated financial statements of Alliance, including the
notes thereto, and the audited consolidated financial statements of BGII,
including the notes thereto, and other financial and operating information
included elsewhere in this Prospectus.
9
<PAGE>
SUMMARY FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW (1)
<TABLE>
<CAPTION>
COMPARATIVE ANALYSIS OF
OPERATING INCOME AND
ADJUSTED OPERATING CASH
FLOW (2)
--------------------------
TWELVE MONTHS FORECASTED OPERATING INCOME
ENDED DECEMBER 31, AND ADJUSTED OPERATING CASH
-------------------------- FLOW FOR THE TWELVE MONTHS
1994 1995 ENDING DECEMBER 31, 1996
------------ ------------ ------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS INFORMATION:
Total Revenues...................................... $ 373,031 $ 400,964 $ 425,957
Total Operating Costs............................... 361,888(3) 381,855(3) 398,889(3)
------------ ------------ --------
Operating Income.................................. 11,143 19,109 27,068
------------ ------------ --------
SUPPLEMENTAL INFORMATION:
Depreciation and Amortization....................... 22,618 22,719 23,192
Casino Royalty...................................... (1,670) (3,674) (4,368)
Minority Interest................................... (675) (504) (920)
------------ ------------ --------
Subtotal.......................................... 31,416 37,650 44,972
Adjustments:
Rainbow Operations................................ -- 1,912(4) --
Unusual or Non-recurring
Charges.......................................... 2,856(5) 7,783(5) 1,000(6)
Direct Merger Costs............................... -- -- 8,944(7)
------------ ------------ --------
Adjusted Operating Cash Flow........................ $ 34,272(8) $ 47,345(8) $ 54,916(8)
------------ ------------ --------
------------ ------------ --------
OTHER DATA:
Net Interest Expense................................ $ 20,600
--------
--------
Mandatory Principal Payments........................ $ 4,657(9)
--------
--------
Capital Expenditures................................ $ 13,485(10)
--------
--------
Ratio of Adjusted Operating Cash Flow to Net
Interest Expense................................... 2.7x
Ratio of Long-Term Debt to Adjusted Operating Cash
Flow............................................... 3.5x
</TABLE>
- --------------------------
(1) The Summary Forecast, which consists of forward-looking statements, is based
upon a number of estimates and assumptions that, while presented with
numerical specificity and considered reasonable by management of the
Company, are inherently subject to significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of
which are difficult to predict and many of which are beyond the control of
the Company. The Summary Forecast is necessarily speculative in nature, and
it is usually the case that one or more of the assumptions do not
materialize. The Summary Forecast and actual results will vary, and those
variations may be material. Accordingly, the inclusion of the Summary
Forecast herein should not be regarded as a representation by the Company or
any other person (including the Underwriters) that the Summary Forecast will
be achieved. In addition, because the Summary Forecast has been prepared on
a consolidated basis, the Summary Forecast does not account for the
Company's holding company structure, which may result in cash flows earned
at some subsidiaries being unavailable for distribution to the Company,
including to service indebtedness of the Company, including the Notes.
Prospective investors are cautioned not to place undue reliance on the
Summary Forecast.
(2) See Note 2--Presentation of Supplemental Comparative Information of the
"Summary of Significant Assumptions and Accounting Policies for the
Forecast" elsewhere in the Prospectus.
(3) Includes selling, general and administrative costs for the twelve months
ended December 31, 1994 and 1995 net of the following: direct Merger costs,
the business development costs over the $3.0 million budgeted amount
totaling $4.7 million and $12.1 million in 1994 and 1995, respectively and
net synergy cost savings totaling $5.0 million in 1994 and 1995, and $4.0
million in 1996. See note (6) below for one-time $1.0 million costs to
implement synergy cost savings. See note (7) below for the 1996 presentation
of direct Merger costs.
(4) Represents adjustment to reflect management's derivation of Rainbow Casino's
annualized results for the period, net of incremental royalty.
(5) Reflects items determined by management to be unusual or non-recurring
(which are also included in Total Operating Costs). The concepts of
non-recurring or unusual charges are not defined in generally accepted
accounting principles ("GAAP").
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
10
<PAGE>
(6) For 1996, the non-recurring charges consist of the $1.0 million of one-time
charges (which are included in Total Operating Costs) to implement the
expected annual synergy cost savings (which are reflected in Total Operating
Costs as well).
(7) Direct Merger costs for 1996 have been included in Total Operating Costs and
presented as an adjustment in computing the Adjusted Operating Cash Flow.
See note (3) above for the presentation of direct Merger costs in 1994 and
1995.
(8) The following is a reconciliation of the historical EBITDA (as defined) by
business unit to the combined Adjusted Operating Cash Flow:
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
EBITDA by Business Unit:
Gaming.................................................... $ 7,004(a) $ 5,905(a) $ 10,750
Systems................................................... 3,593 5,788 6,303
Wulff..................................................... 15,575 15,172 16,836
Gaming Machine Management................................. 17,159 18,260 19,957
Casinos................................................... 2,927 10,546 14,958
Alliance Corporate Administrative Expense................... (10,609) (8,912) (5,800)
Alliance Development Expense................................ (7,694) (15,072) (10,944)
BGII Corporate Administrative Expense....................... (4,520) (3,732) (4,800)
Discontinued Operations..................................... (1,378) (933) --
Casino Royalty.............................................. -- (2,718) (4,368)
Minority Interests.......................................... (675) (504) (920)
BGII Unusual Charges........................................ -- (5,816) (2,000)
---------- ---------- ------------
Combined EBITDA............................................... 21,382 17,984 39,972
Adjustments:
Direct Merger Costs......................................... -- 13,106(b) 8,944(b)
Alliance Development Expense Reductions..................... 4,694 966 --
Rainbow Operations.......................................... 340(c) 2,506(c) --
Unusual or Nonrecurring Charges............................. 2,856(d) 7,783(e) 1,000(f)
Synergy Cost Savings........................................ 5,000 5,000 5,000
---------- ---------- ------------
Adjusted Operating Cash Flow.................................. $ 34,272 $ 47,345 $ 54,916
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
- ------------------------
(a) Includes certain charges incurred by Gaming and not reflected as
"BGII Unusual Charges" above, consisting of costs relating to a
regulatory investigation and legal proceedings in Louisiana totalling
$0.3 million and $1.4 million for the years ended December 31, 1994 and
1995 respectively.
(b) For the twelve months ended December 31, 1995, $11.1 million of
direct Merger costs are included in Alliance Development Expense and
$2.0 million in BGII Unusual Charges. For the Forecasted Twelve Months
Ending December 31, 1996, $6.9 million of direct Merger costs are
included in Alliance Development Expense and $2.0 million in BGII
Unusual Charges.
(c) To adjust to reflect the operating results of the Rainbow Casino as
if owned during 1994 and 1995 and, for the twelve months ended December
31, 1995, to reflect the most recent operating results of the Rainbow
Casino, as if such results had occurred for all of 1995 (including an
adjustment for additional casino royalty expense of approximately $1.7
million and $1.0 million, respectively).
(d) Includes legal costs included as BGII Corporate Administrative
Expense related to a former executive totalling $0.5 million and $0.3
million incurred by Gaming relating to a regulatory investigation and
legal proceedings in Louisiana and a reserve for discontinued
operations of $2.0 million for Alliance included in Alliance Corporate
Administrative Expense.
(e) Includes one-time charges included in Alliance Corporate
Administrative Expense consisting of an executive signing bonus of $1.3
million paid in Common Stock and $1.1 million of termination costs for
certain officers and directors, which were incurred during the quarter
ended June 30, 1995. Also includes $1.4 million incurred by Gaming
relating to a regulatory investigation and legal proceedings in
Louisiana, and $0.2 million included in BGII Corporate Administrative
Expense for legal costs related to the "Bally" trade name litigation.
Also includes BGII unusual charges of $2.0 million in costs related to
the merger agreement with WMS, a provision of $0.8 million at Wulff to
writedown to net realizable value the carrying value of a building to
be sold and a provision of $1.0 million to increase Wulff's tax
reserves primarily for V.A.T.
(f) Includes $1.0 million of one-time charges to implement the expected
annual synergy cost savings.
(9) All of such mandatory principal payments relate to indebtedness of
subsidiaries of the Company.
(10) See Note 3 -- Operating Assumptions -- Capital Expenditures of the Summary
of Significant Assumptions and Accounting Policies for the Forecast.
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
ALLIANCE GAMING CORPORATION
<TABLE>
<CAPTION>
FISCAL YEARS SIX MONTHS
ENDED JUNE 30, ENDED DECEMBER 31,
---------------------------------- --------------------
1993 1994 1995 1994 1995
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net Revenues................................................ $ 113,091 $ 123,054 $ 131,988 $ 62,338 $ 76,229
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Operating Loss.............................................. (52) (7,468) (4,261) (1,861) (3,524)
Net Interest Expense........................................ (4,048) (4,746) (5,335) (2,411) (3,470)
Net Loss.................................................... $ (3,650) $ (13,128) $ (10,751) $ (5,017) $ (9,431)
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
OTHER DATA:
Gaming Machine Management:
Units..................................................... 5,868 5,889 5,902 5,976 5,951
Locations................................................. 518 506 526 528 531
Casinos:
Tables.................................................... 9 9 37 9 38
Slots Operated............................................ 428 434 1,005 433 1,042
Revenues:
Gaming Machine Management................................. $ 96,282 $ 102,830 $ 106,827 $ 52,511 $ 52,621
Casinos................................................... 11,286 12,046 19,668 6,612 22,352
Discontinued Operations................................... 5,523 8,178 5,493 3,215 1,256
---------- ---------- ---------- --------- ---------
Total Revenues.......................................... $ 113,091 $ 123,054 $ 131,988 $ 62,338 $ 76,229
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
EBITDA (1):
Gaming Machine Management................................. $ 14,564 $ 16,820 $ 18,562 $ 8,800 $ 8,498
Casinos (2)............................................... 1,963 2,190 5,359 1,713 6,900
Corporate Development Expenses (3)........................ (900) (1,192) (7,843) (3,508) (10,737)
Corporate Administrative Expenses (4)..................... (6,191) (7,882) (10,177) (4,252) (2,987)
Discontinued Operations (5)............................... (770) (7,874) (642) (1) (292)
Casino Royalty............................................ -- -- (810) -- (1,908)
Minority Interest......................................... -- (506) (397) (169) (276)
---------- ---------- ---------- --------- ---------
Total EBITDA (1)........................................ $ 8,666 $ 1,556 $ 4,052 $ 2,583 $ (802)
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Depreciation and Amortization............................... $ 8,718 $ 9,530 $ 9,520 $ 4,613 $ 4,906
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Capital Expenditures........................................ $ 5,092 $ 7,022 $ 7,880 $ 3,338 $ 7,478
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents and Securities Available for Sale...................................... $ 29,468
Working Capital.................................................................................. 20,109
Total Assets..................................................................................... 116,872
Long-term Debt, Including Current Maturities..................................................... 100,106
Stockholders' Deficiency......................................................................... (717)
</TABLE>
- ------------------------
(1) EBITDA is defined as earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA"). When presented for each business
unit, EBITDA excludes corporate expenses, casino royalty and minority
interest. EBITDA should not be construed as an alternative to net income or
any other GAAP measure of performance as an indicator of Alliance's
performance or to cash flows generated by operating, investing and financing
activities as an indicator of cash flows or a measure of liquidity.
Management believes that EBITDA is a useful adjunct to net income and other
measurements under GAAP and is a conventionally used financial indicator.
(2) Since March 29, 1995, the Rainbow Casino operations have been consolidated
with Alliance.
(3) Includes direct Merger costs of $1.7 million and $9.4 million for the fiscal
year ended June 30, 1995 and the six months ended December 31, 1995,
respectively.
(4) Includes one-time charges incurred by Alliance consisting of an executive
signing bonus of $1.3 million paid in Common Stock and $1.1 million of
termination costs for certain officers and directors, which were incurred
during the quarter ended June 30, 1995.
(5) Includes businesses now or previously considered as discontinued operations.
12
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................................. $ 168,707 $ 236,192 $ 249,312(1)
---------- ---------- ----------
---------- ---------- ----------
Operating Income (Loss).............................. (18,536 (2) 13,381 (4) 8,364 (6)
Interest Expense..................................... 4,424 6,768 6,853
Net Income (Loss).................................... $ (23,443) $ 3,793 $ (3,393)
---------- ---------- ----------
---------- ---------- ----------
OTHER DATA:
Unit Sales:
Gaming............................................. 10,156 21,625 18,084
Wulff.............................................. 12,552 13,100 12,000
Revenues:
Gaming (7)......................................... $ 49,298 $ 118,659 $ 111,849(1)
Systems............................................ 12,748 13,386 20,681
---------- ---------- ----------
Gaming Machine Manufacturing and Systems......... 62,046 132,045 132,530
Wulff.............................................. 106,661 104,147 116,782
---------- ---------- ----------
Total Revenues................................... $ 168,707 $ 236,192 $ 249,312
---------- ---------- ----------
---------- ---------- ----------
EBITDA (8):
Gaming (7)......................................... $ (24,747 (2) $ 7,004(3) $ 5,905 (5)
Systems............................................ 3,829 3,593 5,788
---------- ---------- ----------
Gaming Machine Manufacturing and Systems......... (20,918 (2) 10,597(3) 11,693 (5)
Wulff.............................................. 15,959 15,575 15,172
Parent (7)......................................... (5,473) (4,520 (4) (3,732 (4)
Unusual Charges.................................... -- -- (5,816 (6)
---------- ---------- ----------
Total EBITDA (8)................................. $ (10,432) $ 21,652 $ 17,317
---------- ---------- ----------
---------- ---------- ----------
Depreciation and Amortization........................ $ 8,103 $ 8,271 $ 8,953
---------- ---------- ----------
---------- ---------- ----------
Capital Expenditures................................. $ 6,467 $ 9,537 $ 8,240
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents........................................................................ $ 5,526
Working Capital.................................................................................. 97,357
Total Assets..................................................................................... 194,316
Long-term Debt, Including Current Maturities..................................................... 69,944
Stockholders' Equity............................................................................. 88,410
</TABLE>
- ------------------------
(1) Includes the impact of sales returns of $0.3 million by Gaming related to
two riverboats at the River City Complex in New Orleans which filed for
bankruptcy.
(2) Includes $6.2 million in charges to increase inventory valuation reserves in
1993 principally related to inventory originally intended for sale in the
Louisiana video lottery terminal market. Includes $1.2 million in charges
related to a management reorganization at Gaming in 1993. Includes a
provision for doubtful receivables totaling $5.1 million recorded by Gaming
in 1993 related to a former distributor who filed for bankruptcy during the
second quarter of 1993.
(3) Includes certain charges incurred by Gaming, and not reflected as "Unusual
Charges" under Other Data, consisting of costs relating to a regulatory
investigation and legal proceedings in Louisiana totaling $0.3 million and
$1.4 million for the years ended December 31, 1994 and 1995, respectively.
(4) Includes legal costs related to a former executive totaling $0.5 million
during the year ended December 31, 1994 and legal costs related to the
"Bally" trade name litigation totaling $0.2 million during the year ended
December 31, 1995.
(5) Includes a provision for doubtful receivables of $0.9 million related to the
bankruptcy described in note (1) above.
(6) Includes $2.0 million in Merger transaction costs and related litigation
expenses, $2.0 million in costs related to the merger agreement with WMS
Industries, Inc. ("WMS"), a provision of $0.8 million at Wulff to write-down
to net realizable value the carrying value of a building to be sold and a
provision of $1.0 million to increase Wulff's tax reserves primarily for
German value added taxes ("V.A.T.").
(7) Includes results of GmbH and BGI Australia Pty Limited in Gaming's results,
along with certain reclassifications from historical presentation.
(8) See note (1) to "Summary Historical Financial Information -- Alliance Gaming
Corporation."
13
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED TWELVE MONTHS
ENDED DECEMBER 31, ENDED
JUNE 30, ---------------------- DECEMBER 31,
1995 1994 1995 1995
----------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues..................................................... $ 400,821 $ 187,863 $ 188,006 $ 400,964
Operating Income............................................. 22,458 8,419 5,070 19,109
Net Interest Expense......................................... (19,578) (9,786) (10,097) (19,889)
Casino Royalty............................................... (3,431) (1,665) (1,908) (3,674)
Minority Interest............................................ (397) (169) (276) (504)
Other, net................................................... 418 (213) 535 1,166
----------- ---------- ---------- --------------
Loss Before Taxes............................................ (530) (3,414) (6,676) (3,792)
Provisions for Income Taxes.................................. (2,555) (1,202) (1,289) (2,642)
----------- ---------- ---------- --------------
Net Loss..................................................... $ (3,085) $ (4,616) $ (7,965) $ (6,434)
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
Preferred Stock Dividend (1)................................. $ (8,039) $ (3,872) $ (3,872) $ (8,039)
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
OTHER DATA:
Depreciation and Amortization................................ $ 22,861 $ 12,105 $ 11,963 $ 22,719
Capital Expenditures......................................... 16,742 7,769 11,287 20,260
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents and Securities Available for Sale...................................... $ 14,476
Working Capital.................................................................................. 115,079
Total Assets..................................................................................... 343,630
Long-term Debt, Including Current Maturities..................................................... 193,255
Stockholders' Equity............................................................................. 49,433
</TABLE>
- ------------------------
(1) Dividends on the Preferred Stock are compounded quarterly at a rate of 15%
per annum; however, such dividends are permitted to be paid in kind for the
first five years after issuance and partially in kind for the next two
years.
14
<PAGE>
SUMMARY SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED TWELVE MONTHS
ENDED DECEMBER 31, ENDED
JUNE 30, ---------------------- DECEMBER 31,
1995 1994 1995 1995
----------- ---------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
HISTORICAL COMBINED INFORMATION (1):
Operating Income (Loss) (2)(3)(4)(5)......................... $ 13,701 $ 4,822 $ (6,439) $ 2,440
Depreciation and Amortization................................ 18,002 9,221 9,985 18,766
Minority Interest............................................ (397) (169) (276) (504)
Casino Royalty............................................... (810) -- (1,908) (2,718)
----------- ---------- ---------- --------------
Subtotal................................................... $ 30,496 $ 13,874 $ 1,362 $ 17,984
----------- ---------- ---------- --------------
ADJUSTMENTS TO HISTORICAL COMBINED INFORMATION:
Direct Merger Costs (4)...................................... $ 1,919 $ -- $ 11,187 $ 13,106
Rainbow Operations (6)....................................... 6,121 3,615 -- 2,506
Unusual or Non-recurring Charges (2)(3)...................... 4,317 800 4,266 7,783
Alliance Development Expense Reductions (5).................. 3,174 2,008 (200) 966
Synergy Cost Savings......................................... 5,000 2,500 2,500 5,000
----------- ---------- ---------- --------------
Adjusted Operating Cash Flow (7)............................. $ 51,027 $ 22,797 $ 19,115 $ 47,345
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
Pro Forma Net Interest Expense (8)........................... $ 19,578 $ 9,786 $ 10,097 $ 19,889
----------- ---------- ---------- --------------
----------- ---------- ---------- --------------
Ratio of Adjusted Operating Cash Flow to Pro Forma Net
Interest Expense............................................ 2.4x
Ratio of Pro Forma Long-Term Debt to Adjusted Operating Cash
Flow........................................................ 4.1x
</TABLE>
- --------------------------
(1) The information is derived from the historical financial information of
Alliance and BGII, which has been combined for purposes of this summary.
(2) Includes certain charges incurred by BGII consisting of costs relating to a
regulatory investigation and legal proceedings in Louisiana, legal costs
related to a former executive, legal costs related to the "Bally" trade name
litigation that were directly caused by the investigation, and certain
unusual charges consisting of costs related to the merger agreement with
WMS, reserve for German V.A.T. and the write-down of a building in Germany.
There can be no assurance that other unusual charges will not occur in the
future.
(3) Includes one-time charges incurred by Alliance consisting of an executive
signing bonus of $1.3 million paid in Common Stock and $1.1 million of
termination costs for certain directors, which charges were incurred during
the quarter ended June 30, 1995.
(4) Includes direct costs related to the Merger consisting of legal, accounting,
and investment banking fees and related costs.
(5) Reflects the reduction of Alliance Development Expense, which relates to
mergers, acquisitions and joint ventures, to $3.0 million annually. The
reduction to $3.0 million reflects the anticipated elimination of expenses
that were being incurred prior to Alliance's accomplishment of its strategic
plan to acquire a major gaming machine manufacturing company. The adjustment
to eliminate direct costs related to the Merger is shown in note (4) above.
For the six months ended December 31, 1995, Alliance Development Expense was
below the $3.0 million annual rate.
(6) For purposes of this summary the Rainbow Casino is presented as if owned
from the beginning of each period presented. Also, as the final elements of
the Rainbow Casino facility were not completed until July 1995, Alliance
management believes that the results of operations for the six months ended
December 31, 1995 after considering seasonality (which was immaterial), are
more reflective of the property's ongoing results of operations.
Accordingly, such results have been annualized based on the actual results
for the six months ended December 31, 1995, as Alliance management believes
that such results better portray the Rainbow Casino's expected contribution
to Adjusted Operating Cash Flow. This annualization constitutes
forward-looking statements that involve risks and uncertainties, including
the risks of competition, gaming regulation and other risks detailed in this
Prospectus, including under "Risk Factors."
(7) Adjusted Operating Cash Flow should not be construed as an alternative to
net income or any other GAAP measure of performance as an indicator of the
Company's performance or to cash flows generated by operating, investing and
financing activities as an indicator of cash flows or a measure of
liquidity. Management believes that Adjusted Operating Cash Flow is a useful
adjunct to net income and other GAAP measurements.
(8) The information is derived from the Unaudited Pro Forma Condensed Combined
Financial Information, and is included here to provide potential investors
with additional comparative information.
15
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS BEFORE
PURCHASING THE SECURITIES OFFERED HEREBY.
HIGH LEVERAGE AND FIXED CHARGES AFTER THE MERGER; HOLDING COMPANY STRUCTURE;
WORKING CAPITAL
The Company will have a substantial amount of indebtedness after the
Transaction. As of December 31, 1995, on a pro forma basis after giving effect
to the Transaction, the Company would have had outstanding debt of approximately
$193.3 million and a long-term debt to equity ratio of 3.9 to 1. If the
Preferred Stock is included in debt the long-term debt to equity ratio would be
4.9 to 1. See "The Merger and Related Financings," "Use of Proceeds,"
"Capitalization" and "Unaudited Pro Forma Condensed Combined Financial
Information." In addition, if the maximum amount of dividends on the Preferred
Stock were paid in kind, as anticipated, the liquidation value of the Preferred
Stock would accrete to $124.0 million after seven years. The high level of
indebtedness and amount of Preferred Stock of the Company outstanding following
the Transaction will have important consequences, including without limitation
the following: (i) significant interest expense, cash dividend requirements
(after five years), principal repayment (primarily after seven years) and
Preferred Stock redemption obligations (after eight years) resulting in
substantial annual fixed charges and significant repayment and redemption
obligations; (ii) significant limitations on the Company's ability to obtain
additional financing, make capital expenditures, make acquisitions and take
advantage of other business opportunities that may arise; and (iii) increased
vulnerability to adverse general economic and industry conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources of the Company (Pro Forma)."
On a pro forma basis after giving effect to the Transaction and the use of
proceeds thereof, the Company's earnings would have been inadequate to cover
fixed charges by approximately $0.5 million for the year ended June 30, 1995 and
would have been inadequate to cover fixed charges by approximately $6.7 million
for the six-month period ended December 31, 1995. On a pro forma basis after
giving effect to the Transaction, the Company would have fixed charges of
approximately $43.6 million (which includes the imputed fixed charges for
contingent rental expense related to revenue-sharing agreements in its Nevada
gaming machine management operations of approximately $18.0 million annually),
plus $8.0 million of dividends on the Preferred Stock (permitted to be paid in
kind for the first five years after issuance and partially in kind for the next
two years) for the 12-month period ended December 31, 1995. Future operating
results are subject to significant business, economic, regulatory and
competitive uncertainties and contingencies, many of which are beyond the
control of the Company. There can be no assurance that the Company will be able
to generate the cash flow necessary to permit the Company to meet its fixed
charges and repayment obligations. If the Company is unable to generate
sufficient cash flow from operations in the future, it may be required to
refinance all or a portion of its existing debt or to obtain additional
financing. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained on terms that are favorable
or acceptable to the Company. Any inability of the Company to service its fixed
charges and repayment obligations would have a significant adverse effect on the
Company and the market value and marketability of the Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources of the Company (Pro Forma)."
Alliance is a holding company, the only material assets of which are equity
interests in its subsidiaries (including, after the Merger, BGII and its
subsidiaries). The ability of Alliance to make interest and principal payments
on its obligations, including the Notes, 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 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
16
<PAGE>
generated by operations and other available cash will be sufficient to satisfy
the Company's normal working capital needs, although there can be no assurance
the Company will generate such available cash. See
"-- Implementation of the Merger." In order to be competitive in meeting the
growing customer demand for financing of gaming equipment in emerging gaming
markets, the Company also plans to continue to involve third-party finance
companies and secure additional financing; however, there can be no assurances
that such additional financing will be obtained. Failure to obtain such
financing on terms acceptable to the Company could impair the Company's
operations and ability to pursue its business strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RESTRICTIONS ON CERTAIN ACTIVITIES
The Indenture pursuant to which the Notes will be issued (the "Indenture")
will impose restrictions on Alliance and its subsidiaries, in addition to
restrictions imposed by existing instruments, including the indentures for the
Convertible Debentures and the New Debentures, respectively. Generally, the
restrictions contained in these instruments relate to the incurrence of
additional indebtedness, the distribution of cash and/or property to
shareholders, the repayment or repurchase of PARI PASSU or junior securities,
investments, mergers and sales of assets and the creation of liens. These
restrictions and requirements could limit the ability of the Company to respond
to changing business and economic conditions. A failure to comply with any of
these obligations could also result in an event of default under the Indenture,
which could permit acceleration of the Notes and acceleration of certain other
indebtedness of the Company under other instruments which may contain
cross-acceleration or cross-default provisions. See "Description of the Notes."
CERTAIN CONSIDERATIONS RELATED TO THE COLLATERAL
There can be no assurance that, in the event the Trustee were to exercise
remedies under the Indenture, the proceeds of the sale of any of the Collateral
(as defined) securing the Notes pursuant to the Indenture and the related
security documents (described herein under "Description of the Notes -- Security
for the Notes") would be sufficient to satisfy any payment of the Notes. The
amount of proceeds received on any such sale of the Collateral would be
influenced by many factors, including limitations on the ownership and operation
of assets and securities of the Company contained in various gaming laws, the
timing and manner of any such sale and whether assets are being sold as part of
an ongoing business. See "Gaming Regulation and Licensing." Consequently the
book value of the Collateral should not be relied upon as a measure of
realizable value.
OPERATING HISTORY--RECENT LOSSES
Alliance incurred net losses of $3.7 million, $13.1 million and $10.8
million during its fiscal years ended June 30, 1993, 1994 and 1995,
respectively, and a net loss of $9.4 million during the six months ended
December 31, 1995, whereas BGII had net income of $5.3 million, a net loss of
$23.4 million, net income of $3.8 million and a net loss of $3.4 million for its
fiscal years ended December 31, 1992, 1993, 1994 and 1995, respectively.
Alliance's net losses include business development and Merger costs of $0.9
million, $1.2 million, $7.8 million, and $10.7 million incurred during its
fiscal years ended June 30, 1993, 1994, 1995 and the six months ended December
31, 1995, respectively. On a pro forma basis after giving effect to the
Transaction, for the 12-month period ended June 30, 1995 the Company would have
had a net loss, prior to accruing dividends on the Preferred Stock, of $3.1
million and for the six months ended December 31, 1995 the Company would have
had a net loss of $8.0 million. Dividends on the Preferred Stock will be
approximately $8.0 million in the first 12-month period. Management believes
that of the losses of Alliance during its fiscal years ended June 30, 1993, 1994
and 1995, approximately $900,000, $6.4 million and $2.4 million, respectively,
were attributable to items that management considers to be non-recurring,
primarily reflecting the discontinuance of certain businesses and prior
management strategies. Of BGII's loss for its fiscal year ended December 31,
1995, $5.8 million was attributable to certain unusual charges incurred by BGII
related to a reserve for German V.A.T., the write-down of a building in Germany
to be sold to its estimated net realizable value, and transaction costs relating
to the Merger, the previous tender offer and consent solicitation by Alliance,
and the proposed merger with WMS. Nevertheless, there can be no assurance that
the Company will be profitable in the future, that there will not be similar or
other unusual or non-recurring
17
<PAGE>
charges in the future, or that future results will improve as a result of the
Merger. See "Unaudited Pro Forma Condensed Combined Financial Information,"
"Selected Historical Financial Information of Alliance" and "Selected Historical
Financial Information of BGII."
The new wall machine unit sales of Wulff decreased by approximately 8% in
the year ended December 31, 1995 as compared to the year ended December 31,
1994. Management believes new wall machine revenues for the last six months of
1995 were adversely affected by an industry downturn caused by regulations
imposed in Germany limiting the number of wall machines per square meter in
arcade locations effective January 1, 1996, thereby reducing sales opportunities
and by increased foreign competition in Germany. Management expects the adverse
impact of such regulations to continue during the first six months of 1996;
however, there can be no assurance that this impact will only be temporary. The
foreign competition may also continue to have an adverse impact on wall machine
revenues.
IMPLEMENTATION OF THE MERGER
The Company's future operations and earnings will be largely dependent upon
the Company's ability to integrate the businesses separately conducted by
Alliance and BGII prior to the Merger. Alliance and BGII currently operate in
different areas of the gaming entertainment industry, with only modest overlap
in their activities. There can be no assurance that the Company will
successfully integrate the businesses of Alliance and BGII, and a failure to do
so would have a material adverse effect on the Company's financial position,
results of operations and cash flows. Additionally, although the Company does
not currently have any specific acquisition plans other than the Merger, the
need to focus management's attention on integration of the separate businesses
may limit the Company's ability to successfully pursue acquisitions or other
opportunities related to its business for the foreseeable future. Although the
Company plans to introduce more sophisticated technology into BGII's electronic
gaming machines, there is no assurance that it will succeed in doing so or that
it will be able to enter into alliances with technology and entertainment
companies. In addition, although management cannot precisely quantify future
cost savings, the Company expects to realize cost savings of approximately $5.0
million on an annual basis (primarily through the reduction of duplicative
costs, such as facility, legal, accounting and compensation costs) as a result
of the Merger. In order to achieve these cost savings, the Company believes it
will incur one-time costs of approximately $1.0 million. The achievement of
these savings is dependent on, among other things, the successful integration of
the businesses of Alliance and BGII. There can be no assurance, however, that
such savings will be achieved or sustained. See "Unaudited Pro Forma Condensed
Combined Financial Information."
BGII currently supplies electronic gaming machines to certain customers
which are in competition with Alliance. It is possible that, because of such
competition, certain of these customers may cease purchasing electronic gaming
machines from BGII after the Merger. Alliance and BGII do not believe that such
discontinuations, if at all, will be material. BGII sales to machine management
operators have historically been, and are likely to remain, insignificant.
Nevertheless, discontinuance of purchases by customers could adversely affect
the Company's sales.
FINANCIAL FORECAST
The Company was the sole preparer of the Forecast set forth under "Forecast
of Operating Income and Adjusted Operating Cash Flow." While such Forecast is
presented with numerical specificity, it is based on the Company's current best
estimates of expected results given the forecasted assumptions described in the
Summary of Significant Assumptions and Accounting Policies for the forecast for
the period presented. The Forecast, which consists of forward-looking
statements, is qualified by and subject to the assumptions set forth therein and
the other information contained in this Prospectus. The Company does not intend
to update or otherwise revise the Forecast to reflect events or circumstances
existing or arising after the date of this Prospectus or to reflect the
occurrence of unanticipated events. The Forecast necessarily is based upon a
number of estimates and assumptions, that, while presented with numerical
specificity and considered reasonable by the Company, are inherently subject to
significant business, economic, competitive, regulatory and other uncertainties
and contingencies, all of which are difficult to predict and many of which are
beyond the control of the Company. Financial forecasts are necessarily
speculative in nature, and it is usually the case that one or more of the
assumptions underlying such projections do not materialize. The Forecast and
18
<PAGE>
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 (including the Underwriters) 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.
CHANGE OF CONTROL
The Indenture will contain provisions relating to certain changes of control
of the Company. Upon the occurrence of such a change of control, the Company
would be obligated to make an offer to purchase all of the Notes then
outstanding at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of purchase. There can be no
assurance that funds necessary to effect such a purchase would be available if
such an event were to occur. See "Description of the Notes."
COMPETITION
GAMING MACHINE MANUFACTURING AND SYSTEMS. The market for gaming machines is
extremely competitive, and there are a number of established, well-financed and
well-known companies producing machines that compete with each of the Company's
product lines in each of the markets for the Company's gaming machine
manufacturing operations. The domestic market for gaming machines is dominated
by a single competitor, International Game Technology ("IGT"), with a number of
smaller competitors in the field. In addition, certain technology-oriented
companies have recently announced plans to enter the gaming machine market.
Management believes that some of these competitors have greater capital
resources than the Company. Competition among gaming product manufacturers,
particularly with respect to sales of gaming machines into new and emerging
markets, is based on competitive customer pricing and financing terms, appeal to
the player and quality of the product, and having an extensive distribution and
sales network. Sales to established casinos in Nevada normally require
completion of a successful trial period for the machines in the casino.
The competition for the computerized monitoring systems designed and sold by
Systems currently consists of IGT, Casino Data Systems ("CDS"), and, to a lesser
extent, Gaming Systems International, Inc. and Acres Gaming, Inc. Competition is
keen in this market due to the number of providers and the limited number of
casinos and the jurisdictions in which they operate. Pricing, product feature
and function, accuracy, and reliability are all main factors in determining a
provider's success in selling its system. Systems believes the future success of
its operations will be determined by its ability to bring new and innovative
products to the marketplace while at the same time maintaining the base of loyal
existing customers.
GERMAN OPERATIONS. Germany's wall machine manufacturing industry is
dominated by Wulff, and two of its competitors. These three entities are
believed collectively to account for more than 90% of the entire market for wall
machines (which exists almost exclusively in Germany). Wulff's two major
competitors have greater resources than the Company and own and operate a
significant number of arcades, which may give them a competitive advantage
arising from a built-in market for their games and the ability to test market
new games in their own arcades. In addition, wall machines compete for floor
space in arcades with token machines, the sales of which have expanded rapidly
in the last several years, in part as a result of low price competitors from
outside Germany.
GAMING MACHINE MANAGEMENT OPERATIONS. The competition for obtaining and
renewing gaming machine routes in Nevada is high and continues to intensify.
Such competition has, over time, reduced Alliance's gross profit margins for
such operations. In addition, such competition has required Alliance to provide
substantial financial incentives and incur financial risks to retain or obtain
certain gaming machine route locations. Such incentives include long-term lease
commitments, guarantees of leases in favor of owners of local establishments,
substantial advance deposits, payments of lease rentals in advance and loans for
buildings and tenant-improvement costs. Although Alliance believes that it now
has adequate procedures for evaluating and managing such risks, historically
substantial losses have been incurred in connection with such transactions
reflecting, in part, former management's willingness to accept higher levels of
risk to further its policy of emphasizing market share. Notwithstanding the
change in the Company's business strategy to one emphasizing profitability
rather than market share, the future success of the Company's machine management
operations
19
<PAGE>
will continue to be dependent to some extent on its ability and willingness to
provide such financial inducements. Although Alliance has historically generated
sufficient new machine management contracts to offset the loss of old machine
management contracts, due to increased competition, the increased sophistication
and bargaining power of customers and possibly other factors not yet known,
there can be no assurance that the Company will be able to obtain new machine
management contracts or renew or extend its current space leases or
revenue-sharing arrangements upon their expiration or termination, or that, if
renewed or extended, the terms will be favorable to the Company. In Louisiana,
the Company'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. The Company's one dockside casino in Vicksburg, Mississippi faces
substantial direct competition from other dockside gaming facilities in the
region. In Sparks/Reno, Nevada, the principal competition for the Company's
operations comes from larger casinos focusing on the local market.
PRODUCT DEVELOPMENT
The future success of the Company depends to a large extent upon its ability
to design, manufacture and market technologically sophisticated products that
achieve high levels of player acceptance. The development of a successful new
product or product design by a competitor could adversely affect sales of the
Company's products and force it to respond quickly with its own competing
products. The Company's plans with respect to the introduction of more
sophisticated technology into the electronic gaming machine market are designed
to lead to an increase in market share and profitability for the Company. See
"Business." However, no products incorporating such technology have reached the
development stage, and there is no assurance that any such products will be
developed, or that if developed they will receive necessary regulatory approvals
or be commercially successful.
CUSTOMER FINANCING
Management believes that customer financing terms have become an
increasingly important competitive factor in certain emerging markets.
Competitive conditions sometimes require Gaming to grant extended payment terms
on electronic gaming machines and other gaming equipment. Approximately 75% of
Gaming's slot and video gaming machine customers pay within 90 days or less.
Approximately 25% of Gaming's sales, primarily in certain emerging gaming
markets such as riverboat casinos and Indian gaming casinos, are financed over
extended periods as long as 36 months and bear interest at rates ranging from 8%
to 14%. While customer financings are normally collateralized by such equipment,
the resale value of the collateral in the event of a default may be less than
the amount financed. Accordingly, Gaming has greater exposure to the financial
condition of its customers in emerging markets than has historically been the
case in established markets like Nevada and Atlantic City. In addition, in
certain situations, Gaming has participated in the financing of other
gaming-related equipment manufactured by third parties in the emerging North
American gaming markets. International sales by Gaming are generally consummated
on a cash basis or financed over a period of one year or less.
Wulff provides customer financing for approximately 20% of its sales, and
management expects this practice to increase during the latter half of 1996. See
"Business--German Operations--Operations of Wulff--Sales and Marketing."
SALES TO NON-TRADITIONAL GAMING MARKETS
The continued growth of the non-traditional markets outside of Nevada and
Atlantic City, New Jersey for electronic gaming machines is contingent upon the
public's acceptance of these markets and an ongoing regulatory approval process
by Federal, state and local governmental authorities. The Company cannot predict
which new jurisdictions or markets, if any, will approve the operation of
electronic gaming machines, the timing of any such approval or the level of the
Company's participation in any such markets or that jurisdictions currently
permitting gaming will continue to do so in the future.
20
<PAGE>
INVESTMENT IN MINORITY-OWNED SUBSIDIARY
Alliance invested $1,580,000 for a 50% interest in Kansas Financial
Partners, L.L.C. ("KFP") in 1994. KFP owns a second mortgage in the amount of
$3,205,000, plus accrued interest, secured by a greyhound racing facility in
Frontenac, Kansas owned by Camptown Greyhound Racing, Inc. ("Camptown").
Camptown filed for protection under Chapter 11 of the U.S. Bankruptcy Code in
January of 1996. KFP intends to pursue its rights to protect its collateral,
including foreclosing on the second mortgage, which would require KFP to assume
or pay the first mortgage of approximately $2,000,000. There can be no assurance
that KFP will be able to gain control of the greyhound racing facility and
obtain a license to operate the facility, or that Alliance will be able to
recover its investment in KFP. Additionally, Alliance owns a 50% interest in
Kansas Gaming Partners, L.L.C. ("KGP") which owns the rights to operate gaming
machines and/or casino style gaming at the greyhound racing facility if and when
such gaming becomes legal in Kansas. The Kansas legislature has considered
gaming bills during the 1996 session although none have passed. There can be no
assurance that gaming of any type will ever be legalized in Kansas and
management intends to continue to evaluate the recoverability of its investment.
FOREIGN OPERATIONS
The Company's business in foreign markets is subject to the risks
customarily associated with such activities. These risks include fluctuations in
foreign currency exchange rates and controls, expropriation, nationalization and
other economic, tax and regulatory policies of local governments as well as the
laws and policies of the United States affecting foreign trade and investment.
BGII does not generally enter into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations.
KEY PERSONNEL
The success of the Company will be dependent, to a significant extent, upon
the continued services of a relatively small group of executive personnel. The
loss or unavailability of one or more of such executive officers or the
inability to attract or retain key employees in the future could have an adverse
effect upon the Company's operations. See "Management."
STRICT REGULATION BY GAMING AUTHORITIES
The manufacture and distribution of gaming machines and the conduct of
gaming operations is subject to extensive Federal, state, local and foreign
regulation by various gaming authorities (each, a "Gaming Authority"). Although
the laws and regulations of the various jurisdictions in which the Company
operates vary in their technical requirements and are subject to amendment from
time to time, virtually all of these jurisdictions require licenses, permits,
documentation of the qualification, including evidence of integrity and
financial stability, and other forms of approval for companies engaged in the
manufacture and distribution of gaming machines and gaming operations as well as
for the officers, directors, major stockholders and key personnel of such
companies. Alliance and BGII and their key personnel have obtained, or applied
for, all government licenses, registrations, finding of suitability, permits and
approvals necessary for the manufacture and distribution, and operation where
permitted, of their gaming machines in the jurisdictions in which Alliance and
BGII currently do business. However, there can be no assurance that such
licenses, registrations, finding of suitability, permits or approvals will be
given or renewed in the future or that the Company will obtain the licenses
necessary to operate in emerging markets.
The Company was pursuing a permanent manufacturer's license for Gaming as it
relates to the land-based casino in New Orleans. However, in November 1995, the
operator of the land-based casino in New Orleans filed for bankruptcy
reorganization and ceased operations. That action resulted in the termination of
funding for the regulatory operations of the Louisiana Economic Development
Gaming Corporation ("LEDGC") and, shortly thereafter, the Attorney General of
Louisiana took control of the agency and effectively closed its operations and
dismissed its President and employees. The foregoing occurred prior to
completion of review of Gaming's pending application. In addition, the Company's
application for renewal of Gaming's license as a gaming-related casino service
industry in New Jersey is pending before the New Jersey Casino Control
Commission (the "New Jersey Commission"). See "--Ongoing BGII Regulatory
Investigations" and "Gaming Regulation and Licensing."
21
<PAGE>
The Company currently has an agreement with Fair Grounds Corporation,
Jefferson Downs Corporation and Finish Line Management Corporation
(collectively, "Fair Grounds") to be the exclusive operator of video poker
machines at the only racetrack and ten associated OTBs in the greater New
Orleans area. The Louisiana legislature which convened on March 25, 1996 has
passed a bill which would allow each parish to decide whether to disallow video
poker devices, riverboat casinos and, in Orleans Parish, land-based casinos. If
any parish in which the Company operates elects to disallow video poker devices,
the Company would have to cease its video poker operations there by June 30,
1999. The Company cannot predict which parishes will so elect; however, if all
of the parishes in which the Company operates so elect, the cessation of the
Company's video poker operations would have a material adverse effect on the
operations of the Company.
OWNERSHIP LIMITATIONS ON SECURITIES OF THE COMPANY
The Gaming Authorities may, in their discretion, require the holder of any
debt security of the Company, such as the Notes, to file applications, be
investigated and be found suitable to own such debt security of the Company. If
a record or beneficial owner of the Notes is required by a Gaming Authority to
be found suitable, such owner will be required to apply for a finding of
suitability within 30 days after request by such Gaming Authority, or within
such earlier time as required by such Gaming Authority. 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
Notes or to have any other relationship with the Company, then the Company can
be sanctioned, including by the loss of its approvals, if without the prior
approval of the Gaming Authorities, it; (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction. The Company will be permitted to repurchase
a holder's Note pursuant to a Required Regulatory Redemption. See "Description
of the Notes--Optional Redemption."
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 Notes
found unsuitable and who holds, directly or indirectly, any beneficial ownership
of the Notes beyond such period of time prescribed by a Gaming Authority may be
guilty of a criminal offense. See "Gaming Regulation and Licensing."
ONGOING BGII REGULATORY INVESTIGATIONS
In May 1994, an investigation of BGII's former VLT Louisiana distributor
culminated in the indictment by a United States grand jury and subsequent
conviction in New Orleans of 18 individuals including certain of the former
distributor's officers, directors, employees and others. In addition, Alan
Maiss, a former director and president of BGII, pled guilty to misprision of a
felony in connection with such investigation. BGII, its subsidiaries and its
current employees were not subject to such investigation. BGII's activities with
regard to its former VLT distributor in Louisiana have been the subject of
current inquiries by gaming regulators. The gaming authorities in Ontario,
Canada, who have investigated the matter, issued a gaming registration to Bally
Gaming, Inc. on February 8, 1996. The New Jersey Commission is currently
reviewing such proceedings in connection with Gaming's application for a license
renewal. An adverse determination by a Gaming Authority in any jurisdiction
could result in the loss of the Company's ability to do business in that
jurisdiction and could have the effect of discouraging gaming operators from
doing business with the Company. In addition, further regulatory scrutiny in
other jurisdictions may follow any such adverse determination. See
"Business--Other Litigation" and "Gaming Regulation and Licensing."
CERTAIN LITIGATION; BALLY TRADE NAME
Bally Entertainment Corporation ("BEC"), the licensor of the "Bally" trade
name, has claimed that a merger between BGII and the Merger Subsidiary (as
defined) will result in the loss of BGII's right to use
22
<PAGE>
such trade name. The "Bally" trade name is an important component of the
Company's marketing strategy. On November 20, 1995, Alliance, the Merger
Subsidiary and BGII commenced an action against BEC in Federal District Court in
Delaware seeking a declaratory judgment that the Company will be permitted to
use the "Bally" trade name subsequent to the Merger. On November 28, 1995, BEC
commenced an action against BGII, Gaming, Alliance and the Merger Subsidiary in
Federal District Court in New Jersey seeking to enjoin such parties from using
the "Bally" trade name. On February 16, 1996 BGII received notice from BEC
alleging that BGII had violated the license agreement relating to such trade
name by, among other things, granting to Marine Midland Business Loans, Inc.
("Marine Midland"), the lender which provides Bally Gaming, Inc.'s revolving
line of credit, a security interest in general intangibles. In such notice, BEC
also stated that as a result of the foregoing, it was immediately terminating
the License Agreement. Loss of the "Bally" trade name, should such loss occur,
may have a material adverse effect on the business, results of operations and
financial condition of the Company, taken as a whole.
WMS has instituted a lawsuit in New York State Court against BGII alleging,
among other things, that $4.8 million is due and payable from BGII to WMS as a
result of the termination of BGII's merger agreement with WMS. Pursuant to the
Merger Agreement, Alliance has agreed to indemnify BGII against such a claim
under certain circumstances.
Prospective purchasers should read the description of these and other
litigation proceedings currently pending against Alliance and BGII, as well as
certain purported class actions, under the captions "Business--Litigation
Relating to the Merger" and "--Other Litigation."
GAMING TAXES AND VALUE ADDED TAXES
Gaming operators are typically subject to significant taxes and fees in
addition to corporate income taxes, and such taxes and fees are subject to
increase at any time. Any material increase in these taxes or fees, which could
occur prospectively or retroactively, would adversely affect the Company. Sales
of Wulff's products in Germany are generally subject to V.A.T. The operations of
Wulff had benefitted from a special tax rebate that was phased out from January
1, 1992 to January 1, 1994. See "Gaming Regulation and Licensing--Germany." In
addition, during 1995, Wulff increased the amount of V.A.T. reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $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.
FRAUDULENT TRANSFER CONSIDERATIONS
The obligations of the Company under the Notes may be subject to review
under state or Federal fraudulent transfer laws in the event of the bankruptcy
or other financial difficulty of the Company. Under those laws, if a court in a
lawsuit by an unpaid creditor or representative of creditors of the Company,
such as a trustee in bankruptcy, or the Company as debtor-in-possession, were to
find that at the time the Company incurred its obligations under the Notes, it
(a) did so with actual intent to hinder, delay or defraud its creditors or (b)
did not receive reasonably equivalent value or fair consideration therefor, and
either (i) was insolvent, (ii) was rendered insolvent, (iii) was engaged in a
business or transaction for which its remaining unencumbered assets constituted
unreasonably small capital or (iv) intended to incur or believed that it would
incur debts beyond its ability to pay as such debts matured, such court could
void the Company's obligations under the Notes and direct the return of any
amounts paid thereunder to the Company or to a fund for the benefit of its
creditors.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
would be required to pay its probable liability on its existing debts as they
become absolute and matured.
23
<PAGE>
ABSENCE OF PUBLIC MARKET; POTENTIAL VOLATILITY OF MARKET PRICES
The Company does not intend to list the Notes on a national securities
exchange or to seek the admission thereof for trading in the Nasdaq National
Market System ("Nasdaq"). The Underwriters have advised the Company that,
following the consummation of the Note Offering, they intend to make a market in
the Notes, but are not obligated to do so and may discontinue any such market
making at any time without notice. Further, there can be no assurance as to the
liquidity of, or that an active trading market will develop for, the Notes.
In addition, factors such as quarterly fluctuations in the Company's
financial and operating results, announcements by the Company or others and
developments affecting the Company customers or the gaming industry generally
could cause the market price of the Notes to fluctuate substantially.
24
<PAGE>
THE MERGER AND RELATED FINANCINGS
On October 18, 1995, Alliance entered into the Merger Agreement with BGII, a
Delaware corporation, and BGII Acquisition Corp. (the "Merger Subsidiary"), a
Delaware corporation and wholly-owned subsidiary of Alliance. Pursuant to the
Merger Agreement and subject to the terms and conditions set forth therein, the
Merger Subsidiary will merge into BGII which will become a wholly-owned
subsidiary of Alliance. The Merger consideration to BGII stockholders will be
approximately $77.2 million in cash, $35.7 million in Preferred Stock and $2.9
million in Common Stock, assuming 10,799,501 shares of BGII common stock
outstanding, less 1,000,000 shares owned by Alliance which will be canceled upon
consummation of the Merger. Alliance will also retire approximately $67.6
million of BGII's outstanding debt (including prepayment premium and original
issue discount), plus accrued and unpaid interest, in connection with the
Merger.
The Merger Agreement provides that Alliance will honor the terms of all
employment agreements to which BGII is a party. Upon consummation of the Merger
and the filing of a Certificate of Merger with the Secretary of State of the
State of Delaware (the "Effective Time"), the following executive officers of
BGII will be entitled, pursuant to the termination of their employment
agreements and performance unit awards with BGII, to the following lump-sum
payments, without discount to present value, in connection with the termination
of their respective employment agreements and performance unit awards: Richard
Gillman, $5.0 million payable in cash; and Neil Jenkins, $1.3 million payable
$0.8 million in cash and $0.5 million in Common Stock valued at the Alliance
Average Trading Price (defined in the Merger Agreement as the average daily
closing price per share of the Common Stock as reported through Nasdaq for the
ten consecutive trading days ending on (and including) the fifth trading day
prior to the Effective Time) but in no event more than $6.00 nor less than $4.25
per share. Robert Conover and Alliance have agreed that at the Effective Time,
he will receive $0.7 million, payable $0.2 million in cash and $0.5 million in
Common Stock (valued at the Alliance Average Trading Price but in no event
greater than $6.00 or less than $4.25 per share), and that he will remain as
President of Systems. Hans Kloss and Alliance have agreed that at the Effective
Time, Mr. Kloss will receive $1.5 million in cash and $3.0 million in Common
Stock (valued at the Alliance Average Trading Price but in no event more than
$6.00 nor less than $4.25 per share) and that he will continue as President of
BGII for a period of one year. Mr. Kloss and Alliance have also agreed that his
current employment arrangement with Wulff will continue until the end of its
term in May 1998 and that Mr. Kloss will be entitled to certain bonus payments
based on future performance.
In addition, the Company will generally assume BGII's obligations with
respect to each outstanding stock option and warrant to purchase shares of BGII
common stock, subject to certain modifications approved by BGII stockholders.
The BGII stock options and warrants assumed by Alliance will continue to have
the same terms and conditions except that (i) (A) all BGII stock options subject
to provisions of stock option plans which shorten the exercise period by reason
of the Merger and (B) all BGII stock options held by directors of BGII shall be
amended to the extent necessary to permit such BGII stock option to remain
exercisable for the lesser of (x) the full option period immediately prior to
the Merger, (y) three years after the completion of the Merger or (z) except
with respect to options held by Messrs. Gillman, Jenkins and Kloss, the period
ending on the date on which the option holders' employment is terminated for
cause or voluntarily; and (ii) unless the terms thereof explicitly require
otherwise, each BGII stock option and warrant will be exercisable for the Merger
consideration per share of BGII common stock subject to such option or warrant
at the option price per share of such BGII stock option or warrant in effect
immediately prior to the Effective Time, 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 BGII options held by such person (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.
At April , 1996, an aggregate of 1,052,500 shares of BGII common stock
were subject to options granted to employees and directors under various stock
option plans or as replacement options with respect thereto (of which options
with respect to 552,500 shares are expected to remain outstanding after the
Merger) and an aggregate of 1,498,000 shares of BGII common stock were subject
to warrants issued by BGII in connection with certain financing transactions.
25
<PAGE>
A financial institution has agreed to purchase privately at the time of
consummation of the Merger $5.0 million of the equity of Alliance at a price
equal to the lower of $4.56 (the average trading price of the Common Stock for
the five trading day period immediately preceding the agreement) and the closing
sales price of the Common Stock on the day of pricing of the Offerings. 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, with the remainder to be in the form of non-voting
special stock convertible into Common Stock. The Company anticipates, and it is
assumed for all purposes herein, that all $5.0 million will be issued in the
form of Common Stock.
In addition, Alliance has filed the Exchange Offer Registration Statement
with the Commission with respect to the Convertible Exchange Offer, pursuant to
which Alliance will offer to exchange each $1,000 principal amount of the
Convertible Debentures into $1,000 principal amount of the New Debentures, which
will have terms identical to the Convertible Debentures except for maturity, the
absence of certain transfer restrictions and registration rights relating to the
Convertible Debentures, and except that if the Merger is consummated within 60
days following the issuance of the New Debentures, then upon consummation of the
Merger, the New Debentures will be automatically converted into Common Stock at
the Special Conversion Price of $5.56 so that each $1,000 principal amount of
New Debentures will be converted into approximately 180 shares of Common Stock
pursuant to the Automatic Conversion. A holder of New Debentures may elect to
forego receipt of all or any portion of Common Stock that such holder would be
entitled to receive upon the occurrence of the Automatic Conversion, to receive
in lieu thereof one-tenth of a share of the Series E Special Stock for each
share of Common Stock that such holder would otherwise have been entitled to
receive. Each share of Series E Special Stock will be convertible into 10 shares
of Common Stock and will have the same rights and preferences as the Common
Stock except that the Series E Special Stock will have no voting rights and will
have a $0.10 per share liquidation preference. The Convertible Exchange Offer
will expire on June , 1996, unless extended. The consummation of the
Convertible Exchange Offer is not conditioned upon any minimum principal amount
of Convertible Debentures being tendered for exchange.
SOURCES AND USES OF FUNDS
The following table sets forth the anticipated sources and uses of funds to
be used to consummate the Merger and related transactions based on the Company's
cash and debt balances as of December 31, 1995. The actual balances and number
of shares outstanding may vary based on the date of consummation of the
Transaction.
(IN MILLIONS)
<TABLE>
<CAPTION>
ANTICIPATED SOURCES OF FUNDS
<S> <C>
CASH SOURCES:
Notes................................ $ 140.0
Preferred Stock...................... 15.0
Common Stock (Private Placement)..... 5.0
Available Cash....................... 12.4
---------
Total Cash Sources............... 172.4
---------
<CAPTION>
ANTICIPATED USES OF FUNDS
<S> <C>
CASH USES:
Cash to BGII Stockholders(a)......... $ 77.2
Retire BGII Debt
(includes prepayment premium and
original issue discount)(b)......... 67.6
Employee Contract Termination Costs
and Performance Unit Awards(c)...... 7.6
Fees and Expenses(d):................ 20.0
---------
Total Cash Uses.................... 172.4
---------
</TABLE>
<TABLE>
<CAPTION>
NON-CASH SOURCES:
<S> <C>
Preferred Stock...................... 35.7
Common Stock......................... 2.9
Common Stock Issued in Partial
Satisfaction of Employee Contract
Termination Costs and Performance
Unit Awards(c)...................... 4.0
---------
Total Non-Cash Sources........... 42.6
---------
Total Sources.................. $ 215.0
---------
---------
<CAPTION>
NON-CASH USES:
<S> <C>
Preferred Stock to BGII
Stockholders(e)..................... 35.7
Common Stock to BGII
Stockholders(f)..................... 2.9
Common Stock Issued in Partial
Satisfaction of Employee Contract
Termination Costs and Performance
Unit Awards(c)...................... 4.0
---------
Total Non-Cash Uses.............. 42.6
---------
Total Uses..................... $ 215.0
---------
---------
</TABLE>
26
<PAGE>
- ------------------------
(a) Represents the cash consideration to be paid to BGII stockholders in the
Merger consisting of $7.83 per share of BGII common stock (including
interest accruing at a rate of 5.5% per annum from May 3, 1996 to the
Effective Time), calculated in accordance with the terms of the Merger
Agreement.
(b) Represents retirement of the following debt of BGII outstanding at December
31, 1995:
(i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a
prepayment premium of 101% of the aggregate principal amount thereof
plus original issue discount of $0.3 million;
(ii) $15.9 million under Wulff bank lines of credit, of which $1.6 million
matures ratably per quarter through March 31, 1998 and bears interest
at a rate of 6.95% per annum, $11.2 million is due on demand and bears
interest at a fluctuating rate tied to an international borrowing rate
plus 1% (5.3% per annum at December 31, 1995) and $3.1 million is due
on demand and bears interest at a fluctuating rate tied to an
international borrowing rate plus 1% (4.8% per annum at December 31,
1995);
(iii) $9.4 million under Bally Gaming, Inc.'s bank revolving line of credit,
which matures on March 31, 1997 and bears interest at a fluctuating
rate based on the bank's prime rate plus 1 1/2% (10% per annum at
December 31, 1995); and
(iv) Other notes payable of BGII aggregating $1.9 million due in varying
amounts from 1996 through 1999 bearing interest at rates varying from
5% to 12%.
Accrued and unpaid interest on such debt is not reflected as such amounts
are not considered material.
(c) Includes $5.0 million payable in cash to Richard Gillman and $1.3 million
payable to Neil Jenkins consisting of $0.8 million in cash and $0.5 million
in Common Stock, all pursuant to agreements with Alliance in connection with
the termination of their respective employment agreements and performance
unit awards. Additionally, Hans Kloss, who will remain with the Company,
will receive a total of $4.5 million consisting of $1.5 million in cash and
$3.0 million in Common Stock and Robert Conover, who will remain with the
Company, will receive a total of $0.7 million consisting of $0.2 million in
cash and $0.5 million in Common Stock, in connection with their employment
agreements and performance unit awards. The Common Stock portion of each of
such payments will be valued at the Alliance Average Trading Price but in no
event more than $6.00 nor less than $4.25 per share. See "The Merger and
Related Financings."
(d) Total estimated Alliance and BGII Transaction-related fees and expenses are
$32.0 million, of which $12.0 million has been paid through December 31,
1995.
(e) Represents the Preferred Stock consideration to be paid to BGII stockholders
in the Merger consisting of $3.57 per share of BGII common stock (including
dividends accruing at a rate of 15% per annum from May 3, 1996 to the
Effective Time), calculated in accordance with the terms of the Merger
Agreement to equate to the value per share of Preferred Stock obtained in
the Preferred Stock Offering.
(f) Represents the Common Stock consideration to be paid to BGII stockholders in
the Merger consisting of $0.30 per share of BGII common stock valued at the
Alliance Average Trading Price.
USE OF PROCEEDS
The net proceeds of the Note Offering are estimated to be approximately $
million. The Company intends to use the net proceeds of the Note Offering,
together with the net proceeds of the Private Placement, the Preferred Stock
Offering and available cash to consummate the Merger and related transactions.
See "The Merger and Related Financings."
27
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization as of
December 31, 1995 (i) of Alliance on a historical basis, (ii) of BGII on a
historical basis, and (iii) of the Company on a pro forma basis as adjusted to
reflect the Transaction (including the use of the estimated proceeds from the
Offerings and the Private Placement). See "The Merger and Related Financings,"
"Use of Proceeds," and "Unaudited Pro Forma Condensed Combined Financial
Information."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
--------------------------------------
THE COMPANY
ALLIANCE BGII PRO FORMA
ACTUAL ACTUAL AS ADJUSTED
---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash, Cash Equivalents and Securities Available for Sale................. $ 29,468 $ 5,526 $ 14,476
---------- ---------- --------------
---------- ---------- --------------
Long-Term Debt:
Notes(1)............................................................... $ -- $ -- $ 140,000
Convertible Debentures(2).............................................. 85,000 -- 35,000
Hospitality Franchise Systems.......................................... 8,476 -- 8,476
Due to Stockholder, Net of Unamortized Discount of $0.629 at December
31, 1995.............................................................. 2,797 -- 2,797
10 3/8% Senior Secured Notes due July 1998............................. -- 39,656 --
Wulff Revolving Lines of Credit........................................ -- 15,905 --
Bally Gaming, Inc. Revolving Line of Credit............................ -- 9,400 --
Other Notes Payable.................................................... 3,833 4,983 6,982
---------- ---------- --------------
Total Long-Term Debt..................................................... 100,106 69,944 193,255
New Preferred Stock(1)................................................... -- -- 50,671
Total Stockholders' Equity (Deficiency)(1)(3)(4)(5)...................... (717) 88,410 49,433
---------- ---------- --------------
Total Capitalization..................................................... $ 99,389 $ 158,354 $ 293,359
---------- ---------- --------------
---------- ---------- --------------
</TABLE>
- ------------------------
(1) Issuance costs relative to the Note Offering and the Preferred Stock
Offering are assumed to be capitalized and amortized over the relative terms
of these instruments. Issuance costs relative to the Private Placement have
been offset against proceeds.
(2) Assumes $50.0 million of Convertible Debentures are exchanged and converted
into Common Stock at a premium of $340.00 per $1,000 principal amount,
payable in Common Stock pursuant to the Convertible Exchange Offer and the
Automatic Conversion.
(3) Excludes up to (i) 2,168,834 shares of Common Stock subject to options
issued and outstanding under the United Gaming, Inc. 1991 Long-Term
Incentive Plan, as amended ("the Alliance 1991 Stock Option Plan") and the
Gaming and Technology 1984 Employee Stock Option Plan (the "the Alliance
1984 Stock Option Plan"), of which options covering 987,310 shares were
exercisable as of December 31, 1995; (ii) 2,000,000 shares of Common Stock
which will be issuable upon exercise of warrants issued to Alfred H. Wilms;
(iii) 2,750,000 shares of Common Stock issuable upon exercise of warrants
issued to Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland"); (iv)
1,250,000 shares of Common Stock issuable upon exercise of warrants issued
to Gaming Systems Advisors, L.P. ("GSA") on September 21, 1993 and up to
2,500,000 shares of Common Stock which may be issued to GSA upon exercise of
additional warrants to be granted upon consummation of the Merger; (v)
3,500,000 shares of Common Stock issuable upon conversion of the Convertible
Debentures, assuming that $50.0 million of Convertible Debentures have
already been exchanged and converted into Common Stock (see note (2) above);
and (vi) an aggregate additional 1,780,000 shares issuable upon the exercise
of other options, warrants and convertible securities. See "Risk
Factors--Outstanding Options and Convertible Securities," "Certain
Relationships and Related Transactions" and "Security Ownership of Certain
Beneficial Holders and Management--Outstanding Options and Convertible
Securities."
(4) Excludes (i) approximately 14,118 shares of Common Stock issuable to the
non-employee directors of BGII upon exercise of options granted under BGII's
1991 Non-Employee Directors' Option Plan (the "BGII 1991 Directors' Plan")
and BGII's 1994 Stock Option Plan for Non-Employee Directors (the "BGII 1994
Plan") (assuming a price of $4.25 per share of Common Stock) and (ii)
552,500 shares of Common Stock issuable immediately prior to the Effective
Time upon the exercise of options held by employees other than Messrs.
Gillman, Jenkins and Kloss granted under the BGII 1991 Incentive Plan, based
on the assumption that all such employees elect to have their BGII options
exercisable for the number of shares of Common Stock equal to the number of
shares of BGII common stock subject thereto. See "The Merger and Related
Financings" and "Security Ownership of Certain Beneficial Holders and
Management--Outstanding Options and Convertible Securities."
(5) Includes approximately $4.0 million payable in shares of Common Stock,
subject to a collar on the Common Stock price (932,471 shares, assuming a
share price of $4.25) to Messrs. Jenkins, Kloss and Conover in connection
with employment contract termination payments and performance unit awards.
The Company currently anticipates obtaining one or more working capital
revolving facilities at Gaming and Wulff permitted under the Indenture
(providing up to $ of borrowing availability in aggregate), which would be
secured by the inventory and accounts receivable of such entities and their
subsidiaries. The Company has not received any commitment for any such facility
and no assurance can be given that it will be able to obtain any such facility
on terms acceptable to the Company. At closing, even if such facilities are
obtained, the Company expects that no borrowings will have been made under such
facilities.
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Combined Statements of Operations present
results of operations of the Company assuming the Transaction occurred on July
1, 1994 for the statements for the twelve months ended June 30, 1995 and
December 31, 1995 and for the six months ended December 31, 1995, and on July 1,
1993 for the statements for the six months ended December 31, 1994 and that the
Rainbow Casino operations were consolidated. Adjustments necessary to reflect
these assumptions and to restate historical combined results of operations are
presented in the Pro Forma Adjustments columns, which are further described in
the Notes to Unaudited Pro Forma Condensed Combined Financial Information.
The Unaudited Pro Forma Condensed Combined Balance Sheet presents the
financial position of the Company assuming the Transaction occurred on December
31, 1995. In preparing the following Pro Forma Financial Information, the
Company has also assumed that $50.0 million of the $85.0 million principal
amount of the Convertible Debentures are exchanged in the Convertible Exchange
Offer and converted into Common Stock pursuant to the Automatic Conversion.
Adjustments necessary to reflect this assumption and to restate historical
combined balance sheets are presented in the Pro Forma Adjustments column, which
are further described in the Notes to Unaudited Pro Forma Condensed Combined
Financial Information.
The historical unaudited financial information for Alliance is derived from
the audited financial statements of Alliance for the year ended June 30, 1995,
and the unaudited reports of Alliance for the six-month periods ended December
31, 1994 and 1995. The historical unaudited financial information for BGII is
derived from the unaudited interim information generated as of and for the
periods ended June 30, 1994 and 1995. BGII operating results for the
twelve-month period ended June 30, 1995 are calculated by subtracting the
unaudited six-month period ended June 30, 1994 results from the audited year
ended December 31, 1994 results and adding the unaudited six-month period ended
June 30, 1995 results. BGII operating results for the six-month periods ended
December 31, 1994 and 1995 are calculated by subtracting the unaudited six-month
periods ended June 30, 1994 and 1995 results from the audited years ended
December 31, 1994 and 1995 results, respectively.
The Supplemental Unaudited Pro Forma Information presents pro forma cash
flow and fixed charges information. Additionally, the Supplemental Unaudited Pro
Forma Condensed Combined Statements of Operations reflect pro forma earnings for
the twelve-month period ended December 31, 1995 assuming the Transaction and the
effect of consolidating the Rainbow Casino operating results occurred on January
1, 1995. The related pro forma adjustments are consistent with those assumed
elsewhere herein.
The following information does not purport to present the financial position
or results of operations of the Company had the Transaction and events assumed
therein occurred on the dates specified, nor is it necessarily indicative of the
results of operations of the Company as they may be in the future or as they may
have been had the Transaction and the effect of consolidating the Rainbow Casino
operating results been consummated on the dates shown. The Unaudited Pro Forma
Condensed Combined Financial Information is based on certain assumptions and
adjustments described in the Notes to Unaudited Pro Forma Condensed Combined
Financial Information and should be read in conjunction therewith and with "The
Merger and Related Financings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited and unaudited
historical consolidated financial statements and related notes thereto of
Alliance and BGII included elsewhere herein.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1995 (1)(2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
ALLIANCE BGII COMBINED ADJUSTMENTS COMBINED
---------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents and Securities $ 29,468 $ 5,526 $ 34,994 $ 152,825(a) $ 14,476
Available for Sale............................ (67,539)(b)
(77,227)(c)
(7,559)(c)
(10,410)(c)
2,285(d)
(12,893)(e)
Receivables, Net............................... 3,110 87,176 90,286 90,286
Inventories.................................... 672 51,591 52,263 52,263
Other.......................................... 3,395 3,983 7,378 7,378
---------- ---------- ---------- -----------
Total Current Assets......................... 36,645 148,276 184,921 164,403
Property and Equipment, Net...................... 50,870 23,244 74,114 74,114
Other Assets:
Long Term Receivables, Net..................... 4,809 9,981 14,790 14,790
Excess of Costs over Net Assets of an Acquired 3,733 5,434 9,167 44,158(c) 53,325
Business, Net.................................
Intangible Assets, Net......................... 11,638 5,380 17,018 5,202(c) 19,742
(2,478)(f)
Investment in Minority Owned Subsidiary........ 1,585 1,585 1,585
Other, Net..................................... 7,592 2,001 9,593 6,575(a) 15,671
(497)(b)
---------- ---------- ---------- -----------
Total Other Assets........................... 29,357 22,796 52,153 105,113
---------- ---------- ---------- -----------
Total Assets................................. $ 116,872 $ 194,316 $ 311,188 $ 343,630
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable............................... $ 2,295 $ 18,556 $ 20,851 $ 20,851
Accrued Liabilities............................ 10,187 17,406 27,593 (3,174)(e) 24,419
Current Maturities of Long Term Debt........... 4,054 14,957 19,011 (14,957)(b) 4,054
---------- ---------- ---------- -----------
Total Current Liabilities.................... 16,536 50,919 67,455 49,324
---------- ---------- ---------- -----------
Long Term Debt, Less Current Maturities.......... 96,052 54,987 151,039 140,000(a) 189,201
(51,838)(b)
(50,000)(f)
Other Liabilities................................ 4,082 4,082 4,082
---------- ---------- ---------- -----------
Total Liabilities............................ 116,670 105,906 222,576 242,607
Minority Interest................................ 919 919 919
Preferred Stock.................................. 15,000(a) 50,671
35,671(c)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common Stock, Par.............................. 1,298 108 1,406 118(a) 2,478
69(c)
93(c)
(108)(c)
900(f)
Paid-in Capital................................ 32,134 68,345 100,479 4,282(a) 90,257
(68,345)(c)
2,871(c)
3,870(c)
47,100(f)
Retained Earnings (Accumulated Deficit)........ (32,562) 1,842 (30,720) (744)(b) (43,223)
(497)(b)
(1,842)(c)
777(d)
(7,719)(e)
(2,478)(f)
Cumulative Translation Adjustments............. 18,662 18,662 (18,662)(c)
Other Stockholders' Equity..................... (1,587) (547) (2,134) 547(c) (79)
1,508(d)
---------- ---------- ---------- -----------
Total Stockholders' Equity (Deficiency)...... (717) 88,410 87,693 49,433
---------- ---------- ---------- -----------
Total Liabilities and Stockholders' Equity
(Deficiency)................................ $ 116,872 $ 194,316 $ 311,188 $ 343,630
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See Notes To Unaudited Pro Forma Condensed Combined Financial Information
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1995(1)(3)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
----------------------------------- BGII
AS ----------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gaming..................................................................... $128,114 $14,809(g) $142,923 $
Food and Beverage Sales.................................................... 3,847 891(g) 4,738
Net Equipment Sales........................................................ 27 27 248,701
Other...................................................................... 4,432
---------- -------- ----------
Total Revenues........................................................... 131,988 147,688 253,133
---------- -------- ----------
OPERATING COSTS:
Gaming..................................................................... 91,311 2,127(g) 93,438
Food and Beverage.......................................................... 2,795 334(g) 3,129
Equipment Sales............................................................ 12 12 157,538
Selling, General and Administrative........................................ 32,611 9,716(g) 39,153 68,651
(3,174)(h)
Unusual Charges............................................................ 500
Depreciation and Amortization.............................................. 9,520 893(g) 10,413 8,482
---------- -------- ----------
Total Operating Costs.................................................... 136,249 146,145 235,171
---------- -------- ----------
Operating Income (Loss)...................................................... (4,261) 1,543 17,962
OTHER INCOME (EXPENSES):
Interest Income............................................................ 2,798 2,798
Interest Expense........................................................... (8,133) (988)(g) (9,121) (7,090)
Casino Royalty............................................................. (810) (2,621)(g) (3,431)
Minority Interest.......................................................... (397) (397)
Other, Net................................................................. 317 101(g) 418
---------- -------- ----------
Income (Loss) Before Taxes................................................... (10,486) (8,190) 10,872
Domestic Tax Expense......................................................... (265) (265) (290)
Foreign Tax Benefit (Expense)................................................ (5,779)
---------- -------- ----------
Net Income (Loss)............................................................ $(10,751) $ (8,455) $ 4,803
---------- -------- ----------
---------- -------- ----------
Preferred Stock Dividend.....................................................
Net Loss Applicable to Common Shares.........................................
Income (Loss) Per Common Share(6)............................................ $ (.95) $ .45
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities........................................................................................
Cash Flows from Investing Activities........................................................................................
Cash Flows from Financing Activities........................................................................................
Pro Forma Deficit of Earnings to Fixed Charges................................................................................
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend...................................................
<CAPTION>
AS PRO FORMA
ADJUSTED ----------------------
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
<S> <C> <C> <C>
REVENUES:
Gaming..................................................................... $142,923 $ $142,923
Food and Beverage Sales.................................................... 4,738 4,738
Net Equipment Sales........................................................ 248,728 248,728
Other...................................................................... 4,432 4,432
-------- --------
Total Revenues........................................................... 400,821 400,821
-------- --------
OPERATING COSTS:
Gaming..................................................................... 93,438 93,438
Food and Beverage.......................................................... 3,129 3,129
Equipment Sales............................................................ 157,550 157,550
Selling, General and Administrative........................................ 107,804 (5,000)(i) 101,135
(1,669)(j)
Unusual Charges............................................................ 500 (250)(j) 250
Depreciation and Amortization.............................................. 18,895 1,167(k) 22,861
2,502(l)
(214)(m)
836(n)
(325)(o)
-------- --------
Total Operating Costs.................................................... 381,316 378,363
-------- --------
Operating Income (Loss)...................................................... 19,505 22,458
OTHER INCOME (EXPENSES):
Interest Income............................................................ 2,798 2,798
Interest Expense........................................................... (16,211 ) (6,165)(n) (22,376 )
Casino Royalty............................................................. (3,431 ) (3,431 )
Minority Interest.......................................................... (397 ) (397 )
Other, Net................................................................. 418 418
-------- --------
Income (Loss) Before Taxes................................................... 2,682 (530 )
Domestic Tax Expense......................................................... (555 ) (555 )
Foreign Tax Benefit (Expense)................................................ (5,779 ) 3,779(p) (2,000 )
-------- --------
Net Income (Loss)............................................................ $(3,652 ) $(3,085 )
-------- --------
--------
Preferred Stock Dividend..................................................... $(8,039 )
--------
Net Loss Applicable to Common Shares......................................... $(11,124)
--------
--------
Income (Loss) Per Common Share(6)............................................ $ (.48 )
--------
--------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
$ 7,042
Cash Flows from Operating Activities.......................................
--------
--------
$(26,936)
Cash Flows from Investing Activities.......................................
--------
--------
Cash Flows from Financing Activities....................................... $ (757 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges............................... $ (530 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend.. $(8,569 )
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
31
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1995(1)(4)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
----------------------------------- BGII
AS ----------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gaming.................................................................... $74,300 $ $74,300 $
Food and Beverage Sales................................................... 1,923 1,923
Net Equipment Sales....................................................... 6 6 108,893
Other..................................................................... 2,884
---------- -------- ----------
Total Revenues.......................................................... 76,229 76,229 111,777
---------- -------- ----------
OPERATING COSTS:
Gaming.................................................................... 50,248 50,248
Food and Beverage......................................................... 1,426 1,426
Equipment Sales........................................................... 1 1 71,093
Selling, General and Administrative....................................... 23,172 200(r) 23,372 33,204
Unusual Charges........................................................... 5,316
Depreciation and Amortization............................................. 4,906 4,906 5,079
---------- -------- ----------
Total Operating Costs................................................... 79,753 79,953 114,692
---------- -------- ----------
Operating Income (Loss)..................................................... (3,524) (3,724) (2,915)
OTHER INCOME (EXPENSES):
Interest Income........................................................... 818 818
Interest Expense.......................................................... (4,288) (4,288) (3,284)
Casino Royalty............................................................ (1,908) (1,908)
Minority Interest......................................................... (276) (276)
Other, Net................................................................ 535 535
---------- -------- ----------
Income (Loss) Before Taxes.................................................. (8,643) (8,843) (6,199)
Domestic Tax Expense........................................................ (788) (788) (165)
Foreign Tax (Expense) Benefit............................................... (961)
---------- -------- ----------
Net Loss.................................................................... $(9,431) $(9,631) $ (7,325)
---------- -------- ----------
---------- -------- ----------
Preferred Stock Dividend....................................................
Net Loss Applicable to Common Shares........................................
Loss Per Common Share(6).................................................... $ (.79) $ (.68)
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities........................................................................................
Cash Flows from Investing Activities........................................................................................
Cash Flows from Financing Activities........................................................................................
Pro Forma Deficit of Earnings to Fixed Charges................................................................................
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend...................................................
<CAPTION>
AS PRO FORMA
ADJUSTED ----------------------
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
<S> <C> <C> <C>
REVENUES:
Gaming.................................................................... $74,300 $ $74,300
Food and Beverage Sales................................................... 1,923 1,923
Net Equipment Sales....................................................... 108,899 108,899
Other..................................................................... 2,884 2,884
-------- --------
Total Revenues.......................................................... 188,006 188,006
-------- --------
OPERATING COSTS:
Gaming.................................................................... 50,248 50,248
Food and Beverage......................................................... 1,426 1,426
Equipment Sales........................................................... 71,094 71,094
Selling, General and Administrative....................................... 56,576 (2,500)(s) 44,639
(9,437)(t)
Unusual Charges........................................................... 5,316 (1,750)(t) 3,566
Depreciation and Amortization............................................. 9,985 584(u) 11,963
1,251(v)
(112)(w)
418(x)
(163)(y)
-------- --------
Total Operating Costs................................................... 194,645 182,936
-------- --------
Operating Income (Loss)..................................................... (6,639 ) 5,070
OTHER INCOME (EXPENSES):
Interest Income........................................................... 818 818
Interest Expense.......................................................... (7,572 ) (3,343)(x) (10,915 )
Casino Royalty............................................................ (1,908 ) (1,908 )
Minority Interest......................................................... (276 ) (276 )
Other, Net................................................................ 535 535
-------- --------
Income (Loss) Before Taxes.................................................. (15,042 ) (6,676 )
Domestic Tax Expense........................................................ (953 ) (953 )
Foreign Tax (Expense) Benefit............................................... (961 ) 625(z) (336 )
-------- --------
Net Loss.................................................................... $(16,956) $(7,965 )
-------- --------
--------
Preferred Stock Dividend.................................................... $(3,872 )
--------
Net Loss Applicable to Common Shares........................................ $(11,837)
--------
--------
Loss Per Common Share(6).................................................... $ (.50 )
--------
--------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities...................................... $20,084
--------
--------
Cash Flows from Investing Activities...................................... $ 215
--------
--------
Cash Flows from Financing Activities...................................... $(5,357 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges.............................. $(6,676 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend. $(10,548)
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1994(1)(4)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
----------------------------------- BGII
AS ----------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gaming.................................................................... $ 60,372 $ 9,261(q) $ 69,633 $
Food and Beverage Sales................................................... 1,950 666(q) 2,616
Net Equipment Sales....................................................... 16 16 113,123
Other..................................................................... 2,475
---------- -------- ----------
Total Revenues.............................................................. 62,338 72,265 115,598
---------- -------- ----------
OPERATING COSTS:
Gaming.................................................................... 43,867 1,442(q) 45,309
Food and Beverage......................................................... 1,414 257(q) 1,671
Equipment Sales........................................................... 9 9 70,835
Selling, General and Administrative....................................... 14,296 6,255(q) 18,543 33,472
(2,008)(r)
Depreciation and Amortization............................................. 4,613 906(q) 5,519 4,608
---------- -------- ----------
Total Operating Costs....................................................... 64,199 71,051 108,915
---------- -------- ----------
Operating Income (Loss)..................................................... (1,861) 1,214 6,683
OTHER INCOME (EXPENSES):
Interest Income........................................................... 1,504 1,504
Interest Expense.......................................................... (3,915) (748)(q) (4,663) (3,521)
Casino Royalty............................................................ (1,665)(q) (1,665)
Minority Interest......................................................... (169) (169)
Other, Net................................................................ (286) 73(q) (213)
---------- -------- ----------
Income (Loss) Before Taxes.................................................. (4,727) (3,992) 3,162
Domestic Tax Expense........................................................ (290) (290) (170)
Foreign Tax (Expense) Benefit............................................... (2,121)
---------- -------- ----------
Net Income (Loss)........................................................... $ (5,017) $ (4,282) $ 871
---------- -------- ----------
---------- -------- ----------
Preferred Stock Dividend....................................................
Net Loss Applicable to Common Shares........................................
Income (Loss) Per Common Share(6)........................................... $ (.45) $ .08
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities.......................................................................................
Cash Flows from Investing Activities.......................................................................................
Cash Flows from Financing Activities.......................................................................................
Pro Forma Deficit of Earnings to Fixed Charges...............................................................................
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend..................................................
<CAPTION>
AS PRO FORMA
ADJUSTED ----------------------
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
<S> <C> <C> <C>
REVENUES:
Gaming.................................................................... $69,633 $ $69,633
Food and Beverage Sales................................................... 2,616 2,616
Net Equipment Sales....................................................... 113,139 113,139
Other..................................................................... 2,475 2,475
-------- --------
Total Revenues.............................................................. 187,863 187,863
-------- --------
OPERATING COSTS:
Gaming.................................................................... 45,309 45,309
Food and Beverage......................................................... 1,671 1,671
Equipment Sales........................................................... 70,844 70,844
Selling, General and Administrative....................................... 52,015 (2,500)(s) 49,515
Depreciation and Amortization............................................. 10,127 584(u) 12,105
1,251(v)
(112)(w)
418(x)
(163)(y)
-------- --------
Total Operating Costs....................................................... 179,966 179,444
-------- --------
Operating Income (Loss)..................................................... 7,897 8,419
OTHER INCOME (EXPENSES):
Interest Income........................................................... 1,504 1,504
Interest Expense.......................................................... (8,184 ) (3,106)(x) (11,290 )
Casino Royalty............................................................ (1,665 ) (1,665 )
Minority Interest......................................................... (169 ) (169 )
Other, Net................................................................ (213 ) (213 )
-------- --------
Income (Loss) Before Taxes.................................................. (830 ) (3,414 )
Domestic Tax Expense........................................................ (460 ) (460 )
Foreign Tax (Expense) Benefit............................................... (2,121 ) 1,379(z) (742 )
-------- --------
Net Income (Loss)........................................................... $(3,411 ) $(4,616 )
-------- --------
--------
Preferred Stock Dividend.................................................... $(3,872 )
--------
Net Loss Applicable to Common Shares........................................ $(8,488 )
--------
--------
Income (Loss) Per Common Share(6)........................................... $ (.37 )
--------
--------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities...................................... $8,921
--------
--------
Cash Flows from Investing Activities...................................... $(11,243)
--------
--------
Cash Flows from Financing Activities...................................... $(1,569 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges.............................. $(3,414 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend. $(7,286 )
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1995(1)(5)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
----------------------------------- BGII
AS ----------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gaming.................................................................... $142,042 $5,548(aa) $147,590 $
Food and Beverage Sales................................................... 3,820 225(aa) 4,045
Net Equipment Sales....................................................... 17 17 244,471
Other..................................................................... 4,841
---------- -------- ----------
Total Revenues.......................................................... 145,879 151,652 249,312
---------- -------- ----------
OPERATING COSTS:
Gaming.................................................................... 97,692 685(aa) 98,377
Food and Beverage......................................................... 2,807 77(aa) 2,884
Equipment Sales........................................................... 4 4 157,796
Selling, General and Administrative....................................... 41,487 3,461(aa) 43,982 68,383
(966)(bb)
Unusual Charges........................................................... 5,816
Depreciation and Amortization............................................. 9,813 (13)(aa) 9,800 8,953
---------- -------- ----------
Total Operating Costs....................................................... 151,803 155,047 240,948
---------- -------- ----------
Operating Income (Loss)..................................................... (5,924) (3,395 ) 8,364
OTHER INCOME (EXPENSES):
Interest Income........................................................... 2,112 2,112
Interest Expense.......................................................... (8,506) (240)(aa) (8,746 ) (6,853)
Casino Royalty............................................................ (2,718) (956)(aa) (3,674 )
Minority interest......................................................... (504) (504 )
Other, Net................................................................ 1,138 28(aa) 1,166
---------- -------- ----------
Income (Loss) Before Taxes.................................................. (14,402) (13,041 ) 1,511
Domestic Tax Expense........................................................ (763) (763 ) (260)
Foreign Tax (Expense) Benefit............................................... (4,644)
---------- -------- ----------
Net Income (Loss)........................................................... $(15,165) $(13,804) $(3,393)
---------- -------- ----------
---------- -------- ----------
Preferred Stock Dividend....................................................
Net Loss Applicable to Common Shares........................................
Loss Per Common Share(6) $ (1.33) $ (.31)
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities.......................................................................................
Cash Flows from Investing Activities.......................................................................................
Cash Flows from Financing Activities.......................................................................................
Pro Forma Deficit of Earnings to Fixed Charges...............................................................................
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend..................................................
<CAPTION>
AS PRO FORMA
ADJUSTED ----------------------
COMBINED ADJUSTMENTS COMBINED
-------- ----------- --------
<S> <C> <C> <C>
REVENUES:
Gaming.................................................................... $147,590 $ $147,590
Food and Beverage Sales................................................... 4,045 4,045
Net Equipment Sales....................................................... 244,488 244,488
Other..................................................................... 4,841 4,841
-------- --------
Total Revenues.......................................................... 400,964 400,964
-------- --------
OPERATING COSTS:
Gaming.................................................................... 98,377 98,377
Food and Beverage......................................................... 2,884 2,884
Equipment Sales........................................................... 157,800 157,800
Selling, General and Administrative....................................... 112,365 (5,000)(cc) 96,259
(11,106)(dd)
Unusual Charges........................................................... 5,816 (2,000)(dd) 3,816
Depreciation and Amortization............................................. 18,753 1,167(ee) 22,719
2,502(ff)
(214)(gg)
836(ii)
(325)(hh)
-------- --------
Total Operating Costs....................................................... 395,995 381,855
-------- --------
Operating Income (Loss)..................................................... 4,969 19,109
OTHER INCOME (EXPENSES):
Interest Income........................................................... 2,112 2,112
Interest Expense.......................................................... (15,599 ) (6,402)(ii) (22,001 )
Casino Royalty............................................................ (3,674 ) (3,674 )
Minority interest......................................................... (504 ) (504 )
Other, Net................................................................ 1,166 1,166
-------- --------
Income (Loss) Before Taxes.................................................. (11,530 ) (3,792 )
Domestic Tax Expense........................................................ (1,023 ) (1,023 )
Foreign Tax (Expense) Benefit............................................... (4,644 ) 3,025(jj) (1,619 )
-------- --------
Net Income (Loss)........................................................... $(17,197) $(6,434 )
-------- --------
--------
Preferred Stock Dividend.................................................... $(8,039 )
--------
Net Loss Applicable to Common Shares........................................ $(14,473)
--------
--------
Loss Per Common Share(6) $ (.62 )
--------
--------
SUPPLEMENTAL INFORMATION:(7)
PRO FORMA CASH FLOW INFORMATION:
Cash Flows from Operating Activities...................................... $18,205
--------
--------
Cash Flows from Investing Activities...................................... $(15,478)
--------
--------
Cash Flows from Financing Activities...................................... $(4,545 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges.............................. $(3,792 )
--------
--------
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend. $(11,831)
--------
--------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
1. The Unaudited Pro Forma Condensed Combined Financial Statements of
Operations are presented as if the combination of Alliance and BGII occurred on
July 1, 1994 for the statements of operations for the twelve months ended June
30, 1995 and December 31, 1995 and for the six months ended December 31, 1995,
and on July 1, 1994 for the statement of operations for the six months ended
December 31, 1994. The Unaudited Pro Forma Condensed Combined Balance Sheet is
presented assuming the combination occurred on December 31, 1995 for purposes of
presenting the pro forma balance sheet. The combination is expected to be
recorded as a purchase transaction in accordance with generally accepted
accounting principles and, accordingly, BGII assets and liabilities are
presented at their estimated fair values as of that date.
The Merger Agreement provides that BGII stockholders will receive in the
Merger, in exchange for each of their issued and outstanding shares of common
stock, (i) an amount of cash (the "Cash Consideration") determined by dividing
$76.7 million by the number of shares of BGII common stock issued and
outstanding immediately prior to the Effective Time ($7.83 per share for
purposes of presentation of the pro forma financial information) (plus interest
accruing at a rate of 5.5% per annum from May 3, 1996 to the Effective Time),
(ii) a fraction of a share of Common Stock equal to the quotient of $0.30 and
the Alliance Average Trading Price ($2.9 million in aggregate) and (iii) that
number of shares (or fractions thereof) of Preferred Stock having a value as
determined in accordance with the Merger Agreement equal to $11.40 less the Cash
Consideration of $7.83, or $3.57 per share for purposes of presentation of the
pro forma financial information ($35.0 million in aggregate) (plus dividends
accruing at a rate of 15% per annum from May 3, 1996 to the Effective Time). The
price per share of Common Stock used for purposes of these Unaudited Pro Forma
Condensed Combined Financial Statements is $4.25, based on the closing price of
the Common Stock as reported on Nasdaq on April 22, 1996. The assumed price per
share of the $5.0 million Private Placement is $4.25, based on the lower of the
closing price of the Common Stock as reported on Nasdaq on April 22, 1996 or the
average trading price of $4.56 of the Common Stock for the five trading day
period immediately preceding the Private Placement agreement. See "The Merger
and Related Financings."
Foreign taxes result from the income generated by Wulff. Domestic taxes
result from Federal consolidated Alternative Minimum Taxes and state and local
income taxes.
The Rainbow Casino in Vicksburg began operations in July 1994. In March
1995, Alliance completed its acquisition of the general partnership interest in
the limited partnership owning the casino and from that point forward the
Rainbow Casino's operations have been consolidated with those of Alliance. The
Rainbow Casino's operating results have been included in the Pro Forma Condensed
Combined Statements of Operations as if it was owned for each period presented.
Certain reclassifications of BGII balances have been made to conform to the
Alliance reporting format.
The following adjustments have been made to arrive at the Unaudited Pro
Forma Condensed Combined Financial Information:
2. PRO FORMA CONDENSED COMBINED BALANCE SHEET ADJUSTMENTS AT DECEMBER 31,
1995
(a) To adjust for the net cash proceeds of the Offerings and the Private
Placement, less estimated fees and expenses which have been capitalized in
the case of the Offerings, and netted against the gross proceeds in the case
of the Private Placement.
(b) To adjust for the repayment of $67.6 million of BGII debt as such
instruments are intended to be repaid with the proceeds of the Offerings
including the remaining original issue discount and other costs associated
with the prepayment of the BGII debt totaling $0.8 million. Additionally,
certain deferred financing costs related to the BGII debt totaling $0.5
million will be written off.
35
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
(c) The purchase of BGII is presented as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
CONSIDERATION PAID:
Cash paid for original 1 million shares of BGII common stock owned by
Alliance..................................................................... $ 10,410
Cash consideration............................................................ 77,227
Value of Common Stock to be exchanged for BGII shares......................... 2,940
Value of Preferred Stock to be exchanged for BGII shares...................... 35,671
Contract termination costs for certain BGII personnel (see below)............. 6,320
--------------
Total consideration........................................................... 132,568
Estimated value of BGII's underlying net assets............................... 88,410
--------------
Excess of costs over the net assets of BGII acquired.......................... $ 44,158
--------------
--------------
</TABLE>
The compensation to be paid to BGII personnel consists of cash payable
to Messrs. Gillman and Jenkins totaling $5.8 million and Common Stock valued
at $0.5 million (the number of shares will be determined using the Alliance
Average Trading Price but in no event more than $6.00 nor less than $4.25
per share). As each of the above individuals will not be employed by the
Company after the Merger, such costs have been included in the computation
of goodwill.
Consideration to be paid to Messrs. Kloss and Conover consists of $1.7
million in cash and $3.5 million of Common Stock (the number of shares will
be determined using the Alliance Average Trading Price but in no event more
than $6.00 nor less than $4.25 per share). As Messrs. Kloss and Conover will
remain with the Company, such amounts have been capitalized and will be
amortized over the 2.5 and 1 year life of each of their employment
agreements, respectively. These transactions have been given simultaneous
effect in the Unaudited Pro Forma Condensed Combined Financial Statements
since they are conditions of the Merger Agreement.
The allocation of purchase cost in the pro forma financial statements is
based on available information. After consummation of the Merger, Alliance
will arrange for independent appraisal of the significant assets and
liabilities of BGII to determine the final allocation of purchase
cost. Alliance management does not currently believe that any adjustments to
the final allocation of purchase price will have a material effect on the
pro forma financial statements.
(d) To add back the $1.5 million valuation adjustment net of the tax
effect of $0.8 million, for the Alliance-owned BGII common stock,
representing the difference between the purchase cost of $10.4 million and
the market value at December 31, 1995 of $8.1 million.
(e) To record the payment of certain Merger and related expenses assumed
to be incurred prior to and concurrent with the pro forma balance sheet date
totaling $12.9 million of which $3.2 million has been accrued for at
December 31, 1995.
(f) Represents the conversion of $50.0 million of the Convertible
Debentures into shares of Common Stock. Under the original terms of the
Convertible Debentures, each $1,000 principal amount of Convertible
Debentures were convertible into 100 shares of Common Stock, less aggregate
estimated costs of $2.0 million. The Company has decreased the conversion
price so that each $1,000 of principal will be converted into approximately
180 shares of Common Stock. The additional 80 shares of Common Stock per
$1,000 of principal is treated as a "sweetener" to the original terms of the
Convertible Debentures and is recorded at the fair value of the stock
consideration being offered.
In accordance with the rules and regulations of the Commission, the net
loss from the Convertible Exchange Offer was not considered in the Unaudited
Pro Forma Condensed Combined Statements of Operations. Assuming $50.0
million of Debentures to be exchanged in the Convertible Exchange Offer and
converted into Common Stock pursuant to the Automatic Conversion would
result in a non-cash
36
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
charge of $19.5 million representing the value of the Common Stock
inducement for early conversion of $17.0 million and the write-off of the
proportionate amount of the existing deferred financing costs. For every
change of $10.0 million of Debentures converted, the correlative increase or
decrease in the non-cash charge would be $3.9 million.
3. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR
THE YEAR ENDED JUNE 30, 1995
(g) To recognize operations of the Rainbow Casino as if owned for the
entire year.
(h) Alliance development expenses, which relate to mergers, acquisitions
and joint ventures, were reduced to $3.0 million annually resulting in an
adjustment of $3.2 million. Such adjustment does not include any effect from
the elimination of direct costs related to the Merger shown separately in
(j) below. The reduction to $3.0 million reflects the elimination of costs
that were being incurred prior to Alliance's accomplishment of its strategic
plan to acquire a major gaming machine manufacturing company. To accomplish
this reduction Alliance reduced payroll costs and fees paid to consultants
and legal costs related to non-BGII transactions it had been pursuing.
(i) To adjust for estimated synergy cost savings identified by
management to date including elimination of certain duplicative costs, such
as facility, legal, accounting and compensation, which total approximately
$5.0 million on an annual basis.
(j) To eliminate costs associated with the Merger incurred by Alliance
and BGII totaling $1.7 million and $0.3 million, respectively, consisting of
legal, accounting and investment banking fees and related costs.
(k) To record the amortization on the goodwill resulting from the
Merger. The goodwill is being amortized over 40 years.
(l) To amortize the costs associated with the termination of Messrs.
Kloss and Conover's existing employment contracts with BGII over the life of
their respective employment contracts.
(m) To eliminate the amortization of goodwill on the historical
financial statements of BGII.
(n) To adjust for the interest expense on the $140.0 million of debt
which Alliance currently intends to issue as part of the financing of the
Merger, and to amortize the debt issuance costs over 7 years, net of the
elimination of the interest on the BGII debt being refinanced. For every
0.50% change in the interest rate for the $140.0 million debt financing, the
correlating change in interest expense for the year would be $0.7 million on
a pre-tax basis. Also represents the reduction of interest expense caused by
the exchange and conversion into Common Stock of $50.0 million of principal
of the Convertible Debentures. Every $10.0 million of principal of the
Convertible Debentures exchanged and converted into Common Stock causes a
decrease in interest expense of $0.75 million on a pre-tax basis.
(o) Represents the reduction of the amortization of the deferred
financing costs related to the $50.0 million of Convertible Debentures
exchanged and converted into Common Stock.
(p) To adjust for the estimated effect of foreign income tax savings
resulting from acquisition restructuring which will enable Alliance to
allocate items such as interest expense to Wulff.
4. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR
THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1994 AND 1995
(q) To recognize operations of the Rainbow Casino as if owned for each
period.
37
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
(r) Alliance development expenses, which relate to mergers, acquisitions
and joint ventures, were reduced to $3.0 million annually. For the six-month
period ended December 31, 1994, Alliance exceeded this $3.0 million
annualized amount by $2.0 million, but in the most recent six-month period
ended December 31, 1995 Alliance was below this annualized amount by $0.2
million. The elimination of direct costs related to the Merger is shown
separately in note (t) below.
(s) To adjust for estimated synergy cost savings identified by
management to date including elimination of certain duplicative costs, such
as facility, legal, accounting and compensation, which total approximately
$5.0 million on an annual basis.
(t) To eliminate costs associated with the Merger incurred by Alliance
and BGII of $9.4 million and $1.8 million, respectively, for the six-month
period ended December 31, 1995, consisting of legal, accounting and
investment banking fees and related costs. No such merger costs were
incurred by either company in the six-month period ended December 31, 1994.
(u) To record the amortization of the goodwill resulting from the
Merger. The goodwill is being amortized over 40 years.
(v) To amortize the costs associated with the termination of Messrs.
Kloss and Conover's existing employment contracts with BGII over the life of
their respective employment contracts.
(w) To eliminate the amortization of goodwill on the historical
financial statements of BGII.
(x) To adjust for the interest expense on the $140.0 million of debt
which Alliance currently intends to issue as part of the financing of the
Merger, and to amortize the debt issuance costs over 7 years, net of the
elimination of the interest on the BGII debt being refinanced. Also
represents the reduction of interest expense caused by the exchange and
conversion into Common Stock of $50.0 million of principal of the
Convertible Debentures.
(y) Represents the reduction of the amortization of the deferred
financing costs related to the $50.0 million of Convertible Debentures
exchanged and converted into Common Stock.
(z) To adjust for the estimated effect of foreign income tax savings
resulting from acquisition restructuring which will enable Alliance to
allocate items such as interest expense to Wulff.
5. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR
THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1995
Alliance management believes that it is useful to present an unaudited pro
forma statement of operations for the most recent twelve-month period ended
December 31, 1995 in addition to those already presented because it is more
representative of the Company's current operations. This presentation assumes
that the Transaction occurred on January 1, 1995. All relevant adjustments have
been presented consistent with the Pro Forma Adjustments noted above.
(aa) To recognize operations of the Rainbow Casino as if owned for the
entire year.
(bb) Alliance development expenses, which relate to mergers,
acquisitions and joint ventures, were reduced to $3.0 million annually,
resulting in a cost reduction on a pro forma basis of $1.0 million for the
twelve-month period ended December 31, 1995. The development expenses
exceeded this $3.0 million annual amount during the first six-month period
ended June 30, 1995 by $1.2 million; however, development expenses were
below this annual amount during the six month period ended December 31, 1995
by $0.2 million. The elimination of direct costs related to the Merger is
shown separately in (dd) below.
(cc) To adjust for estimated synergy cost savings identified by
management to date including elimination of certain duplicative costs, such
as facility, legal, accounting and compensation, which total approximately
$5.0 million on an annual basis.
38
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
(dd) To eliminate costs associated with the Merger incurred by Alliance
and BGII of $11.1 million and $2.0 million, respectively, consisting of
legal, accounting and investment banking fees and related costs.
(ee) To record the amortization of the goodwill resulting from the
Merger. The goodwill is being amortized over 40 years.
(ff) To amortize the costs associated with the termination of Messrs.
Kloss and Conover's existing employment contracts with BGII over the life of
their respective employment contracts.
(gg) To eliminate the amortization of goodwill on the historical
financial statements of BGII.
(hh) Represents the reduction of the amortization of the deferred
financing costs related to the $50.0 million of Convertible Debentures
exchanged and converted into Common Stock.
(ii) To adjust for the interest expense on the $140.0 million of debt
which Alliance currently plans to issue as part of the financing of the
Merger, and to amortize the debt issuance costs over 7 years, net of the
elimination of the interest on the BGII debt being refinanced. Also
represents the reduction of interest expense caused by the exchange and
conversion into Common Stock of $50.0 million of principal of the
Convertible Debentures.
(jj) To adjust for the estimated effect of foreign income tax savings
resulting from acquisition restructuring which will enable Alliance to
allocate items such as interest expense to Wulff.
6. SHARE INFORMATION
The following table reflects computations of the pro forma number of shares
of Common Stock outstanding and the per share computations (shares in millions):
<TABLE>
<CAPTION>
12 MONTHS 6 MONTHS 6 MONTHS 12 MONTHS
ENDED JUNE 30, ENDED DEC. 31, ENDED DEC. 31, ENDED DEC. 31,
1995 1994 1995 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Historical weighted average shares outstanding
(a)............................................... 11.3 11.1 11.9 11.4
Shares to be sold in the Private Placement......... 1.2 1.2 1.2 1.2
Shares to be issued to BGII stockholders........... 0.7 0.7 0.7 0.7
Common Stock to be issued to terminate contracts
for certain BGII personnel........................ 0.9 0.9 0.9 0.9
Common Stock to be issued in the Automatic
Conversion........................................ 9.0 9.0 9.0 9.0
--- --- --- ---
Pro forma weighted average shares
outstanding................................... 23.1 22.9 23.7 23.2
--- --- --- ---
--- --- --- ---
</TABLE>
- ------------------------
(a) Excludes 1.3 million shares of non-voting special stock held by KIC, which
was converted into Common Stock in December 1995.
39
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(CONTINUED)
Effect of the Merger on the shareholders of Alliance, assuming a stock price
of $4.25, is as follows (shares in millions):
<TABLE>
<S> <C> <C> <C> <C>
Shares of Common Stock outstanding at
December 31, 1995....................... 13.0
Shares of BGII common stock outstanding
at December 31, 1995.................... 10.8
Less the shares of BGII common stock
already owned by Alliance........... 1.0
---
BGII common stock to be
converted......................... 9.8
---
---
Common Stock to be issued to BGII
shareholders............................ 0.7
Common Stock to be issued to terminate
contracts for certain BGII personnel.... 0.9
Common Stock to be sold in Private
Placement............................... 1.2
Common Stock to be issued in the
Automatic Conversion.................... 9.0
---
Pro forma total outstanding shares... 24.8
---
---
</TABLE>
7. SUPPLEMENTAL PRO FORMA INFORMATION
Additional supplemental information regarding cash flow and fixed charges
has been presented with adjustments consistent with those shown in the pro forma
operating results. The earnings required to cover the Preferred Stock dividend
fixed charge have been presented excluding the effects of income taxes due to
the fact that the pro forma results of operations reflect losses from continuing
operations, resulting in a computed effective tax rate from continuing
operations that is not meaningful.
40
<PAGE>
SUPPLEMENTAL ANALYSIS OF
ADJUSTED OPERATING CASH FLOW
The Company believes that it is important to present supplementally an
analysis of its Adjusted Operating Cash Flow, given the pro forma leverage ratio
of the Company. Reference should be made to the Unaudited Pro Forma Condensed
Combined Financial Information presented elsewhere herein. The information
presented in the following schedule is being provided solely for the purposes of
assisting a prospective investor in making an investment decision.
The Company believes that this information is a useful adjunct to net
income, cash flows and other 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 EBITDA resulting in
Adjusted Operating Cash Flow. As is more fully described below, such adjustments
consist of the elimination of certain charges that management has determined to
be non-recurring or unusual, as well as adjustments made to reflect the most
recent operating results of the Rainbow Casino by annualizing the most recent
six month operating results (seasonally adjusted), and presenting such results
as if they had occurred for each period presented. The concepts of non-recurring
or unusual charges are not defined in GAAP. In making these adjustments,
management considered non-recurring revenue items as well as non-recurring
expense items. There can be no assurance that other unusual charges will not
occur in the future.
41
<PAGE>
SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ESTIMATED
ALLIANCE BGII SYNERGY ADJUSTED OPERATING
-------------------------- ------------- COST CASH FLOW AND PRO FORMA
HISTORICAL AS ADJUSTED AS ADJUSTED SAVINGS NET INTEREST EXPENSE
----------- ------------- ------------- ----------- -----------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1995
Operating Income (Loss)................. $ (4,261) $ 1,543 $ 17,962
Depreciation and Amortization........... 9,520 10,413 8,482
Minority Interest....................... (397) (397) --
Casino Royalty.......................... (810) (3,431) --
----------- ------------- -------------
$ 4,052 8,128 26,444
----------- ------------- -------------
-----------
Reclassification of Certain Direct
Merger Costs......................... 1,669 250
ADJUSTMENTS:
Rainbow Operations.................... 5,219 --
Other Unusual or Nonrecurring
Charges.............................. 2,367 1,950
------------- -------------
Adjusted Operating Cash Flow............ $ 17,383 $ 28,644 $ 5,000 $ 51,027
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.......... $ 19,578
-------
-------
SIX MONTH PERIOD ENDED DECEMBER 31, 1994
Operating Income (Loss)................. $ (1,861) $ 1,214 $ 6,683
Depreciation and Amortization........... 4,613 5,519 4,608
Minority Interest....................... (169) (169) --
Casino Royalty.......................... -- (1,665) --
----------- ------------- -------------
$ 2,583 4,899 11,291
----------- ------------- -------------
-----------
ADJUSTMENTS:
Rainbow Operations.................... 3,307 --
Other Unusual or Nonrecurring
Charges.............................. -- 800
------------- -------------
Adjusted Operating Cash Flow............ $ 8,206 $ 12,091 $ 2,500 $ 22,797
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.......... $ 9,786
-------
-------
SIX MONTH PERIOD ENDED DECEMBER 31, 1995
Operating (Loss)........................ $ (3,524) $ (3,724) $ (2,915)
Depreciation and Amortization........... 4,906 4,906 5,079
Minority Interest....................... (276) (276) --
Casino Royalty.......................... (1,908) (1,908) --
----------- ------------- -------------
$ (802) (1,002) 2,164
----------- ------------- -------------
-----------
Reclassification of Certain Direct
Merger Costs......................... 9,437 1,750
ADJUSTMENTS:
Other Unusual or Nonrecurring
Charges.............................. -- 4,266
------------- -------------
Adjusted Operating Cash Flow............ $ 8,435 $ 8,180 $ 2,500 $ 19,115
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.......... $ 10,097
-------
-------
TWELVE MONTH PERIOD ENDED DECEMBER 31,
1995
Operating Income (Loss)................. $ (5,924) $ (3,395) $ 8,364
Depreciation and Amortization........... 9,813 9,800 8,953
Minority Interest....................... (504) (504) --
Casino Royalty.......................... (2,718) (3,674) --
----------- ------------- -------------
$ 667 2,227 $ 17,317
----------- ------------- -------------
-----------
Reclassification of Certain Direct
Merger Costs......................... 11,106 2,000
ADJUSTMENTS:
Rainbow Operations.................... 1,912 --
Other Unusual or Nonrecurring
Charges.............................. 2,367 5,416
------------- -------------
Adjusted Operating Cash Flow............ $ 17,612 $ 24,733 $ 5,000 $ 47,345
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.......... $ 19,889
-------
-------
Ratio of Adjusted Operating Cash Flow to
Pro Forma Net Interest Expense......... 2.4x
Ratio of Pro Forma Long-Term Debt to
Adjusted Operating Cash Flow........... 4.1x
</TABLE>
The above supplemental analysis should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Information and the notes
thereto. In this regard, for the year ended June 30, 1995 the Company's pro
forma deficit of earnings to fixed charges was $0.5 million, and the pro forma
deficit of earnings to fixed charges after the Preferred Stock dividend was $8.6
million. The Company's pro forma deficit of earnings to fixed charges, both
before and after the Preferred Stock dividend, for the twelve
42
<PAGE>
months ended December 31, 1995 was $3.8 million, and $11.8 million,
respectively. The Company's pro forma deficit of earnings to fixed charges, both
before and after the Preferred Stock dividend, for the six-month period ended
December 31, 1994 was $3.4 million and $7.3 million, respectively. The Company's
pro forma deficit of earnings to fixed charges, both before and after the
Preferred Stock dividend, for the six-month period ended December 31, 1995 was
$6.7 million and $10.6 million, respectively.
The direct Merger costs have been reclassified and presented in computing
the separate company Adjusted Operating Cash Flow, as management believes that
such presentation provides additional relevant information to the potential
purchasers of the Company's securities, after eliminating direct costs related
to the Merger.
DIRECT MERGER COSTS. Both Alliance and BGII have incurred direct costs
related to the Merger consisting of legal, accounting, and investment banking
fees and related costs. For Alliance, such costs totalled $1.7 million, $9.4
million and $11.1 million for the year ended June 30, 1995, the six months ended
December 31, 1995 and the twelve months ended December 31, 1995, respectively.
BGII's direct costs incurred relating to the Merger totalled $0.2 million, $1.8
million and $2.0 million for the year ended June 30, 1995, the six months ended
December 31, 1995 and the twelve months ended December 31, 1995, respectively.
The adjustments which were made in determining the supplemental analysis of
Adjusted Operating Cash Flow, which were not considered in the preceding
Unaudited Pro Forma Condensed Combined Statements of Operations reflect the
following:
RAINBOW OPERATIONS. The final elements of the Rainbow Casino facility,
consisting of an 89-room hotel and an amusement park and the completion of the
casino exterior decor, parking, landscaping and signage, were not completed
until July 1995, although the Rainbow Casino had been open without these
amenities since July 1994. Although the hotel and amusement park are not owned
or operated by Alliance, management believes that such facilities have
contributed significantly to the recent strong financial results of the Rainbow
Casino. Therefore Alliance management believes that the results of operations
for the six months ended December 31, 1995 after considering seasonality (which
management believes was immaterial) are more reflective of the property's
ongoing results of operations. Accordingly, such results for the twelve months
ended December 31, 1995 have been annualized based on the actual financial
results for the six months ended December 31, 1995, as Alliance management
believes that such results better portray the Rainbow Casino's contribution to
Adjusted Operating Cash Flow. This annualization involves forward-looking
statements that involve risks and uncertainties, including the risks of
competition, gaming regulation and the other risks detailed in this Prospectus,
including under "Risk Factors."
BGII ONE-TIME COSTS. Certain charges incurred by BGII consist of costs
relating to a regulatory investigation and legal proceedings in Louisiana
totalling $1.0 million, legal costs related to a former executive totaling $0.5
million, and legal costs related to the "Bally" trade name litigation that were
directly caused by the investigation totaling $0.2 million during the fiscal
year ended June 30, 1995. For the six months ended December 31, 1994, these
charges consisted of legal costs relating to Louisiana of $0.3 million and legal
costs related to a former executive of $0.5 million. Results for the six months
ended December 31, 1995 were adjusted for charges consisting of a reserve for
German VAT taxes and the write-down of a building in Germany, which had been
acquired in the purchase of a distributor and never used by Wulff, to its net
realizable value in anticipation of its sale, totalling $1.8 million, as well as
to adjust for legal costs relating to Louisiana of $0.7 million. During the year
ended December 31, 1995, legal costs relating to Louisiana totalled $1.4
million, legal costs related to the "Bally" trade name litigation totaled $0.2
million, and charges in Germany were $1.8 million. Such costs are considered to
be non-recurring.
During the year ended December 31, 1995, BGII entered into a merger
agreement with WMS, which was ultimately terminated to enter into the Merger
Agreement with Alliance. Based on management's assessment and allocation of the
total costs incurred for both the WMS and Alliance merger transactions one-time
costs related to the WMS transaction were, $0.2 million, $1.8 million and $2.0
million for the fiscal year ended June 30, 1995, the six months ended December
31, 1995 and the twelve months ended December 31, 1995, respectively.
43
<PAGE>
ALLIANCE ONE-TIME COSTS. One-time charges incurred by Alliance consist of
an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million
of termination costs for certain directors. These charges were incurred during
the quarter ended June 30, 1995 and are therefore included as adjustments only
for the twelve months ended June 30, 1995 and December 31, 1995.
SYNERGY COST SAVINGS. Although management cannot precisely quantify future
savings, the Company has identified and expects to realize synergy cost savings
of approximately $5.0 million on an annual basis (primarily through the
reduction of duplicative costs, such as facility, legal, accounting and
compensation costs) as a result of the Merger. The Company further expects to
incur approximately $1.0 million in one-time implementation costs in realizing
these savings, which expenditures have been added back in arriving at the above
supplemental analysis.
44
<PAGE>
FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW
The following Forecast of Operating Income and Adjusted Operating Cash Flow
(the "Forecast") is based on the expected combined operating data for Alliance
and BGII for the twelve-month period ending December 31, 1996, to the best of
management's knowledge and belief. The Forecast is based on the Company's
current best estimates of expected results given the forecasted assumptions
described in the Summary of Significant Assumptions and Accounting Policies for
the Forecast for the period presented. The Forecast, which consists of
forward-looking statements, is qualified by, and subject to, the assumptions set
forth below and the other information contained in this Prospectus, and should
be read in conjunction with the Summary of Significant Assumptions and
Accounting Policies for the Forecast as well as the "Unaudited Pro Forma
Condensed Combined Financial Information," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the audited and unaudited
historical consolidated financial statements and related notes thereto of
Alliance and BGII included elsewhere herein.
The Company does not intend to update or otherwise revise the Forecast to
reflect events or circumstances existing or arising after the date of this
Prospectus or to reflect the occurrence of unanticipated events. BGII's
independent accountants, Coopers & Lybrand L.L.P., have neither examined nor
compiled nor had any other involvement with the preparation of the Forecast and
accordingly do not express an opinion or any other form of assurance with
respect thereto, nor do they assume any responsibility for the Forecast.
Independent accountants for Alliance, KPMG Peat Marwick LLP, have not examined
the Forecast presented herein and, accordingly, do not express an opinion or any
other form of assurance with respect thereto, and no other independent expert
has examined the Forecast.
The Forecast is based upon a number of estimates and assumptions that while
presented with numerical specificity and considered reasonable by management of
the Company, are inherently subject to significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of which
are difficult to predict and many of which are beyond the control of the
Company. The assumptions disclosed herein are those that the Company believes
are significant to the Forecast and reflects management's judgment as of the
date hereof. The Forecast is necessarily speculative in nature, and it is
usually the case that one or more of the assumptions do not materialize.
However, not all assumptions used in the preparation of the Forecast have been
set forth herein. In addition, as disclosed elsewhere in this Prospectus under
"Risk Factors", the business and operations of the Company are subject to
substantial risks which increase the uncertainty inherent in the Forecast. Many
of the factors disclosed under "Risk Factors" in this Prospectus could cause
actual results to differ materially from those expressed in the Forecast. The
Forecast and actual results will vary, and those variations may be material.
Accordingly, the inclusion of the Forecast herein should not be regarded as a
representation by the Company or any other person (including the Underwriters)
that the Forecast will be achieved. The Forecast is provided solely for the
purposes of assisting a prospective investor in making an investment decision,
and not for purposes of assessing equity value. The inclusion of the Forecast
herein should not be regarded as a representation by the Company or any other
person (including the Underwriters) that the Forecast will be achieved.
Prospective investors are cautioned not to place undue reliance on the Forecast.
The Company was the sole preparer of the Forecast, which was prepared in
accordance with guidelines established by the American Institute of Certified
Public Accountants, except that it combines Alliance and BGII as if the
Transaction had occurred and it omits the disclosure of non-operating items,
income taxes, extraordinary items, net income and significant changes in
financial position.
The Forecast indicates Operating Income and Adjusted Operating Cash Flow,
but it may not fully reflect the Company's ability to pay cash interest
requirements because it does not reflect other cash obligations and
requirements, such as mandatory payments on debt principal and preferred stock
redemptions and dividends, and operating requirements relating to capital
maintenance and expansion. Because the Forecast has been prepared on a combined
basis, the Forecast does not account for the Company's holding company
structure, which will result in cash flows earned at certain subsidiaries being
unavailable for distribution to the Company, including to service indebtedness
of the Company.
45
<PAGE>
ALLIANCE GAMING CORPORATION
FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW
FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 1996
WITH COMPARATIVE ANALYSIS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
COMPARATIVE ANALYSIS OF
OPERATING INCOME AND
ADJUSTED OPERATING CASH
FLOW (1)
--------------------------
FORECASTED OPERATING INCOME
TWELVE MONTHS AND ADJUSTED OPERATING
ENDED DECEMBER 31, CASH FLOW FOR THE TWELVE
-------------------------- MONTHS
1994 1995 ENDING DECEMBER 31, 1996
------------ ------------ ------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING INFORMATION:
Revenues
Gaming.......................................... $ 129,690 $ 147,590 $ 163,389
Food and Beverage Sales......................... 7,096 4,045 4,189
Net Equipment Sales............................. 236,245 249,329 258,379
------------ ------------ --------
Total Revenues................................ 373,031 400,964 425,957
------------ ------------ --------
Operating Costs
Gaming.......................................... 90,125 98,377 103,331
Food and Beverage............................... 4,755 2,884 3,150
Equipment Sales................................. 152,582 157,800 158,804
Selling, General and Administrative............. 91,808(2) 96,259(2) 110,412(2)
Unusual Charges................................. -- 3,816 --
Depreciation and Amortization................... 22,618 22,719 23,192
------------ ------------ --------
Total Operating Costs....................... 361,888 381,855 398,889
------------ ------------ --------
Operating Income.................................. 11,143 19,109 27,068
------------ ------------ --------
SUPPLEMENTAL INFORMATION:
Operating Income.................................. 11,143 19,109 27,068
Depreciation and Amortization..................... 22,618 22,719 23,192
Casino Royalty.................................... (1,670) (3,674) (4,368)
Minority Interest................................. (675) (504) (920)
------------ ------------ --------
Subtotal........................................ 31,416 37,650 44,972
Adjustments:
Rainbow Operations.............................. -- 1,912(3) --
Other Unusual or Non-recurring Charges.......... 2,856(4) 7,783(4) 1,000(5)
Direct Merger Costs............................. -- -- 8,944(6)
------------ ------------ --------
Adjusted Operating Cash Flow...................... $ 34,272 $ 47,345 $ 54,916
------------ ------------ --------
------------ ------------ --------
OTHER DATA:
Net Interest Expense............................ $ 20,600
--------
--------
Mandatory Principal Payments.................... $ 4,957
--------
--------
Capital Expenditures............................ $ 13,485
--------
--------
Ratio of Adjusted Operating Cash Flow to Net
Interest Expense............................... 2.7x
Ratio of Long-Term Debt to Adjusted Operating
Cash Flow...................................... 3.5x
</TABLE>
- ------------------------------
(1) See Note 2 -- Presentation of Supplemental Comparative Information of the
"Summary of Significant Assumptions and Accounting Policies for the
Forecast."
(2) Includes selling, general and administrative costs for the twelve months
ended December 31, 1994 and 1995 net of the following: direct Merger costs,
the business development costs over the $3.0 million budgeted amount
totaling $4.7 million and $12.1 million in 1994 and 1995, respectively and
net synergy cost savings totaling $5.0 million in 1994 and 1995, and $4.0
million in 1996. See note (6) below for one-time $1.0 million costs to
implement synergy cost savings. See note (6) below for the 1996 presentation
which includes direct Merger costs.
(3) Represents adjustment to reflect Rainbow Casino's annualized results for the
period net of incremental royalty.
(4) Reflects items determined by management to be unusual or non-recurring
(which are also included in Total Operating Costs). The concepts of one-time
or unusual charges are not defined in GAAP.
(5) For 1996, the non-recurring charges consist of the $1.0 million of one-time
charges (which are included in Selling, General and Administrative costs) to
implement the expected annual synergy cost savings (which are reflected in
Total Operating Costs as well).
(6) Direct Merger Costs for 1996 have been included in Total Operating Costs and
presented as an adjustment in computing the Adjusted Operating Cash Flow.
See note (2) above for the presentation of direct Merger costs in 1994 and
1995.
See accompanying Summary of Significant Assumptions and Accounting Policies for
the Forecast
46
<PAGE>
SUMMARY OF SIGNIFICANT
ASSUMPTIONS AND ACCOUNTING POLICIES FOR THE FORECAST
FOR THE TWELVE-MONTH PERIOD ENDING DECEMBER 31, 1996
NOTE 1. -- INTRODUCTION
The Forecast of Operating Income and Adjusted Operating Cash Flow for the
twelve-month period ending December 31, 1996 and the accompanying related
Summary of Significant Assumptions and Accounting Policies of Alliance Gaming
Corporation and subsidiaries, after consummation of the Transaction, represent
the Company's best estimate as of the date of the Forecast of Operating Income
and Adjusted Operating Cash Flow of the Company for the first twelve months of
combined operations (after elimination of all significant intercompany accounts
and transactions). The Forecast reflects management's judgment, based on present
circumstances, of the expected set of conditions and their expected courses of
action, to the extent such conditions or actions are anticipated to affect the
results described in the Forecast.
The assumptions described herein are those that management believes are
significant to the Forecast or are the key factors upon which the results shown
in the Forecast depend. However, not all assumptions used in the preparation of
the forecast have been set forth herein. The estimates and assumptions, which
though considered reasonable by management may not be achieved and are
inherently subject to significant business, economic, regulatory and competitive
uncertainties and contingencies, including possible competitive responses, many
of which are not within the control of the Company and are not possible to
assess accurately. Therefore, the actual results achieved during the forecast
period will vary from those set forth in the Forecast, and the variations may be
material. Prospective investors are cautioned not to place undue reliance on the
Forecast.
The Forecast assumes that, among other things: (i) the proceeds of the
Offerings and the Private Placement are used as contemplated in "Use of
Proceeds;" (ii) there will be no change in generally accepted accounting
principles that may have a direct material effect on the reporting of financial
results of the Company; (iii) there will be no material adverse affect from the
matters discussed in "Risk Factors" included elsewhere in this Prospectus; (iv)
there will be no material changes made to gaming regulations that would affect
the operations of the Company; and (v) that management will realize the
anticipated synergies. Management believes that these assumptions, when taken
together with management's extensive experience in operating in such markets,
provide a reasonably objective basis to forecast the Company's operations for
the period presented.
The Company does not intend to update or otherwise revise the Forecast to
reflect events or circumstances existing or arising after the date hereof or to
reflect the occurrence of unanticipated events. The Forecast is provided solely
for the purpose of assisting a prospective investor in making an investment
decision, and not for the purpose of assessing equity value.
For a discussion of significant accounting policies see Note 1 of the Notes
to the Alliance audited consolidated financial statements and the "Summary of
Significant Accounting Policies" of the notes to the BGII audited consolidated
financial statements included elsewhere in this Prospectus.
NOTE 2. -- PRESENTATION OF SUPPLEMENTAL COMPARATIVE INFORMATION
For the purpose of assisting investors in evaluating the forecasted
information, the Company has presented a Comparative Analysis for the
twelve-month periods ended December 31, 1994 and 1995. The Statement of
Operations Information in the Comparative Analysis for the twelve months ended
December 31, 1995 has been derived from the Company's Unaudited Pro Forma
Condensed Combined Statements of Operations and the Supplemental Information in
the Comparative Analysis for the twelve months ended December 31, 1995 has been
derived from the Supplemental Analysis of Adjusted Operating Cash Flow included
elsewhere herein. The Comparative Analysis for the twelve months ended December
31, 1994 has been derived using accounting principles and assumptions consistent
with those used in deriving the Comparative Analysis for the twelve months ended
December 31, 1995, and includes adjustments for the planned reduction of the
Company's ongoing development costs to $3.0 million per year, resulting in an
47
<PAGE>
NOTE 2. -- PRESENTATION OF SUPPLEMENTAL COMPARATIVE INFORMATION (CONTINUED)
adjustment for such period of $4.7 million, certain estimated synergy cost
savings (net of one-time implementation costs) and items management believes to
be one-time charges totaling $2.8 million, and assumes that the Rainbow Casino
was owned since its opening in July 1994. The Comparative Analysis presented for
the twelve-month periods ended December 31, 1994 and 1995 has been prepared by
management to provide potential investors with additional information to analyze
the Forecast and should not be construed as a presentation of actual historical
results or expected future results. The "Unaudited Pro Forma Condensed Combined
Financial Information," "Supplemental Analysis of Adjusted Operating Cash Flow"
and the audited and unaudited historical consolidated financial statements and
related notes thereto of Alliance and BGII included elsewhere herein should be
read for additional information.
NOTE 3. -- OPERATING ASSUMPTIONS
The assumptions disclosed herein are those that management believes are
significant to the Forecast. There will be differences between forecasted and
actual results because events and circumstances frequently do not occur as
expected, and those differences may be material.
REVENUES AND COST OF SALES
GAMING MACHINE MANAGEMENT OPERATIONS
NEVADA
In its Nevada gaming machine management operations, Alliance selects, owns,
installs, manages and services gaming devices (approximately 5,250 devices at
December 31, 1995) in third-party owned local establishments such as taverns,
restaurants, supermarkets, drug stores and convenience stores (approximately 520
locations at December 31, 1995).
The Company has agreements with local bars, taverns, restaurants and
convenience stores for either space leases or revenue-sharing arrangements.
Under the revenue-sharing arrangements, the Company shares the revenues from the
machines with the location operator, and with space leases the Company pays a
fixed rental to the owner of the establishment and then the Company receives all
of the revenues derived from the gaming devices. At December 31, 1995, the
weighted average remaining term of the Company's revenue-sharing arrangements
was approximately 3.9 years, and for space leases was approximately 2.9 years.
NEVADA GAMING MACHINE MANAGEMENT OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS MONTHS
ENDED DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS EXCEPT UNIT
DATA)
<S> <C> <C> <C>
Average Number of Machines............................................. 5,180 5,288 5,482
Average Number of Locations............................................ 504 521 541
Total Revenues......................................................... $90,092 $91,949 $101,579
Costs and Expenses..................................................... $76,248 $77,507 $85,582
</TABLE>
Gaming machine management revenues are a function of the average number of
machines installed, times the average net win per machine. The revenues are
assumed to increase due to the increase in the number of Alliance's machines
installed, which reflects increased demand caused in part by Nevada's
significant population growth trend. The Forecast assumes the renewal of 80% of
the contracts expiring during the forecast period which the Company intends to
retain. For the year ended June 30, 1995, the Company did not renew 17% of
expiring agreements, including those the Company had determined to allow to
lapse.
48
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
Additionally, in December 1995, the Company implemented the Gambler's Bonus
cardless slot player's club and player tracking system. The Company assumes, for
the purpose of this Forecast, that there will be 88 locations, or an aggregate
of 980 machines, installed at June 1996, increasing to 130 locations, or 1,490
machines, at December 1996. Consistent with results of previously installed
machines linked to Gambler's Bonus, the Forecast assumes that there will be an
increase in the average net win per machine at these locations. Consistent with
contracts signed to date, the Forecast assumes that the contracts with the
additional locations will allow the Company to receive a percentage of the
increased gaming win generated by Gambler's Bonus in addition to its existing
revenue participation. Forecasted results of the Nevada gaming operations are
directly dependent upon the realization of these assumptions. Variations from
the realization of these assumptions will have a material effect upon the
forecasted results.
The Forecast assumes that costs and expenses (which include selling, general
and administrative costs) related to the 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 primarily as a result of the full year
impact of the Metairie OTB location completed in October 1995.
The Forecast assumes that the statute that permits the operation of
unlimited numbers of video poker devices in pari-mutuel horse racing tracks and
the associated OTB's is not adversely amended in the current Louisiana
legislature session or changed by referendum. See "Risk Factors -- Strict
Regulation by Gaming Authorities." Forecasted results of the Louisiana gaming
operations are directly dependent upon the assumption concerning the pending
legislation. An unfavorable result in legislation or referendum will have a
material adverse effect upon the forecasted results.
Pursuant to the terms of the VSI Loan (as defined), VSI may not pay cash
dividends or make any distribution of its property. The loan, which had an
outstanding balance of $3.4 million at December 31, 1995, amortizes quarterly
until due in full in September 1998 and may be prepaid at any time without
penalty. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Forecast assumes that costs and expenses (which include selling, general
and administrative costs) related to the Louisiana gaming machine management
operations are relatively stable as a percentage of revenues as compared to the
1995 levels.
49
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
CASINO OPERATIONS
PLANTATION STATION
PLANTATION STATION OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT UNIT
DATA)
<S> <C> <C> <C>
Average Number of Slot Machines.............................................. 422 462 453
Win/Slot/Day................................................................. $ 46 $ 38 $ 41
Average Number of Table Games................................................ 9 9 9
Win/Table/Day................................................................ $ 260 $ 219 $ 225
Gaming Revenues.............................................................. $ 8,892 $ 8,209 $ 8,645
Total Revenues............................................................... $ 12,847 $ 12,183 $ 12,653
Costs and Expenses........................................................... $ 10,425 $ 10,150 $ 10,555
</TABLE>
Total revenues include food and beverage sales, which are assumed to remain
relatively stable compared to 1995; however, the food and beverage sales provide
only minimal gross profit.
The Forecast assumes that total revenues will experience a 4% increase from
the previous year. Management assumes that the Sparks, Nevada gaming market will
increase by 3% in 1996 compared to 5% growth for calendar 1995 as reported by
the Nevada Gaming Control Board. In addition, because the negative impact on
Plantation Station of a major street, sidewalk, and landscaping redevelopment
project by the City of Sparks ended in December 1995, the Forecast assumes that
revenues will increase in 1996. Forecasted results of the Plantation Station
operations are directly dependent upon the realization of these assumptions.
Variations from these assumptions will have a material effect upon the
forecasted results.
The Forecast assumes that costs and expenses related to the Plantation
Station operations are relatively stable as a percentage at total revenues as
compared to the 1995 levels.
50
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
RAINBOW CASINO
RAINBOW CASINO OPERATIONS (A)
<TABLE>
<CAPTION>
FORECASTED
TWELVE MONTHS ENDED TWELVE
MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS EXCEPT UNIT
DATA)
<S> <C> <C> <C>
TOTAL VICKSBURG MARKET
Number of Slots.............................................................. 2,849 2,847 2,880
Number of Tables............................................................. 152 154 155
Win/Slot/Day................................................................. $ 124 $ 142 $ 153
% CHANGE................................................................... -- 15.2% 7.4%
Win/Table/Day................................................................ $ 851 $ 789 $ 730
% CHANGE................................................................... -- -7.2% -7.5%
Win/Position/Day............................................................. $ 128 $ 140 $ 145
% CHANGE................................................................... -- 9.2% 4.0%
RAINBOW
Number of Slots.............................................................. 573 589 589
Number of Tables............................................................. 28 28 25
Win/Position/Day............................................................. $ 72 $ 102 $ 132
% CHANGE................................................................... -- 42.7% 29.2%
Total Revenues............................................................... $ 10,433 $ 29,069 $ 36,400
Costs and Expenses........................................................... $ 7,918 $ 18,995 $ 23,540
</TABLE>
- ------------------------
(a) The information for 1994 and 1995 represents the historical results of the
Rainbow Casino, which opened in July 1994 and was not consolidated with
Alliance until March 1995.
The total gaming market for the Vicksburg Mississippi area is assumed to
increase 5% to approximately $200 million for 1996. Management assumes that its
location at Vicksburg Landing and the adjoining amenities enable the Rainbow
Casino to attract visitors from the existing tourism market of the historic city
of Vicksburg as well as a significant share of the local market. The Rainbow
Casino market share is assumed to remain at its current 18% level which is up
from 13% prior to the opening of the Days Inn Hotel, the Funtricity
Entertainment Center and the restaurant in July 1995. Both the hotel and
entertainment park are operated by third parties. Forecasted results of
Mississippi gaming operations are directly dependent upon the realization of
these assumptions. Variations from these assumptions will have a material effect
upon forecasted results.
The Forecast assumes that costs and expenses related to the Rainbow Casino
operations are relatively stable as a percentage of revenues as compared to the
1995 levels.
NET EQUIPMENT SALES
Forecasted net equipment sales revenues includes the operating results from
Gaming, Systems and Wulff. There are numerous factors which affect any forecast
of net gaming equipment sales, including gaming regulatory factors and casino or
arcade patron preferences. The impact of such factors on the Company will be
material.
GAMING
Net equipment sales reflect the sales of video and reel-type gaming machines
to casinos in various jurisdictions, including casinos in Nevada and Atlantic
City, riverboats, Native American casinos, and
51
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
international markets. Net equipment sales is a function of the number of unit
sales and the net sales price per unit. Gaming results include GmbH and BGI
Australia Pty Limited along with certain reclassifications from historical
presentation.
GAMING
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------- FORECASTED TWELVE MONTHS
1994 1995 ENDING DECEMBER 31, 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............................................... $ 111,655 $ 105,944 $ 111,733
</TABLE>
Although worldwide electronic gaming machine sales (for these purposes,
primarily slot and video machines) decreased in 1995, management assumes that
1996 worldwide gaming machine sales will increase as a result of (1) three major
casino openings in Las Vegas, (2) the opening of Indiana riverboat casinos and
(3) the expansion of certain other markets and the increasing demand for
replacement machines. However, particularly in the case of non-traditional
gaming markets, the timing and magnitude of electronic gaming machine sales is
difficult to predict with accuracy. The Forecast assumes a relatively constant
market share during the forecast period while Gaming's share over the past three
years has grown significantly.
The Forecast assumes gross margin increases during the forecast period due
to a 1.5% increase in net unit price, continued reduction in the new material
cost per unit (although at a lower rate than experienced during the past two
years) and improved manufacturing efficiencies as a result of higher production
levels during the forecast period than during the year ended December 31, 1995.
Gaming's forecasted operating results are directly dependent upon the
realization of these assumptions. The Forecast assumes selling, general and
administrative expenses will increase 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.
SYSTEMS
Systems' revenues reflect the sales of computer hardware and computer
software, as well as maintenance and upgrades of such computer equipment, to
casinos in various jurisdictions, including Nevada and Atlantic City,
riverboats, Native American casinos and, to a lesser extent, in international
markets. Hardware and software sales are based on the contracts that Systems
enters into with each of the individual casinos. Such contracts generally
reflect pre-determined prices for goods and services provided by Systems.
Maintenance revenues are generally a function of the total installed base of
Systems' GMUs.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------- FORECASTED TWELVE MONTHS
1994 1995 ENDING DECEMBER 31, 1996
---------- ---------- ------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Revenues................................................ $ 13,386 $ 20,681 $ 20,565
Cost and Expenses........................................... $ 9,793 $ 14,893 $ 14,262
</TABLE>
Management assumes that revenues during the forecast period will be
comparable to the prior year. The forecasted net revenues assumes that
approximately 40% of Systems' sales result from product upgrades
52
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
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
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
Costs 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 be lower
during the first half of the forecast period than during the first half of 1995,
but to increase, and exceed the 1995 level of demand in the second half of the
forecast period principally due to the expected impact of new regulations going
into effect on January 1, 1997 which will require all wall machines in use to
have meters to monitor the amount inserted by players and paid out by the
machine. There can be no assurance that the down-turn in the first half of 1996
will be less than the down-turn in the last half of 1995, nor that the down-turn
is solely related to the regulatory change, and, accordingly, temporary in
nature. Further, there can be no assurance that the forecasted positive impact
of the 1997 regulations will be realized or that demand will increase as
forecasted.
The Forecast assumes gross margin will increase during the forecast period
due to lower raw material costs per unit partially offset by a lower average
price per unit. Wulff's forecasted operating results will be directly dependent
upon the realization of these assumptions. The Forecast assumes selling, general
and administrative expenses will remain relatively constant. Variations from the
realization of these assumptions will have a material effect upon forecasted
results. As Wulff's manufacturing overhead costs and selling, general and
administrative expenses are relatively fixed, variances from forecasted unit
sales could impact margins to a greater extent than if such costs were
predominantly variable.
53
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
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 specified or as may result
from yet to be determined potential expenses in connection with or at the time
of the Merger 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 its control, to a greater degree than assumptions
regarding its business units' revenues and cost of sales.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are expected to continue to be charged to
earnings on substantially the same basis as has been done historically. There
are no significant capital additions expected during the forecast period, nor is
there any expected material change to depreciation or amortization rates.
Capital replacement is expected to continue during the year at a moderate rate.
The Forecast also gives effect to expected increases in amortization of goodwill
and other assets resulting from the Merger.
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Gaming...................................................................... $ 1,522 $ 879 $ 750
Systems..................................................................... 626 294 276
Wulff....................................................................... 7,389 7,067 5,682
Gaming Machine Management................................................... 6,166 7,773 5,132
Casinos..................................................................... 644 3,803 1,580
Other....................................................................... 1,170 444 65
--------- --------- ------------
Total................................................................... $ 17,517 $ 20,260 $ 13,485
--------- --------- ------------
--------- --------- ------------
</TABLE>
Management believes that it has substantial discretion to reduce forecasted
levels of capital expenditures without materially reducing operating results for
the forecasted period, principally in the case of the Gaming Machine Management
and Casino expenditures. The significant capital expenditures in 1994 and 1995,
including upgrading the Plantation Casino, completing the Rainbow Casino and
upgrading the Gaming Machine Management installed base, are assumed to further
enhance the Company's ability to reduce 1996 capital expenditures on a
discretionary basis. Management estimates the minimum level of capital
expenditures for maintenance purposes is approximately $8.0 million.
54
<PAGE>
NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT
The following is a reconciliation of the historical EBITDA by business unit
to the combined Adjusted Operating Cash Flow:
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED DECEMBER MONTHS
31, ENDING
------------------------------ DECEMBER 31,
1994 1995 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
EBITDA by Business Unit:
Gaming................................................. $ 7,004(a) $ 5,905(a) $ 10,750
Systems................................................ 3,593 5,788 6,303
Wulff.................................................. 15,575 15,172 16,836
Gaming Machine Management.............................. 17,159 18,260 19,957
Casinos................................................ 2,927 10,546 14,958
Alliance Corporate Administrative Expense.............. (10,609) (8,912) (5,800)
Alliance Development Expense........................... (7,694) (15,072) (10,944)
BGII Corporate Administrative Expense.................. (4,520) (3,732) (4,800)
Discontinued Operations/Other.......................... (1,378) (933) --
Casino Royalty......................................... -- (2,718) (4,368)
Minority Interest...................................... (675) (504) (920)
BGII Unusual Charges................................... -- (5,816) (2,000)
-------------- -------------- --------------
Combined EBITDA.......................................... 21,382 17,984 39,972
Adjustments:
Direct Merger Costs.................................... -- 13,106(b) 8,944(b)
Alliance Development Expense Reductions................ 4,694 966 --
Rainbow Operations..................................... 340(c) 2,506(c) --
Unusual or Nonrecurring Charges........................ 2,856(d) 7,783(e) 1,000(f)
Synergy Costs Savings.................................. 5,000 5,000 5,000
-------------- -------------- --------------
Adjusted Operating Cash Flow............................. $ 34,272 $ 47,345 $ 54,916
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- ------------------------
(a) Includes certain charges incurred by Gaming and not reflected as "BGII
Unusual Charges" above, consisting of costs relating to a regulatory
investigation and legal proceedings in Louisiana totalling $0.3 million and
$1.4 million for the years ended December 31, 1994 and 1995 respectively.
(b) For the twelve months ended December 31, 1995, $11.1 million of direct
Merger costs are included in Alliance Development Expense and $2.0 million
in BGII Unusual Charges. For the Forecasted Twelve Months Ending December
31, 1996, $6.9 million of direct Merger costs are included in Alliance
Development Expense and $2.0 million in BGII Unusual Charges.
(c) To adjust to reflect the operating results of the Rainbow Casino as if owned
during all of 1994 and 1995 and, for the twelve months ended December 31,
1995, to reflect the most recent operating results of the Rainbow Casino,
presented as if such results had occurred for all of 1995 (including an
adjustment for additional casino royalty expense of approximately $1.7
million and $1.0 million, respectively).
(d) Includes legal costs included as BGII Corporate Administrative Expense
related to a former executive totalling $0.5 million and $0.3 million
incurred by Gaming relating to a regulatory investigation and legal
proceedings in Louisiana and a reserve for discontinued operations of $2.0
million for Alliance included in Alliance Corporate Administrative Expense.
55
<PAGE>
NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT (CONTINUED)
(e) Includes one-time charges included in Alliance Corporate Administrative
Expense consisting of an executive signing bonus of $1.3 million paid in
Common Stock and $1.1 million of termination costs for certain officers and
directors, which were incurred during the quarter ended June 30, 1995. Also
includes $1.4 million incurred by Gaming relating to a regulatory
investigation and legal proceedings in Louisiana, and $0.2 million included
in BGII Corporate Administrative Expense for legal costs related to the
"Bally" trade name litigation. Also includes BGII unusual charges of $2.0
million in costs related to the merger agreement with WMS, a provision of
$0.8 million at Wulff to writedown to net realizable value the carrying
value of a building to be sold and a provision of $1.0 million to increase
Wulff's tax reserves primarily for V.A.T.
(f) Includes $1.0 million of one-time charges to implement the expected annual
synergy cost savings.
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
Wulff Debt........................................................................................ 700
Other............................................................................................. 73
------
$ 4,657
------
------
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
56
<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 six months ended December 31, 1994 and 1995. The
historical financial information of Alliance as of June 30, 1991, 1992 and 1993
and for the years ended June 30, 1991 and 1992 as set forth below has been
derived from the audited consolidated financial statements of Alliance not
included in this Prospectus. The results for the period ended December 31, 1995
will not necessarily be indicative of the results for the fiscal year ended June
30, 1996, and in the opinion of Alliance, include all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the information set
forth herein. The table should also be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Pro Forma Condensed Combined Financial Information," the audited
consolidated financial statements of Alliance and the unaudited interim
condensed consolidated financial statements of Alliance, including the notes
thereto and other financial and operating information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER 31,
FISCAL YEARS ENDED JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES:
Gaming:
Routes............................................ $ 77,150 $ 77,940 $ 96,282 $ 102,830 $ 106,827 $ 52,511 $ 52,621
Casinos and Taverns............................... 11,281 11,560 12,526 15,679 21,287 7,861 21,679
Food and Beverage Sales............................. 3,120 3,376 4,184 4,480 3,847 1,950 1,923
Net Equipment Sales(1).............................. 214 379 99 65 27 16 6
--------- --------- --------- --------- --------- --------- ---------
91,765 93,255 113,091 123,054 131,988 62,338 76,229
COSTS AND EXPENSES:
Cost of Gaming:
Routes............................................ 58,299 58,585 72,614 76,332 79,875 39,214 40,361
Casinos and Taverns............................... 8,528 8,459 8,667 11,871 11,436 4,653 9,887
Cost of Food and Beverage........................... 2,249 2,367 2,876 3,084 2,795 1,414 1,426
Cost of Equipment Sales............................. 151 284 49 20 12 9 1
Selling, General and Administrative................. 8,059 8,950 12,667 13,555 14,633 6,486 9,398
Business Development Costs.......................... -- -- 900 1,192 7,843 3,508 10,737
Corporate Expenses.................................. 7,567 5,290 6,191 7,882 9,735 4,302 3,037
Bad Debt Expense.................................... 4,845 539 461 705 400 -- --
Write-off of Inventories, Intangibles and Other
Assets............................................. 4,982 -- -- -- -- -- --
Loss on Abandoned Casinos........................... 7,847 2,307 -- 3,713 -- -- --
Loss on Abandoned Taverns........................... -- -- -- 2,638 -- -- --
Depreciation and Amortization....................... 7,092 7,355 8,718 9,530 9,520 4,613 4,906
--------- --------- --------- --------- --------- --------- ---------
Total cost and expenses........................... 109,619 94,136 113,143 130,522 136,249 64,199 79,753
--------- --------- --------- --------- --------- --------- ---------
Operating Loss........................................ (17,854) (881) (52) (7,468) (4,261) (1,861) (3,524)
OTHER INCOME (EXPENSE):
Interest Income..................................... 1,750 1,324 998 2,084 2,798 1,504 818
Interest Expense.................................... (4,663) (4,505) (5,046) (6,830) (8,133) (3,915) (4,288)
Other Net........................................... (1,007) (618) 450 (673) (890) (455) (1,649)
--------- --------- --------- --------- --------- --------- ---------
Loss Before Income Taxes.............................. (21,774) (4,680) (3,650) (12,887) (10,486) (4,727) (8,643)
Income Tax (Expense) Benefit.......................... 5,958 -- -- (241) (265) (290) (788)
--------- --------- --------- --------- --------- --------- ---------
Net Loss.......................................... $ (15,816) $ (4,680) $ (3,650) $ (13,128) $ (10,751) $ (5,017) $ (9,431)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net Loss Per Common Share............................. $ (1.73) $ (0.51) $ (0.38) $ (1.28) $ (0.95) $ (0.45) $ (0.79)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted Average Common Shares Outstanding............ $ 9,151 $ 9,248 $ 9,696 $ 10,251 $ 11,300 $ 11,101 $ 11,859
Deficit of Earnings to Fixed Charges.................. $ (21,744) $ (4,680) $ (3,650) $ (12,887) $ (10,487) $ (4,726) $ (8,644)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro Forma Ratio of Earnings to Fixed Charges(2)....... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents............................. $ 5,774 $ 10,239 $ 9,580 $ 37,085 $ 13,734 $ 28,189 $ 15,729
Securities Available for Sale......................... -- -- -- 12,489 23,680 12,596 13,739
Net Working Capital................................... 10,450 11,557 7,991 50,926 31,552 40,087 20,109
Total Assets.......................................... 79,024 75,594 73,768 119,416 126,348 115,353 116,872
Long-term Debt, including Current Maturities.......... 44,450 43,282 44,798 90,726 101,397 89,375 100,106
Stockholders' Equity (Deficiency)..................... 27,008 23,660 22,665 15,099 9,985 13,917 (717)
</TABLE>
- ------------------------------
(1) Includes sales to related parties of $86 (1991), $236 (1992), $2 (1993), $6
(1994), $0 (1995).
(2) For the twelve months ended June 30, 1995 and six months ended December 31,
1994 and 1995, the pro forma deficit of earnings to fixed charges was
$(530), $(3,414) and $(6,676), respectively.
58
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII
The following table sets forth selected financial information of BGII
(consolidated for the periods 1992 through 1995 and combined for 1991), as of
and for the years ended December 31, 1991, 1992, 1993, 1994 and 1995, of which
certain periods are included elsewhere in this Prospectus. See "Basis of
Presentation and Description of Business" in BGII's Notes to Consolidated
Financial Statements. The historical financial information of BGII as of
December 31, 1991, 1992 and 1993 and for the years ended December 31, 1991 and
1992 as set forth below has been derived from the audited financial statements
of BGII not included in this Prospectus. The selected historical consolidated
financial data for periods prior to November 18, 1991 (the date BGII completed
its initial public offering of common stock), present, on a historical cost
basis, the financial position and results of operations of the subsidiaries and
divisions of BEC which formerly conducted operations as Gaming, Systems and
Wulff. This table should also be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Pro Forma Condensed Combined Financial Information" and the audited
consolidated financial statements of BGII, including the notes thereto and other
financial and operating information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993(1) 1994(1) 1995(1)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues...................................................... $ 153,648 $ 163,781 $ 168,707 $ 236,192 $ 249,312(2)
Cost of Sales................................................. 102,357 99,906 121,710(3) 157,059 163,131(2)
Selling, General and Administrative Expenses.................. 36,725 46,348 57,357(4) 59,989 65,289
Provision for Doubtful Receivables............................ 2,176 3,597 8,176(5) 5,763 6,712(2)
Unusual Charges............................................... -- -- -- -- 5,816(6)
Interest Expense, Primarily Charged by BEC in 1991............ 1,602 1,951 4,424 6,768 6,853
Provision for Income Taxes.................................... 5,784 6,725 4,242 2,820 4,904
--------- --------- --------- --------- ---------
Income (Loss) before Extraordinary Gain....................... 5,004 5,254 (27,202) 3,793 (3,393)
Extraordinary Gain on Early Extinguishment of Debt............ -- -- 3,759 -- --
--------- --------- --------- --------- ---------
Net Income (Loss)............................................. $ 5,004 $ 5,254 $ (23,443) $ 3,793 $ (3,393)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (Loss) Per Share before Extraordinary Gain............. $ 0.48 $ 0.50 $ (2.54) $ 0.35 $ (0.31)
Extraordinary Gain on Early Extinguishment of Debt Per
Share........................................................ -- -- 0.35 -- --
--------- --------- --------- --------- ---------
Net Income (Loss) Per Share................................... $ 0.48 $ 0.50 $ (2.19) $ 0.35 $ (0.31)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro Forma Net Income.......................................... $ 2,435(7) $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro Forma Net Income Per Share................................ $ 0.23(7) $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average Number of Common Shares Outstanding................... 10,450 10,573 10,685 10,727 10,776
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and Cash Equivalents..................................... $ 14,429 $ 9,800 $ 5,436 $ 9,204 $ 5,526
Working Capital............................................... 69,350 82,481 83,009 95,772 97,357
Property, Plant and Equipment, Net............................ 19,650 18,695 24,042 24,358 23,244
Total Assets.................................................. 131,342 150,805 170,830 192,242 194,316
Long-term Debt, Including Current Maturities.................. 7,186 25,950 62,458 69,762 69,944
Stockholders' Equity.......................................... 98,605 101,277 74,879 85,883 88,410
</TABLE>
- ------------------------------
(1) Includes results from the acquisition of a distribution business by Wulff
in January 1993.
(2) Includes the impact of sales returns of $0.3 million and a provision for
doubtful receivables of $0.9 million recorded in the second quarter of 1995
by Gaming related to two riverboats at the River City Complex in New
Orleans which filed for bankruptcy.
(3) Includes $6.2 million in charges to increase inventory valuation reserves
in 1993 principally related to inventory originally intended for sale in
the Louisiana video lottery terminal market.
(4) Includes $1.2 million in charges related to a management reorganization at
Gaming in 1993.
(5) Includes a provision for doubtful receivables totaling $5.1 million
recorded by Gaming in 1993 related to a former distributor who filed for
bankruptcy during the second quarter of 1993.
(6) Includes $4.0 million in merger transaction costs and related litigation
expenses, a provision of $0.8 million at Wulff to writedown to net
realizable value the carrying value of a building to be sold and a
provision of $1.0 million to increase Wulff's tax reserves primarily for
value added taxes.
(7) Includes pro forma income tax information for the year ended December 31,
1991 to reflect the provision for income taxes and net loss as if Gaming
and Systems had filed separate income tax returns. The pro forma
information assumes that Gaming and Systems would have been unable to
utilize such operating losses on a carry back basis.
59
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides an assessment of the liquidity and capital
resources of Alliance, the pro forma liquidity and capital resources of the
Company, and the results of operations of each of Alliance and BGII. The
discussion should be read in conjunction with the audited consolidated financial
statements of Alliance and BGII, and the unaudited interim condensed
consolidated financial statements of Alliance, in each case including the notes
thereto, which are included elsewhere in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES OF ALLIANCE
At December 31, 1995, Alliance had working capital of approximately
$20,109,000, a decrease of approximately $11,637,000 from June 30, 1995. The
decrease in working capital is due in part to a decrease in cash and cash
equivalents which were used to fund development activities in connection with
Alliance's business strategy. As of December 31, 1995, Alliance had $29,468,000
in cash, cash equivalents and securities available for sale, of which
approximately $7,000,000 is necessary to fund ongoing gaming operations in the
ordinary course of business. At June 30, 1995, Alliance had working capital of
approximately $31,746,000 and $37,414,000 in cash, cash equivalents and
securities available for sale.
For the six months ended December 31, 1995, Alliance incurred development
costs associated with pursuing Alliance's business developmental strategy
relating to mergers and acquisition of approximately $10,737,000 consisting of
$9,437,000 of direct costs incurred related to the Merger and the previous
tender offer and consent solicitation by Alliance and $1,300,000 of salaries and
administrative costs of the mergers and acquisitions unit. During fiscal 1995,
Alliance incurred approximately $7,843,000 in expenses associated with pursuit
of Alliance's business strategy, of which $1,669,000 related to the Merger.
Alliance's business strategy is to use its strengthened management team,
diversified gaming expertise and business and investment community relationships
to develop new opportunities in the operation of land-based, dockside and
riverboat casinos (including Native American casinos), gaming systems and
technology and the supply and management of electronic gaming machines.
On July 16, 1994 the Rainbow Casino located in Vicksburg, Mississippi
permanently opened for business. In connection with the completion of the casino
and the acquisition of its original 45% limited partnership interest in Rainbow
Casino Vicksburg Partnership, L.P. ("RCVP"), the partnership which owns the
casino, through a wholly-owned subsidiary, Alliance funded a $3,250,000 advance
to the Rainbow Casino Corporation, an unaffiliated Mississippi corporation
("RCC"), on the same terms as RCC's financing from Hospitality Franchise
Systems, Inc. ("HFS") (other than the fact that such advance is subordinate to
payments due to HFS and the HFS financing is secured).
The HFS financing provided to RCC on August 3, 1993 consisted of a $7.5
million loan which is secured by a first priority lien on all of the assets of
the project. The terms of the HFS financing provide that, in connection with the
loan and certain marketing services provided by HFS to RCC, RCC will pay to HFS
a royalty based upon the casino's annual gross gaming revenues of 12% on the
first $40 million, 11% on the next $10 million, and 10% thereafter, which
royalty is also secured by a lien on the assets of the project. See
"Business--Casino Operations."
On March 29, 1995, Alliance consummated certain transactions whereby
Alliance acquired from RCC the controlling general partnership interest in RCVP
and increased its limited partnership interest. In exchange for commitments by
Alliance and National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National
Gaming Corporation, to provide additional financing (up to a maximum of
$2,000,000 each) to be used, among other things, for the completion of certain
elements of the project which survived the opening of the casino (for which RCC
was to have been responsible, but failed to satisfy) and for a $500,000 payment
paid to HFS as a waiver fee, a commitment by Alliance to fund any additional
capital necessary for the completion, upgrading or working capital of the
project, the following occurred: (i) a subsidiary of Alliance became the general
partner and RCC became the limited partner of RCVP and (ii) the respective
partnership interests were adjusted. As of December 31, 1995, amounts
outstanding under the HFS facility and the
60
<PAGE>
related financings aggregated $9.7 million. As adjusted, RCC is entitled to
receive 10% of the net available cash flows (which amount shall increase to 20%
of cash flow from gaming revenues above $35,000,000 (i.e. only on such
incremental amount)), for a period of 15 years, such period being subject to one
year extensions for each year in which a minimum payment of $50,000 is not made.
In addition, if during any continuous 12-month period until December 31, 1999
the casino achieved earnings from the project of at least $10.5 million before
deducting depreciation, amortization, royalty and income taxes, then Alliance
would be obligated to pay to certain principals of the original partnership an
amount aggregating $1 million in cash or shares of Common Stock 180 days after
the occurrence. The casino has achieved the required earnings as adjusted, and
Alliance is obligated to make the required payment or issue the Common Stock by
September 30, 1996. Since March 29, 1995 the results of operations of the
Rainbow Casino have been consolidated with those of Alliance.
Alliance and Casino Magic Corporation, through wholly-owned subsidiaries,
are members in KGP and KFP, both Kansas limited liability companies. Under an
option agreement (the "Option Agreement") granted to KGP by Camptown and The
Racing Association of Kansas-Southeast ("TRAK Southeast"), KGP has been granted
the exclusive right, which right expires on September 13, 2013, to operate
gaming machines and/or casino-type gaming at Camptown's racing facility in
Frontenac, Kansas if and when such gaming is permitted in Kansas. In December
1994, Camptown received a $3,205,000 loan from Boatmen's Bank which was
guaranteed by KFP. Alliance and Casino Magic Corporation each invested
$1,580,000 in KFP which amounts were used by KFP to purchase a certificate of
deposit to collateralize its guaranty. Construction of Camptown's racing
facility has been completed and the facility opened for business in May 1995.
The racing facility was temporarily closed on November 5, 1995 due to poor
financial results. Camptown filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in January 1996 and has stated its intention to reopen for
business following bankruptcy reorganization. Boatmen's Bank demanded payment of
the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan
and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed
Boatmen's Bank's position in the loan to Camptown which is secured by a second
mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK
Southeast and Camptown continue to be bound by the Option Agreement. KFP intends
to vigorously pursue all of its rights and remedies which may include, among
other things, seeking authority from the bankruptcy court to commence a
foreclosure action. In the case of a foreclosure action, KFP would be required
to assume or pay the existing first mortgage of approximately $2,000,000 if KFP
becomes the purchaser at any such sale. Alliance intends to continue to monitor
its investment in KFP. The Kansas legislature has considered gaming bills during
the 1996 session although none have passed. There can be no assurance that
gaming of any type will ever be legalized in Kansas.
In March 1992, Alfred H. Wilms committed to provide to VSI, a
majority-controlled subsidiary of Alliance, a subordinated loan of up to $6.5
million dollars (the "VSI Loan"). The VSI Loan, as amended, bears interest at a
rate equal to the London Interbank Offered Rate for a period of ninety days plus
2%, payable quarterly, and is due on September 21, 1998. The VSI Loan is secured
by liens in favor of N.V. Continental Trust Company ("CTC"), an affiliate of Mr.
Wilms, on substantially all of VSI's assets. Pursuant to the terms of the VSI
Loan, VSI may not pay cash dividends or make any distribution of its property.
Alliance also issued to Mr. Wilms warrants to purchase 2,000,000 shares of
Common Stock at $2.50 per share in connection with such loan which expire on
September 1, 1998 (the "Wilms Warrants"). As of December 31, 1995, there was an
outstanding balance of $3.4 million on this loan. See "Certain Relationships and
Related Transactions."
Cash provided by operations for the six months ended December 31, 1995
decreased by approximately $1,588,000 from amounts reported for the same period
in 1994. The change is primarily due to an increase in business development
costs over the same period from the prior year of $7,229,000, primarily related
to the Merger, partially offset by an increase in cash provided by the casino
operations of approximately $5,700,000 attributable to the Rainbow Casino.
Cash provided by operations for fiscal 1995 decreased approximately
$8,105,000 from fiscal 1994. Included in fiscal 1994's cash provided by
operations was a non-recurring gain of $3,600,000 associated with the
termination of Alliance's letter agreement with Capital Gaming International,
Inc. ("Capital Gaming"),
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which concerned the Company's proposed equity investment in Capital Gaming, and
the payment by Capital Gaming of $4,000,000 (offset by transaction expenses) to
the Company in connection therewith, and $6,351,000 of charges related to
Alliance's decision to exit the downtown Las Vegas gaming market and dispose of
its tavern operations. Exclusive of these items, expenditures related to
supporting Alliance's business strategy relating to mergers and acquisitions in
fiscal 1995 increased approximately $3,051,000 from fiscal 1994. Long-term
accrued expenses decreased by approximately $1,031,000 from fiscal 1994 as
Alliance paid rent and other exit expenses against the amounts accrued in fiscal
1994 as noted above. The remaining increase in accrued expenses accounted for
the use of cash in the amount of $4,710,000. These uses of cash were partially
offset by an increase in cash flows from operations of approximately $2,666,000
from Alliance's ongoing business operations and an operating cash contribution
of approximately $3,089,000 from the first year of operations by the Rainbow
Casino. Significant non-cash items added back to cash flows from operations for
fiscal 1995 include $1,313,000 in non-cash compensation expense and $1,075,000
related to certain service contracts and termination costs.
Cash provided by investing activities for the six months ended December 31,
1995 increased $12,403,000 over that in 1994 due primarily to the proceeds from
the sale of approximately $8,015,000 of securities. Also, net collections on
receivables improved by $3,299,000 over the same period last year.
Cash flows used for investing activities in fiscal year 1995 decreased by
$5,651,000 from the prior year. Net collections on receivables in fiscal 1995
improved by $2,605,000 over those in fiscal 1994. In fiscal 1994, Alliance
funded approximately $7,250,000 in loans to Capital Gaming and the original
general partner in RCVP, which additions were partially offset by increased
collections of receivables related primarily to the collection of the Capital
Gaming loan in fiscal 1994.
Cash used in financing activities for the six months ended December 31, 1995
declined $76,000 from the same period in 1994 due primarily to Alliance's
borrowing of $682,000 in 1995.
Cash flows from financing activities in fiscal year 1995 declined
$48,402,000 from fiscal 1994. In fiscal 1994, Alliance completed the private
placement of $85,000,000 aggregate principal amount of its Convertible
Debentures. Concurrent with the closing of the issuance of the Convertible
Debentures, Kirkland invested $5,000,000 in Alliance (the "Kirkland Investment")
in exchange for 1,333,333 shares of Alliance's Non-Voting Junior Convertible
Special Stock and warrants to purchase up to 2,750,000 shares of Common Stock,
subject to certain conditions. A portion of the net proceeds from these
transactions was used to repay previously existing debt and accrued interest of
approximately $38,245,000. In December 1995, Kirkland elected to convert the
entire 1,333,333 shares of Special Stock into an equivalent number of shares of
Common Stock.
EBITDA (as defined: see Note 1 to the Alliance Summary Historical Financial
Information) as a percent of the related revenues changed for Nevada gaming
machine management operations from 15.3% in fiscal 1994 to 16.7% in fiscal 1995
and to 14.8% in the first six months of fiscal 1996 and for Louisiana gaming
machine management operations from 17.5% to 19.1% and to 20.6% for the same
periods. EBITDA as a percent of revenues for casino operations (excluding
discontinued operations), excluding certain one-time charges, was 18.2% in
fiscal 1994 and 23.2% in fiscal 1995 and 30.9% in the first six months of fiscal
1996. The increase in the first six months of fiscal 1996 was due primarily to
the acquisition of the Rainbow Casino. EBITDA should not be construed as an
alternative to net income or any other GAAP measure of performance as an
indicator of Alliance's performance or to cash flows generated by operating,
investing and financing activities as an indicator of cash flows or a measure of
liquidity. Management believes that EBITDA is a useful adjunct to net income and
other GAAP measurements and is a conventionally used financial indicator. On a
pro forma basis, earnings would have been inadequate to cover fixed charges by
approximately $0.5 million for the year ended June 30, 1995 and would have been
inadequate to cover fixed charges by approximately $6.7 million for the
six-month period ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (PRO FORMA)
On October 18, 1995 Alliance entered into the Merger Agreement with BGII and
the Merger Subsidiary. Pursuant to the Merger, BGII will become a wholly-owned
subsidiary of Alliance. The aggregate Merger
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consideration to BGII stockholders will be approximately $77.2 million in cash
(including interest accruing at a rate of 5.5% per annum from May 3, 1996 to the
Effective Time), $35.7 million in Preferred Stock (including dividends accruing
at a rate of 15% per annum from May 3, 1996 to the Effective Time) and $2.9
million in Common Stock. Alliance will also retire approximately $67.6 million
of long-term debt of BGII (including prepayment premium and original issue
discount) plus accrued and unpaid interest in connection with the Merger, and
will generally assume BGII's obligations with respect to outstanding options and
warrants to purchase shares of BGII common stock. See "The Merger and Related
Financings."
The Company currently anticipates obtaining one or more working capital
revolving facilities at Gaming and Wulff permitted under the Indenture
(providing up to $ of borrowing availability in aggregate) which would be
secured by the inventory and accounts receivable of such entities and their
subsidiaries. The Company has not received any commitment for any such facility
and no assurance can be given that it will be able to obtain any such facility
on terms acceptable to the Company. At closing, even if such facilities are
obtained, the Company expects that no borrowings will have been made under such
facilities.
Following the Transaction, the Company believes that its working capital and
funds generated from operations will be sufficient to meet its existing
commitments, debt payments and other obligations as they become due; however,
the Company expects that it will have to refinance all or a portion of the
Convertible Debentures and the Notes at maturity if its cash flow from
operations does not increase substantially. On a pro forma basis after giving
effect to the Transaction, the Company's earnings would have been inadequate to
cover fixed charges and Preferred Stock dividends by approximately $8.6 million
and approximately $10.5 million for the 12-month period ended June 30, 1995 and
the six-month period ended December 31, 1995, respectively. The Company believes
that its cash flow needs for the next 12 months will increase as a result of an
increase in accounts receivable relating to the introduction of new gaming
machines and the expected increases in production and sales levels from recent
historical levels.
Following the Transaction, it remains a part of Alliance's business strategy
to seek on a more limited basis complementary gaming opportunities, including
opportunities in which its gaming machine management and casino experience may
be applicable. As part of its business activities, Alliance is regularly
involved in the identification, investigation and development of such
opportunities. Accordingly, in order to support such activities, Alliance may in
the future desire to issue additional debt or equity securities if and when
attractive opportunities become available on terms satisfactory to management.
However, the terms of the Notes will significantly restrict the Company's
ability to incur indedtedness. See "Risk Factors -- High Leverage and Fixed
Charges after the Merger; Holding Company Structure; Working Capital" and
"Description of the Notes."
Management believes that customer financing terms have become an
increasingly important competitive factor in certain emerging markets.
Competitive conditions sometimes require Gaming and Systems to grant extended
payment terms on gaming machines and other gaming equipment. While these
financings are normally collateralized by such equipment, the resale value of
the collateral in the event of a default may be less than the amount financed.
In conjunction with sales by Gaming, with recourse to Gaming and/or BGII , of
certain trade receivables to third parties, Gaming and/or BGII have guaranteed
amounts due from various customers of approximately $18.2 million at December
31, 1995. It is possible that one or more of Gaming's customers whose obligation
has been guaranteed by Gaming may be unable to make payments as such become due.
In this case Gaming may become responsible for repayment of at least a portion
of such amounts over the term of the receivables. In general, under the terms of
these contracts, the Company may be responsible for monthly payments of the
outstanding obligations. Accordingly, the Company will have greater exposure to
the financial condition of its customers in emerging markets than has
historically been the case in established markets like Nevada and Atlantic City.
Wulff provides customer financing for approximately 20% of its sales, and
management expects this practice temporarily to increase during the latter half
of 1996. In order to be competitive in meeting customer demand for financing of
gaming equipment in emerging markets, the Company plans to continue to evaluate
the need to involve third party finance companies or secure additional
financing, although there is no assurance that such additional financing will be
obtained.
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ALLIANCE RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1994
REVENUES
Total revenues for the six months ended December 31, 1995 were $76,229,000,
an increase of $13,891,000 (22.3%) over those for the same period in 1994.
Revenues from all gaming machine management operations increased $110,000 (0.2%)
to approximately $52,621,000 in the six months ended December 31, 1995. Revenues
from the Louisiana gaming machine management operations increased $147,000
(1.9%) primarily as a result of the opening of a new OTB in October 1995.
Revenues from Nevada gaming machine management operations for the six months
ended December 31, 1995 decreased approximately $36,000 (0.1%). The decrease in
the Nevada gaming machine management revenues was attributable to a $0.52
decrease in the average net win per gaming machine per day for the six months
ended December 31, 1995 over the same period in 1994 (accounting for a decrease
of approximately $499,000) which exceeded an increase in the weighted average
number of gaming machines on location for the six months ended December 31, 1995
over the same period in 1994 (accounting for an increase of approximately
$463,000). Revenues from casino and tavern operations, including food and
beverage sales, increased approximately $13,791,000 (140.6%) during the six
months ended December 31, 1995 over those for the same period in 1994 as
revenues recognized from the Rainbow Casino, which were consolidated beginning
March 29, 1995, exceeded the revenues lost with the termination of Alliance's
lease at the Royal Casino and the reduction of operations at Alliance's tavern
locations.
COSTS AND EXPENSES
COSTS OF REVENUES. Cost of gaming machine management revenues for the six
months ended December 31, 1995 increased $1,147,000 (2.9%) over the same period
in 1994. Costs of revenues from gaming machine management operations in
Louisiana decreased $53,000 (1.1%) over the same period in 1994 as a result of
better controlling direct labor costs. Costs of gaming revenues for Nevada
gaming machine management revenues for the six months ended December 31, 1995
increased $1,200,000 (3.5%) over the same period in 1994 and increased slightly
as a percent of Nevada gaming machine management revenues primarily due to
increased costs associated with additional and renewed space lease contracts.
Cost of gaming machine management revenues includes rents under both space lease
and revenue sharing arrangements, gaming taxes and direct labor, including
related taxes and benefits. The cost of casino and tavern revenues including
costs of food and beverage revenues increased $5,246,000 (86.5%) over the same
period in 1994 primarily due to the Rainbow Casino cost of revenues which were
consolidated beginning March 29, 1995. This increase was partially offset by the
termination of Alliance's lease at the Royal Casino and the reduction of
operations at Alliance's tavern locations. Cost of casino and tavern revenues
includes cost of goods sold, gaming taxes, rent and direct labor, including
related taxes and benefits.
EXPENSES. For the six months ended December 31, 1995 Alliance incurred
developmental costs associated with pursuing Alliance's business development
strategy relating to mergers and acquisitions of approximately $10,737,000,
consisting of $9,437,000 of direct costs incurred related to the Merger and the
previous tender offer and consent solicitation by Alliance and $1,300,000 of
salaries and administrative costs of the mergers and acquisitions unit, which
represented an increase of $7,229,000 (206.1%). These business development
expenses include salaries and wages, related taxes and benefits, professional
fees, travel expense and other expenses associated with supporting Alliance's
strategy. The level of business development activities, exclusive of Merger
costs, has been reduced from prior periods due to the termination of two
executives in this business unit in order to reduce costs, and the relocation of
this unit to lower cost office space. Alliance believes that such reduced level
of costs will be adequate to pursue its business development strategies on a
more limited basis in accordance with its business plan following consummation
of the Merger.
Selling, general and administrative expenses for the six months ended
December 31, 1995 increased approximately $2,912,000 (44.9%) over the same
period in 1994. Expenses for casinos and taverns for the six months ended
December 31, 1995 increased $3,629,000 (198.3%) over the prior year primarily
due to the Rainbow Casino expenses which were consolidated beginning March 29,
1995. This increase was partially
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offset by the termination of Alliance's lease at the Royal Casino and the
reduction of operations at Alliance's tavern locations. Such expenses related to
gaming machine management operations for the six months ended December 31, 1995
decreased $717,000 (15.4%) over the same period in 1994 reflecting steps taken
to control costs, including reduced staffing levels. Corporate general and
administrative expenses decreased $1,265,000 (29.4%). This decrease was caused
primarily by controlling costs and reducing staffing levels. Alliance expects
that there may be further increases in selling, general and administrative
expenses related to the addition of new management and development personnel and
other costs associated with supporting Alliance's business strategy. Included in
last year's other income and expenses is a charge of $404,000 representing
Alliance's equity in the net loss of the Rainbow Casino in its first six months
of operations prior to Alliance's acquisition of the general partnership
interest in RCVP on March 29, 1995.
Interest expense for the period increased $373,000 over the same period last
year due principally to the increased interest expense related to the debt of
Rainbow Casino.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUES
Total revenues for the fiscal year ended June 30, 1995 were approximately
$131,988,000, an increase of $8,934,000 (7.3%) over those for fiscal 1994.
Revenues from all gaming machine management operations increased $3,997,000
(3.9%) to approximately $106,827,000 in fiscal 1995. Revenues from gaming
machine management operations in the State of Louisiana declined $1,796,000
(10.3%) primarily as a result of increased competition from riverboat
operations. Revenue from Nevada gaming machine management operations for fiscal
1995 increased approximately $5,739,000 (6.7%) over those for fiscal 1994. The
increase in the Nevada gaming machine management revenues was attributable to a
$2.15 increase in the average net win per gaming device per day in fiscal 1995
compared to fiscal 1994 (accounting for approximately $4,042,000 of such
increase) and an increase in the weighted average number of gaming devices on
location during fiscal 1995 as compared to fiscal 1994 (accounting for an
increase of approximately $1,751,000). Revenues from casino and tavern
operations, including food and beverage sales, increased approximately
$4,975,000 (24.6%) during fiscal 1995 over those for fiscal 1994 as revenues
recognized from the Rainbow Casino, which were consolidated beginning March 29,
1995, exceeded the revenues lost as a result of the closing of Alliance's
properties in downtown Las Vegas and the termination of Alliance's lease at the
Royal Casino.
COSTS AND EXPENSES
COSTS OF REVENUES. Cost of gaming machine management revenues for the
fiscal year ended June 30, 1995 increased $3,543,000 (4.6%) over that for fiscal
1994. Costs of revenues for gaming machine management operations in Louisiana
decreased $1,199,000 (10.7%) from fiscal 1994 as revenues declined primarily as
a result of increased competition in that market. As a percent of related
revenues, Louisiana gaming machine management costs of revenues remained
relatively constant. Cost of gaming revenues for Nevada gaming machine
management revenues for fiscal 1995 increased $4,742,000 (7.3%) over that in
fiscal 1994 and increased slightly as a percent of Nevada gaming machine
management revenues due primarily to increased costs associated with additional
and renewed space lease contracts. Cost of gaming machine management revenues
includes rents under both space lease and revenue-sharing arrangements, gaming
taxes and direct labor, including related taxes and benefits. The cost of casino
and tavern revenues, including the cost of food and beverage sales, for fiscal
1995 decreased $724,000 (4.8%) over that in fiscal 1994 primarily due to the
closing of Alliance's properties in downtown Las Vegas and the termination of
Alliance's lease at the Royal Casino. These decreases were partially offset by
increases in Rainbow Casino costs of revenues which were consolidated beginning
in March 1995. Cost of casino and tavern revenues includes cost of goods sold,
gaming taxes, rent and direct labor expenses, including taxes and benefits.
Although the gross margin percentage for Nevada operations declined slightly
during fiscal 1995, the decline was completely offset by the addition of the
Rainbow Casino and a small improvement in the Louisiana gross margin percentage.
As a result, the total cost of revenues as a percentage of total revenues
declined by 2.9% over that in fiscal 1994.
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EXPENSES. In fiscal 1995, Alliance incurred development costs associated
with pursuing Alliance's long term growth strategy of approximately $7,843,000,
an increase of approximately $6,651,000 (558.0%) over fiscal 1994. Included in
the development costs for fiscal 1995 was $1,669,000 of costs related to the
Merger. Included as an offset to development costs for fiscal 1994 was a
non-recurring gain of $3,600,000 related to Alliance's effort to acquire Capital
Gaming and the payment by Capital Gaming to extinguish its obligation to issue
warrants to Alliance in connection therewith. Fiscal 1994 development costs also
include certain significant expenses associated with Alliance's purchase of
Native American Investments, Inc. ("NAI"). Development costs include salaries
and wages, related taxes and benefits, professional fees, travel expenses,
payments to third parties for business development options and other expenses
associated with supporting Alliance's long-term growth strategy. With the
exception of the significant costs expected to be incurred in conjunction with
the Merger, Alliance expects to continue to incur a significant level of
development costs although at a reduced level compared to fiscal 1995 due to the
termination of two executives in this business unit in order to reduce costs and
its relocation to lower cost office space. Alliance believes that such reduced
costs will be adequate to pursue its business development strategies on a more
limited basis in accordance with its business plan following consummation of the
Merger.
Corporate administrative expenses for fiscal 1995 were approximately
$9,735,000, an increase of $1,853,000 over the same amounts for fiscal 1994. The
primary cause for the increase was $1,331,000 in compensation expense recognized
upon the issuance of 250,000 shares of Common Stock to Steve Greathouse,
Alliance's President, Chief Executive Officer and Chairman of the Board, in
connection with his employment agreement. Also contributing to the increase in
corporate administrative expenses were $485,000 of expenses related to certain
service contracts and termination costs. Corporate administrative expenses
include salaries and wages, related taxes and benefits, professional fees and
other expenses associated with maintaining the corporate office and providing
centralized corporate services for Alliance.
Exclusive of the development and corporate expenses noted above, selling,
general and administrative expenses for fiscal 1995 increased $1,078,000 (7.9%)
from fiscal 1994. Selling, general and administrative expenses related to gaming
machine management operations in fiscal 1995 decreased $1,340,000 (13.8%) from
fiscal 1994. Selling, general and administrative expenses for Louisiana gaming
machine management operations declined approximately $660,000 (23.8%) as staff
reductions and cost containment measures were implemented to counter increased
competition in that market. The same costs for Nevada gaming machine management
operations in fiscal 1995 decreased $680,000 (9.8%) as the benefit of staff
reductions and cost controls taken in late fiscal 1994 was realized. Selling,
general and administrative costs increased for casino and tavern operations by
$1,595,000 (44.0%) over those in fiscal 1994. The acquisition of the Rainbow
Casino, which contributed $1,984,000 to the increase, was partially offset by
the closing of Alliance's downtown Las Vegas properties and the termination of
the lease at the Royal Casino. Also contributing to the increase in selling,
general and administrative expenses were $478,000 of expenses related to certain
service contracts and termination costs. Selling, general and administrative
expenses may be subject to further increases.
In fiscal 1994, due to continuing losses from operations, negative cash
flows and incompatibility with Alliance's long-term growth strategy, Alliance's
Board of Directors resolved to (i) exit the downtown Las Vegas gaming market and
(ii) dispose of the currently operated small independent tavern operations.
Based on these decisions, Alliance recognized total expenses of approximately
$5,884,000 in fiscal 1994. As a result of the decision to exit the downtown Las
Vegas gaming market, in September 1994, Alliance substantially reduced
operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall &
Saloon. Included in the fiscal 1994 statements of operations are total expenses
of approximately $3,246,000 related to these actions. The total charge included
approximately $488,000 related to the write-down of assets and approximately
$2,758,000 representing primarily the present value of the future lease payments
net of estimated future sublease income. The decision to withdraw from the
tavern business resulted in expenses of approximately $2,638,000 being
recognized in fiscal 1994. Approximately $1,813,000 of the total amount was
related to the write-down of assets while approximately $825,000 represented
primarily the present value of the future lease payments net of estimated future
sublease income.
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On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race
Course in New Orleans, Louisiana where Alliance operated 199 electronic gaming
machines prior to the fire (of which 193 were destroyed by the fire) through its
controlled subsidiary, VSI. Alliance was fully insured for all equipment,
leasehold improvements, other assets and business income with the exception of
approximately $46,000 in deductibles. During fiscal 1995, Alliance recorded
approximately $247,000 of income from business interruption insurance proceeds
compared to $241,000 of such proceeds in fiscal 1994. Alliance is discussing
settlement of additional business interruption claims with the insurance
carrier. Alliance has also received insurance proceeds based on the replacement
value of the assets destroyed in the fire and, therefore, recognized a gain of
approximately $156,000 which is included in other income in fiscal 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
REVENUES
Total revenues for the fiscal year ended June 30, 1994 were approximately
$123,054,000 for fiscal 1994, an increase of $9,963,000 (8.8%) over those for
fiscal 1993. Revenues from all gaming machine management operations increased
$6,548,000 (6.8%) to approximately $102,830,000 in fiscal 1994. Gaming machine
management operations in the state of Louisiana contributed $5,222,000 (an
increase of 42.9%) to the overall increase in gaming machine management revenues
as Alliance continued to experience increasing demand in that relatively young
market. Revenue from Nevada gaming machine management operations increased
approximately $1,326,000 (1.6%) over those for fiscal 1993. The increase in the
Nevada gaming machine management revenues was attributable to a $1.30 increase
in the average net win per gaming machine per day in fiscal 1994 over that of
fiscal 1993 (accounting for an increase of approximately $2,608,000) which was
partially offset by a decrease in the weighted average number of gaming machines
on location during fiscal 1994 as compared to fiscal 1993 (accounting for a
decrease of approximately $1,282,000). Revenues from casino and taverns
increased approximately $3,449,000 (20.6%) during fiscal 1994 as compared to
those for fiscal 1993 due to the continued expansion of casino operations and
operating additional troubled tavern locations.
COSTS AND EXPENSES
COSTS OF REVENUES. Cost of gaming machine management revenues for the
fiscal year ended June 30, 1994 increased $3,718,000 (5.1%) over that for fiscal
1993. Gaming machine management operations in Louisiana contributed $2,854,000
(an increase of 40.6%) from fiscal 1993 to the overall increase. Cost of gaming
revenues for Nevada gaming machine management revenues for fiscal 1994 increased
$864,000 (1.3%) over that for fiscal 1993. The increase to cost of Nevada gaming
machine management revenues was primarily due to an increase in location
operators' share of gaming revenues caused by replacing a large space lease
contract with revenue-sharing arrangements. Cost of gaming machine management
revenues includes rents under both space lease and revenue-sharing arrangements,
gaming taxes and direct labor, including related taxes and benefits. The cost of
casino and tavern revenues for fiscal 1994 increased $3,412,000 (29.6%) over
that for fiscal 1993 primarily due to the first full year of operations of two
small casinos and the first full year of operating the hotel and food and
beverage operations at the Mizpah Hotel and Casino (the "Mizpah"). Previously,
Alliance had operated only the casino at the Mizpah, but in January, 1993 began
operating the entire facility including food and beverage operations to insure
its availability for the casino. Cost of casino and tavern revenues includes
cost of goods sold, gaming taxes, rent and direct labor expenses, including
taxes and benefits. Although the gross margin percentage from Nevada operations
declined during fiscal 1994, the decline was offset by increases in the
Louisiana operating margin percentage. As a result, the combined cost of gaming
revenues as a percentage of gaming revenues remained relatively constant from
fiscal 1993 to fiscal 1994.
EXPENSES. In August 1994, due to continuing losses from operations,
negative cash flows and incompatibility with Alliance's long-term growth
strategy, Alliance's Board of Directors resolved to (i) exit the downtown Las
Vegas gaming market and (ii) dispose of the currently operated small independent
tavern operations. Based on these decisions, Alliance recognized total expenses
of approximately $5,883,500 in fiscal 1994. As a result of the decision to exit
the downtown Las Vegas gaming market, in September 1994, Alliance substantially
reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall
& Saloon. Included in the fiscal 1994 statements of operations are total
expenses of approximately $3,246,000 related to these actions. The total charge
included approximately $488,000 related to the write-down of assets and
approximately $2,758,000 representing primarily the present value of the future
lease payments
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net of estimated future sublease income. The decision to withdraw from the
tavern business resulted in expenses of approximately $2,638,000 being
recognized in fiscal 1994. Approximately $1,813,000 of the total amount was
related to the write-down of assets while approximately $825,000 represented
primarily the present value of the future lease payments net of estimated future
sublease income.
Alliance's lease at the Mizpah has a remaining lease term of approximately
8.5 years with an option on Alliance's behalf to terminate the lease arrangement
at any time after December 31, 1995 with 120 days notice. In September 1994,
Alliance notified the landlord of the Mizpah of its intent to exercise the
termination clause of its lease at the earliest possible date of January 1, 1996
and give 120 days notice at that time. As a result of this decision, Alliance
recognized additional charges of $467,500 in fiscal 1994.
Also included in selling, general and administrative expenses for fiscal
1994 are development costs associated with pursuing Alliance's long term growth
strategy of approximately $1,192,000. These developmental costs include
approximately $4,792,000 in legal fees, travel expenses and other expenses
associated with supporting Alliance's long-term growth strategy, which expenses
are partially offset by the $3,600,000 recovered under the Capital Gaming
termination agreement. Fiscal 1994 was the first year in which significant funds
were expended in pursuit of this strategy.
Exclusive of the reserves, write-downs and development expenses noted above,
selling, general and administrative expenses for fiscal 1994 increased
$1,679,000 (8.5%) over those in fiscal 1993. The primary causes for the increase
include a $400,000 fiscal 1994 bonus granted to Shannon L. Bybee as part of the
restructuring of his employment with Alliance, $350,000 in fees incurred under
the one year consulting contract with Carole A. Carter, the former President and
Chief Operating Officer of Alliance, continued expansion of the Louisiana
machine management operations which contributed approximately $546,000 to the
overall increase and $274,000 of overall increases in Nevada machine management
operations. The general and administrative costs for casinos and taverns were
$3,622,000 (18.0%) of related revenues for fiscal 1994 as compared to $3,511,000
(21.0%) for fiscal 1993. The same costs for gaming machine management operations
were $9,736,000 (9.5%) of revenues for fiscal 1994 and $8,916,000 or (9.3%) of
revenues for fiscal 1993.
Bad debt expense in fiscal 1994 increased 52.9% to approximately $705,000
over that for fiscal 1993 expense of $461,000 due primarily to the financial
difficulties of a particular customer in Northern Nevada.
On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race
Course in New Orleans, Louisiana where Alliance operated 199 electronic gaming
machines prior to the fire (of which 193 were destroyed by the fire) through its
controlled subsidiary, VSI. Alliance is fully insured for all equipment,
leasehold improvements, other assets and business income with the exception of
approximately $46,000 in deductibles. Through June 30, 1994, Alliance had
recorded approximately $241,000 of income from business interruption insurance
proceeds. Alliance will continue to receive proceeds under this policy while the
Fairgrounds Race Course is rebuilt. Alliance also received insurance proceeds
based on the replacement value of the assets destroyed in the fire and,
therefore, recognized a gain of approximately $156,000 which is included in
other income in fiscal 1994.
BGII RESULTS OF OPERATIONS
GENERAL
BGII was formed in August 1991 to consolidate BEC's gaming machine
manufacturing and distribution operations which are conducted through Wulff,
Gaming and Systems. The operations of Wulff were conducted through Bally Wulff
Automaten GmbH and Bally Wulff Vertriebs GmbH, two direct subsidiaries of BEC,
until their transfer to BGII in contemplation of the initial public offering of
common stock of BGII. The operations of Gaming and Systems were conducted as
divisions or subsidiaries of BEC until substantially all of the assets and
liabilities of these divisions and subsidiaries were transferred to BGII in
contemplation of the initial public offering of common stock of BGII. For
purposes of this discussion of results of operations of BGII, the operations of
Wulff, Gaming and Systems are described separately as well as on a consolidated
basis and GmbH results are included in Wulff's results. The results of
operations for Wulff and Gaming include an allocation of BGII, the parent
company, revenues and expenses, and intercompany transactions which are
eliminated on a consolidated basis.
68
<PAGE>
The following tables set forth, for the periods indicated, the percentage of
revenues represented by items reflected in BGII's consolidated statements of
operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
CONSOLIDATED
REVENUES:
Sales....................................................................... 97.5% 97.9% 98.1%
Other....................................................................... 2.5 2.1 1.9
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales............................................................... 72.1% 66.5% 65.4%
Selling, General and Administrative......................................... 34.0 25.4 26.2
Provision for Doubtful Receivables.......................................... 4.9 2.4 2.7
Unusual Charges............................................................. -- -- 2.3
---------- ---------- ----------
111.0 94.3 96.6
---------- ---------- ----------
Operating Income (Loss)....................................................... (11.0) 5.7 3.4
Interest Expense.............................................................. 2.6 2.9 2.8
---------- ---------- ----------
Income (Loss) before Income Taxes and Extraordinary Gain...................... (13.6) 2.8 0.6
Provision for Income Taxes.................................................... 2.5 1.2 2.0
---------- ---------- ----------
Income (Loss) before Extraordinary Gain....................................... (16.1) 1.6 (1.4)
Extraordinary Gain on Early Extinguishment of Debt............................ 2.2 -- --
---------- ---------- ----------
Net Income (Loss)............................................................. (13.9)% 1.6% (1.4)%
---------- ---------- ----------
---------- ---------- ----------
WULFF
REVENUES:
Sales....................................................................... 96.6% 96.3% 97.1%
Other....................................................................... 3.4 3.7 2.9
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales............................................................... 65.4% 64.9% 67.4%
Selling, General and Administrative......................................... 25.5 25.1 24.1
Provision for Doubtful Receivables.......................................... 0.5 1.7 1.3
Unusual Charges............................................................. -- -- 2.9
---------- ---------- ----------
91.4 91.7 95.7
---------- ---------- ----------
Operating Income.............................................................. 8.6 8.3 4.3
Interest Expense.............................................................. 1.3 1.3 1.0
---------- ---------- ----------
Income before Income Taxes.................................................... 7.3 7.0 3.3
Provision for Income Taxes.................................................... 3.7 2.3 3.5
---------- ---------- ----------
Net Income.................................................................... 3.6% 4.7% (0.2)%
---------- ---------- ----------
---------- ---------- ----------
ADDITIONAL INFORMATION (APPROXIMATE UNITS):
New Wall Machines Sold by Wulff............................................. 12,552 13,100 12,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
GAMING
<S> <C> <C> <C>
REVENUES:
Sales....................................................................... 98.3% 99.3% 98.9%
Other....................................................................... 1.7 0.7 1.1
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales............................................................... 100.0% 73.7% 71.9%
Selling, General and Administrative......................................... 48.4 21.9 24.6
Provision for Doubtful Receivables.......................................... 16.9 3.0 3.6
Unusual Charges............................................................. -- -- 1.9
---------- ---------- ----------
165.3 98.6 102.0
---------- ---------- ----------
Operating Income (Loss)....................................................... (65.3) 1.4 (2.0)
Interest Expense.............................................................. 7.1 4.6 5.2
---------- ---------- ----------
Loss before Income Taxes and Extraordinary Gain............................... (72.4) (3.2) (7.2)
Provision for Income Taxes.................................................... -- 0.2 0.3
---------- ---------- ----------
Loss before Extraordinary Gain................................................ (72.4) (3.4) (7.5)
---------- ---------- ----------
Extraordinary Gain on Early Extinguishment of Debt, Net of Income Taxes....... 7.7 -- --
---------- ---------- ----------
Net Income (Loss)............................................................. (64.7)% (3.4)% (7.5)%
---------- ---------- ----------
---------- ---------- ----------
ADDITIONAL INFORMATION (UNITS):
New Slot Machines Sold...................................................... 7,749 17,655 11,948
New Video Gaming Machines Sold.............................................. 2,205 3,807 6,080
Other....................................................................... 202 163 56
---------- ---------- ----------
Total..................................................................... 10,156 21,625 18,084
---------- ---------- ----------
---------- ---------- ----------
SYSTEMS
REVENUES:
Sales....................................................................... 100.0% 100.0% 100.0%
Other....................................................................... -- -- --
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Sales............................................................... 28.2% 32.0% 35.3%
Selling, General and Administrative......................................... 42.8 46.5 34.3
Provision for Doubtful Receivables.......................................... (4.4) 2.1 5.3
---------- ---------- ----------
66.6 80.6 74.9
---------- ---------- ----------
Operating Income.............................................................. 33.4 19.4 25.1
Interest Expense.............................................................. -- 0.2 --
---------- ---------- ----------
Income before Income Taxes.................................................... 33.4 19.2 25.1
Provision for Income Taxes.................................................... -- -- --
---------- ---------- ----------
Net Income.................................................................... 33.4% 19.2% 25.1%
---------- ---------- ----------
---------- ---------- ----------
ADDITIONAL INFORMATION:
New Installations Implemented............................................... 6 11 9
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
70
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
WULFF
Wulff's revenues for the year ended December 31, 1995 were $130.7 million
compared to $111.1 million in 1994, an increase of $19.6 million (18%). This
improvement resulted from the favorable effect of currency translation rates in
the 1995 period, an increase in slot and video gaming machines sold by
Vertriebs' wholly-owned subsidiary, GmbH, and an increase in used equipment and
recreation and amusement machine sales offset in part by a decrease in new wall
machine units sold by 8% and a decrease in the average selling price for new
wall machines by 8.4%. Revenues from GmbH increased by 99% due to increased new
casino openings and greater market penetration in Western and Central Europe and
in Africa. The overall decline in the value of the U.S. dollar against the
Deutsche Mark increased revenues by $15.0 million in 1995. New and used wall
machine sales for the last six months of 1995 were impacted by regulations,
which became effective January 1, 1996, limiting the number of wall machines per
square meter in arcade locations, thereby reducing new sales opportunities.
Industry-wide demand for new machines was adversely effected by this new
regulation while demand for used machines increased dramatically. The decrease
in demand for new wall machines resulted in increased competition based on sales
price resulting in the reduction in average selling price for new units during
the year. Management expects the demand for new wall machines to continue to be
lower than prior year levels during the first half of 1996. See "Risk Factors --
Operating History -- Recent Losses." Revenues from the distribution of
recreational and amusement machines increased by approximately 8.7% during 1995.
Operating income was $5.6 million for 1995 compared to $9.2 million in 1994,
a decrease of $3.6 million or 40%. This decrease resulted from lower gross
margins, higher selling, general and administrative expenses, and unusual
charges, offset in part by a lower provision for doubtful receivables. Gross
margins for 1995 were 33% compared to 35% in the prior year. Gross margin was
unfavorably impacted by higher unit costs associated with lower production
levels, a change in product mix to lower priced used machines and a decrease in
average selling price of new wall machines sold. Selling, general and
administrative expenses increased by $3.5 million resulting from the effect of
currency translation rates between years and costs associated with the increased
revenues in GmbH. Wulff recorded unusual charges in 1995 of $0.8 million to
writedown to net realizable value the carrying value of a building to be sold
and $1.0 million to increase its tax reserves primarily for V.A.T. In addition,
Wulff incurred $2.0 million of unusual charges representing an allocation of
merger transaction costs and litigation expenses related to the proposed merger
with WMS, which has since been terminated, and to a tender offer by Alliance
which was subsequently terminated in connection with the execution of a
definitive merger agreement between BGII and Alliance.
The effective tax rate for the year ended December 31, 1995 was 50% compared
to an effective rate of 26% in 1994. The 1994 rate was lower due to
implementation of a tax planning strategy that reduced the effective tax rate by
approximately 50%.
GAMING
Gaming's revenues for the year ended December 31, 1995 were $108.4 million
compared to $117.8 million in 1994, a decrease of $9.4 million or 8%. New gaming
machines sold decreased to 18,084 units in 1995 from 21,625 units in 1994, a
decrease of 16%. This decline in new unit sales was caused principally by a
reduced number of new casino openings, especially in the riverboat markets,
partially offset by increased sales in the Nevada market. Management believes
that the increase in sales into the Nevada market occurred principally due to
the popularity of Gaming's new Game Maker-Registered Trademark- machine, a
multi-game, touch screen video device which accounted for 26% of Gaming's unit
sales in 1995. The average price of new gaming machines sold increased
approximately 3% in 1995 principally due to proportionately greater sales of the
higher priced Game Maker-Registered Trademark- machine. Revenues from new
machines decreased to $90.9 million in 1995 from $106.6 million in 1994.
Revenues from sales of used equipment increased by 121% to $9.2 million in 1995.
In addition, revenues from sales of service parts and interest income from
financing customer receivables increased by $2.2 million in 1995.
71
<PAGE>
Gaming incurred an operating loss of $2.2 million for 1995 compared to
operating income of $1.6 million in the 1994 period, a decline of $3.8 million.
The decline in operating results was principally due to the impact of the
aforementioned decrease in revenues, higher selling, general and administrative
costs and higher bad debt provisions and unusual charges offset, in part, by an
increase in gross margin.
Gross margin as a percentage of total revenues was 28% for 1995 compared to
26% in 1994. Lower costs of materials in 1995 were offset, in part, by decreased
absorption of manufacturing overhead expenses attributable to the decline in new
sales units for 1995.
Selling, general and administrative expenses increased to $26.7 million in
1995 compared to $25.8 million in 1994, an increase of 3%. The $0.9 million
increase resulted principally from an increase in legal expenses primarily
related to Louisiana. Despite the decrease in unit sales in 1995, the provision
for doubtful accounts increased $0.3 million resulting from the closure of
certain riverboat casinos. Gaming incurred $2.0 million of unusual charges in
1995 representing an allocation of merger transaction costs and litigation
expenses related to the proposed merger with WMS, which has since been
terminated, and to a tender offer by Alliance which was subsequently terminated
in connection with the execution of the Merger Agreement.
SYSTEMS
Systems' revenues for the year ended December 31, 1995 were $20.7 million, a
55% increase compared to 1994. This increase is directly attributable to the
increased number of game monitoring units ("GMUs") sold to both new casinos and
to existing customers which expanded their casinos, upgraded their current
systems due to new products, or replaced existing systems. In 1995 Systems sold
approximately 22,000 GMUs compared to 13,000 in 1994. During 1995, Systems
products were installed in 9 new locations and as of December 31, 1995, Systems
had 50 installations on-line. The average price of a GMU sold during 1995
decreased by 1.5% from the 1994 average price.
Systems' operating income was $5.2 million in 1995 compared to $2.6 million
in 1994, a 100% increase. This increase resulted from increased GMUs sold,
partially offset by lower gross margins, higher selling, general and
administrative expenses and a higher provision for doubtful receivables. Gross
margin was 65% in 1995 compared to 68% in 1994. This decrease results from the
decrease in the average selling price of a GMU during 1995, higher product costs
and a provision for product upgrades. Selling, general and administrative
expenses increased by $0.9 million in 1995 principally as a result of higher
compensation costs to support the business and higher facility costs for the
1995 year as 1994 was only impacted for six months by the higher costs resulting
from Systems occupying its new facility in July 1994. The provision for doubtful
accounts of $1.1 million in 1995 was primarily attributable to one riverboat
customer.
CONSOLIDATED
Revenues for the year ended December 31, 1995 were $249.3 million, net of
eliminations, compared to $236.2 million in 1994, an increase of 6%. This
increase is due to the aforementioned increase at Wulff and Systems partially
offset by the aforementioned decrease in Gaming's revenues.
BGII had operating income of $8.4 million for 1995 compared to $13.4 million
in the 1994 period. The decrease in operating results of $5.0 million was caused
principally by the unusual charges recorded in 1995 along with the
aforementioned decrease in Wulff and Gaming's operating results partially offset
by the aforementioned increase in operating income at Systems.
Interest expense was $6.9 million in 1995 compared to $6.8 million in 1994.
The net loss for 1995 was $3.4 million or $0.31 per share compared to net
income of $3.8 million or $0.35 per share in 1994. This decline in net income
resulted from the after tax effect of $5.3 million in unusual charges and an
increase in the effective income tax rate primarily due to the aforementioned
higher effective tax rate in Germany in 1995.
72
<PAGE>
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
WULFF
Wulff's revenues for the year ended December 31, 1994 were $111.1 million
compared to $112.6 million in 1993, a decrease of $1.5 million (1%). New wall
machine unit sales of Wulff's products increased approximately 4% in 1994.
Additionally, the average selling price for new wall machine units sold
increased approximately 10% due principally to popular models introduced by
Wulff in the latter part of 1994. Revenues from the distribution of recreational
and amusement machines, new wall machines manufactured by third parties, used
wall machines and other revenues decreased approximately 17% in the 1994 period
due in part to depressed economic conditions in Germany and increased
competition in the lower margin recreational and amusement sales markets.
Currency translation rate adjustments of Wulff's revenues into U.S. dollars
increased revenues by $2.3 million in the 1994 period due to fluctuations in the
German mark versus the U.S. dollar.
Wulff's operating income was $9.2 million for 1994 compared to operating
income of $9.7 million in the 1993 period. The $0.5 million decrease in 1994 as
compared to 1993 was caused principally by the aforementioned decrease in
revenues and a $1.4 million increase in the provision for bad debts, offset, in
part, by a slight improvement in Wulff's gross margin as a percentage of total
revenues and a decrease in selling, general and administrative expenses of
approximately 3%. The increase in Wulff's provision for bad debts was caused by
an increase in Wulff's accounts and notes receivable balances in the 1994 period
as well as the general impact of depressed economic conditions on some of
Wulff's customers.
GAMING
Gaming's revenues for the year ended December 31, 1994 were $117.8 million
compared to $48.5 million in 1993, an increase of $69.3 million (143%). New
gaming machines sold increased to 21,625 units in 1994 from 10,156 units in
1993, an increase of 112%. The introduction of Gaming's S5500 ProSeries-TM- line
of slot machines and its new Game Maker-Registered Trademark-, a multi-game
touch screen machine, in the second half of 1993 and 1994, respectively, as well
as the proliferation of legalized gaming in riverboat markets, contributed to
this increase of units sold. The average price of gaming machines sold increased
18% in 1994 due to additional features, such as the embedded bill acceptor, in
the new machines and fewer sales through distributors in 1994. Aggregate
revenues from new machines increased to $106.6 million in 1994 from $41.7
million in 1993. Revenues from other sources, including interest income,
increased $4.4 million from $6.8 million in 1993 to $11.2 million in 1994,
primarily due to increased sales of used units and machine accessories.
Gaming's operating income was $1.6 million for 1994 compared to an operating
loss of $31.7 million in the 1993 period, an improvement of $33.3 million. The
1993 operating loss includes $12.5 million of unusual charges principally
relating to the writedown of inventories originally intended for the Louisiana
VLT market and provisions for bad debts relating to Gaming's former distributor
in Louisiana. The improvement in operating results was principally due to the
aforementioned increase in revenues, higher gross margins realized from
increased absorption of manufacturing overhead costs coupled with lower costs of
materials, offset, in part, by higher selling, general and administrative costs
as well as higher bad debt provisions and interest costs.
Cost of sales as a percentage of Gaming's total revenues, was 73% in 1994
compared to 87% in 1993, excluding an inventory valuation adjustment in 1993 of
$6.2 million (13% of 1993 total revenues). The lower cost of sales is due to
increased absorption of overhead manufacturing expenses attributable to
increased production in 1994 as compared to 1993 and lower costs of materials
attributed to ongoing redesign of products and volume discounts from suppliers.
Selling, general and administrative expenses increased to $25.9 million in
1994 compared to $23.4 million in 1993, an increase of 11%. The $2.5 million
increase was caused principally by increased staffing levels in the sales
departments and sales related costs associated with the aforementioned sales
volume increase in 1994 compared to 1993. Bad debt expense provisions increased
to $3.6 million in 1994 from $3.2 million in 1993, excluding a $5.1 million
increase in the provision in 1993 primarily relating to Gaming's former
distributor of VLT devices in Louisiana. This $0.4 million increase (13%)
resulted from increased sales volume in the 1994 period.
73
<PAGE>
SYSTEMS
Systems' revenues for the year ended December 31, 1994 were $13.4 million
compared to $12.0 million in the comparable 1993 period, an increase of $1.4
million (12%). Continued growth in casino emerging markets, particularly with
casinos on Indian lands and on riverboats, contributed to an increase in the
demand for gaming monitoring systems and the increase in Systems' revenues.
Systems' operating income was $2.6 million for the year ended December 31,
1994 compared to $4.0 million during the twelve months ended December 31, 1993.
This decrease in operating income of $1.4 million was caused primarily by
slightly lower gross profit margins as a percentage of revenues, higher selling,
general and administrative costs and a higher provision for bad debts offset, in
part, by the aforementioned increase in revenues. Selling, general and
administrative expenses increased $1.1 million due to higher sales levels,
increased staffing levels and increased facility costs. The provision for bad
debts increased $0.8 million due to the increase in revenues and higher accounts
receivable balances outstanding during the period.
CONSOLIDATED
Revenues for the year ended December 31, 1994 were $236.2 million, net of
eliminations, compared to $168.7 million in 1993, an increase of 40%. This
increase is due to the aforementioned increase at Gaming and Systems partially
offset by the aforementioned decrease in Wulff's revenues.
BGII had operating income of $13.4 million for 1994 compared to an operating
loss of $18.5 million in the 1993 period. The improvement in operating results
of $31.9 million was caused principally by the aforementioned improvement in
Gaming's operating results partially offset by the aforementioned decline in
operating income at Systems and Wulff.
Interest expenses was $6.8 million in 1994 compared to $4.4 million in 1993.
This increase was caused by higher borrowings outstanding and higher interest
rates in 1994.
BGII's effective tax rate in 1994 and 1993 differs from the U.S. statutory
rate of 34% principally due to the lack of tax benefits available for operating
losses generated in the U.S.
IMPACT OF INFLATION AND FOREIGN CURRENCY TRANSLATION
Inflation has not had a significant effect on Alliance's operations for the
three years ended December 31, 1995 or BGII's operations during the three years
ended December 31, 1995.
Substantially all of Wulff's transactions are denominated in Deutsche Marks.
The Deutsche Mark is the functional currency used by BGII to translate Wulff's
financial statements. Therefore, BGII is exposed to foreign exchange rate risk.
BGII does not generally enter into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations.
74
<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.
BUSINESS STRATEGY
The Company's strategic objective is to build a pre-eminent gaming
entertainment company to capitalize on what management believes to be gaming's
continuing growth within the entertainment industry. In addition to continuing
the development of the Company's existing business units, the Company's
strategic focus will be on the Gaming and Systems business unit, key elements of
which include:
CAPITALIZE ON BGII'S CURRENT SALES MOMENTUM. Since 1993, BGII's management
has initiated steps to increase its share of gaming machine sales in traditional
markets and capture increased gaming machine market share in new and emerging
jurisdictions. In the mid-1980s, BGII's management's slow response to rapidly
evolving technology, new competitors and changing customer preferences
contributed to a significant reduction in Gaming's market position. Hans Kloss,
who became President of BGII in 1993, and other members of the current BGII
senior management, have led BGII's efforts to rebuild its market position, and
have effectively increased its presence in major casinos in the Las Vegas
market, including Caesars Palace and the MGM Grand. As part of its long-term
growth strategy, Gaming has increased its research and development efforts,
focusing on upgrading its gaming machine product line, and has increased its
sales and marketing efforts. For example, Gaming introduced its ProSeries-TM-
reel-type slot machines during the third quarter of 1993 and its multi-game
touch screen machine, the V7000 Game Maker-Registered Trademark- ("Game
Maker-Registered Trademark-"),
75
<PAGE>
during the third quarter of 1994, which have contributed significantly to an
increase in unit sales which have approximately doubled the level of unit sales
in 1993. See "Gaming Machine Manufacturing and Systems-- Gaming--Products."
DEVELOP AND MARKET PREMIER GAMING ENTERTAINMENT PRODUCTS EMPLOYING NEW
TECHNOLOGY. The Company intends to continue to develop, market and sell premier
gaming entertainment products and systems that employ available information
technology currently in common use in other segments of the entertainment
industry, but not yet prevalent in the gaming industry. The Company believes
that technological enhancements are the key to improving the appeal of its games
and locations. To implement this strategy, the Company will draw upon the
resources of Dr. Craig Fields, Vice Chairman of the Board, who has over 20 years
of experience with advanced information technology from his work with several
leading companies and government agencies. Alliance has developed and is
currently marketing a next-generation computerized product called "Gambler's
Bonus," a cardless slot players' club and player tracking system for use in its
gaming machine management route operations which will allow multiple locations
to be linked together into a distributed gaming environment. Management believes
that "Gambler's Bonus" offers a wider variety of gaming choices to players than
any other gaming device currently available for use in route locations.
Additionally, BGII is in the process of developing an innovative form of
cashless wagering that uses bar-coded coupons which can be read by bill
validators in slot machines with the resulting information being transmitted to
a computerized monitoring system, subject to testing and regulatory approval. In
addition, both BGII and Alliance have developed electronic gaming machines with
bill acceptor and ticket printer features, as well as touch screen and
multi-game capabilities.
ENHANCE OPERATING EFFICIENCIES AND IMPROVE THE QUALITY OF THE COMPANY'S
PRODUCTS AND SERVICES. The Company is taking a number of steps in different
business units to improve its operating efficiencies while at the same time
improving the quality of its products and services, including (i) engineering
improvements in its gaming machine manufacturing operations and reducing per
unit costs by increasing production throughput and negotiating decreases in
materials costs; (ii) continuing to improve Wulff's manufacturing efficiency and
productivity through the use of computer-aided design systems, automated
production equipment and devotion of substantial resources to product quality
control in its wall machine operations; (iii) expanding the installed base of
electronic gaming machines equipped with Gambler's Bonus, and updated
bill-acceptor devices throughout its Nevada gaming machine management
operations, which is expected to improve Alliance's revenues and operating
efficiencies; and (iv) initiating improved customer service programs and
increasing employee responsiveness to customers' needs for after-sale services.
Management will continue to seek cost reductions and efficiencies.
CAPITALIZE ON RELATIONSHIPS AND ENTER INTO ALLIANCES WITH TECHNOLOGY AND
ENTERTAINMENT COMPANIES. Management's focus on technological developments in
gaming entertainment has created the potential for alliances with other
technology-oriented companies for the purpose of sharing information or
professional services in developing product concepts. The Company intends to
continue to develop or license technology which can be integrated into various
aspects of the gaming entertainment industry in the future. In addition, the
Company intends to make strategic acquisitions of rights to use proprietary
technology when attractive opportunities arise. There can be no assurance,
however, that any such alliances or acquisitions will be available to the
Company or will result in sustained beneficial results to the Company.
BUSINESS UNITS
Following the Merger, the Company will operate through four business units:
(i) casino-style electronic gaming machine manufacturing and systems, (ii)
German operations (consisting of the manufacture and distribution of
wall-mounted gaming machines and distribution of other recreational and
amusement machines), (iii) gaming machine management operations and (iv) casino
operations.
76
<PAGE>
GAMING MACHINE MANUFACTURING AND SYSTEMS
INDUSTRY OVERVIEW
Gaming's primary markets for its gaming machine products are the United
States and Europe and, to a lesser extent, Canada, the Far East, Latin America
and the Caribbean. The following table sets forth the percentage of Gaming's new
unit sales by market segment during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF NEW UNITS SOLD
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
NEW UNIT SALES BY MARKET SEGMENT 1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Nevada and Atlantic City............................................... 27% 34% 42%
International.......................................................... 27 21 30
Riverboats............................................................. 31 31 12
Indian Gaming.......................................................... 12 13 14
Other (principally VLTs)............................................... 3 1 2
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
UNITED STATES MARKETS. Within the United States, Nevada represents the
largest installed base of gaming machines with an installed base of
approximately 185,000 machines as of December 31, 1995. Atlantic City is the
second largest market which management estimates had an installed base of
approximately 30,000 machines as of December 31, 1995. Product sales in these
markets are primarily to established casino customers to either replace existing
machines or as part of an expansion or refurbishment of the casino. Also,
because gaming machine revenues have increased at a higher rate than table game
revenues over the past decade, casino operators have frequently increased floor
space dedicated to gaming machines. In addition, major casino openings in
Nevada, expansions of existing casinos and the proliferation of casinos in
emerging markets have created additional floor space available for new machines
and are anticipated to further increase competitive pressures on casino
operators to replace existing equipment with new machines on an accelerated
basis.
Riverboat casinos began operating in 1991 and, as of December 31, 1995,
riverboat casinos were operating in Indiana, Iowa, Illinois, Mississippi,
Missouri and Louisiana. The estimated installed base of gaming machines on
riverboats is approximately 61,000 machines as of December 31, 1995.
Casino-style gaming continues to expand on North American Indian lands.
Indian gaming is regulated under the Indian Gaming Regulatory Act of 1988 which
permits specific types of gaming. Gaming's machines are placed only with Indian
gaming operators who have negotiated a compact with the state and received
approval by the U.S. Department of the Interior. Gaming has, either directly or
through its distributors, sold machines for casinos on Indian lands in Arizona,
Connecticut, Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico, North
Dakota, South Dakota and Wisconsin. Compacts have also been approved in Oregon,
Colorado and Louisiana, although Gaming made no deliveries in these
jurisdictions during 1995. In addition to the approved states, compacts are
under consideration in several states, including Alabama, California, Maine,
Massachusetts, Rhode Island, Texas and Washington. The installed base of all
Indian gaming machines as of December 31, 1995 was approximately 52,000 units.
In addition, there are currently casinos in Colorado and South Dakota. The
estimated installed base of machines in these markets as of December 31, 1995
was approximately 13,000 machines.
The continued growth of domestic emerging markets for gaming machines is
contingent upon the public's acceptance of these markets and an ongoing
regulatory approval process by Federal, state and local governmental
authorities. Management cannot predict which new jurisdictions or markets, if
any, will approve the operation of gaming machines, the timing of any such
approval or the level of Gaming's participation in any such new markets.
INTERNATIONAL MARKETS. In addition to the domestic markets, the gaming
industry is also expanding in international markets. Gaming's primary
international market is Europe, and to a lesser extent, Canada, the
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Far East, Latin America and the Caribbean. Gaming has begun, and plans to
continue, expansion into the Australian market, and in 1995, BGII established an
office in Sydney, Australia. No new machines have yet been sold into Australia.
The percentage of Gaming's international revenues by geographic area for the
periods indicated are set forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Europe (including sales to GmbH)......................................... 69.2% 55.6% 51.4%
Canada................................................................... 12.7 16.6 21.6
Latin America............................................................ 16.3 20.5 19.7
Far East................................................................. 1.8 4.4 4.0
Other.................................................................... -- 2.9 3.3
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
MARKETS FOR SYSTEMS. Systems' primary markets for its computerized
monitoring systems are the United States and, to a lesser extent, Canada, New
Zealand, Latin America, Europe, and the Caribbean. Markets for Systems within
the United States include traditional land-based casinos predominately in Nevada
and Atlantic City, New Jersey, Indian gaming and riverboats. Domestically, the
market for monitoring systems is divided equally between selling to new
installations and to existing customers who are either expanding their casino
floors or are upgrading their hardware to a new product release. Unlike the
United States, where most jurisdictions require the implementation of systems,
there have been few international markets to do so. Management believes,
however, that the international market for such systems is increasing, and that
Systems' sales to such markets will increase accordingly.
GAMING
PRODUCTS. Gaming designs, manufactures and distributes a variety of
electronic slot and video gaming machines. Machines are differentiated from one
another by graphic design and theme, cabinet style and size, payout, reel-type
design and minimum/maximum betting amount. Slot machines are normally produced
to specific order, with design and configuration customized to a customer's
particular requirements. Customers may also change from one gaming model to
another gaming model by ordering a "conversion kit" which consists of artwork,
reel strips and a computer chip. Gaming's video gaming machines are designed to
simulate various live card games and keno through a video display. New games and
themes are introduced periodically in order to satisfy customer demand and to
compete with product designs introduced by competitors. Gaming introduced its
"ProSeries-TM-" reel-type slot machines during the third quarter of 1993 and its
multi-game touch screen machine, the Game Maker-Registered Trademark-, during
the third quarter of 1994.
The Game Maker-Registered Trademark- can offer up to 10 different video
games within one gaming device. Various games can be selected from a game
library that has over 200 games. The games simulate various card games, keno and
popular reel-spinning games. The Game Maker-Registered Trademark- machines
contain bill acceptors and many other features believed to be popular with
casinos and their customers. The Game Maker-Registered Trademark- machines are
available in upright, bar top and slant top cabinets. Based on Gaming's sales of
this product to date, management believes that Gaming is currently more
competitive than in the past in the video gaming device market. Revenues from
sales of Game Maker-Registered Trademark- machines were approximately $0.1
million, $6.7 million and $27.4 million during 1993, 1994 and 1995,
respectively.
The ProSeries-TM- was the result of a comprehensive product development
effort which began in 1991. The development process included extensive testing
of the new products in-house and on casino floors for reliability and player
appeal. Based on Gaming's sales of the ProSeries-TM- products to date,
management believes that the ProSeries-TM- has been the catalyst to allow Gaming
to increase market share in traditional and emerging markets for gaming machines
as the product becomes accepted by casino customers. Revenues from sales of
ProSeries-TM- machines were approximately $19.3 million, $86.2 million and $57.1
million during 1993, 1994 and 1995, respectively.
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<PAGE>
Gaming typically offers a 90-day labor and up to a one-year parts warranty
for new gaming machines sold and is actively involved in customer service after
the original installation. Gaming provides several after-sale, value-added
services to its customers including customer education programs, a 24-hour
customer service hot-line, and field service support programs and spare parts
programs.
In addition, Gaming sells and services used gaming machines and sells parts
for existing machines. Sales of used gaming machines increased for 1995 as
management implemented a policy to reduce inventory levels. Sales of used
equipment were $2.7 million, $4.2 million and $9.2 million for the years ended
December 31, 1993, 1994 and 1995, respectively.
The following table sets forth the percentages of Gaming's revenues provided
by each of its major product lines during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Slot machines..................................................... 67.0% 74.2% 52.8%
Video gaming machines............................................. 18.9 16.3 31.0
Other (primarily used machines, parts and services)............... 14.1 9.5 16.2
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
Gaming machines have a mechanical life that can exceed 10 years. However, in
the established markets, Gaming's experience is that casino operators usually
replace gaming machines after three to seven years. The factors which result in
replacement of gaming machines sooner than their mechanical life include
technological advances, development of new games, new sound and visual features
and changing preferences of casino patrons. Casinos typically recoup the
purchase cost of their electronic gaming machines in a few months, which allows
casinos to replace machines with new models that are popular with casino
patrons.
Gaming often accepts used machines as trade-ins toward the purchase of new
gaming equipment. While a small secondary market exists in the United States,
used machines are typically resold into the international market. While some
used equipment is reconditioned for direct sale, much is sold in container lots
on an "as is" condition through independent brokers.
In the past, Gaming had designed, manufactured and distributed video lottery
terminals ("VLTs"), which are generally operated by, or under the regulation of,
state or provincial lottery commissions. The VLT business was less than 2% of
revenues during 1993, 1994 and 1995. Gaming will pursue this business only on a
selected basis in the future.
PRODUCT DEVELOPMENT. The Company believes that technological enhancements
are the key to improving the appeal of its electronic gaming machines. Most
gaming machines on casino floors today are driven by technology which was
developed over 20 years ago. The Company believes that accelerating the use of
existing computer technology will give its gaming machines and systems a
competitive advantage in the gaming industry.
Gaming develops its products for both the domestic and international market.
Gaming's product development process is divided into two areas, hardware and
software. Major areas of hardware development include cabinet style, electronic
capability, machine handle, coin hopper and bill acceptor. Hardware development
efforts are focused upon player appeal, product reliability and ease of
maintenance. Development cycles for hardware can range from a few days for
simple enhancements to more than a year for new electronics or new mechanical
packages.
The software development process for new games, which includes graphics
development, involves a continuous effort requiring relatively significant human
resource allocations. Creativity in software development is an important element
in product differentiation as the major manufacturers sometimes use similar
hardware technology. Ideas for new models are generated both internally and from
customers. Gaming can design the software and artwork for a new model in as
little as two weeks, excluding regulatory approval. All
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<PAGE>
new or modified hardware and software is designed to satisfy all applicable
testing standards and must receive the approval of the appropriate gaming
regulatory agency based substantially on satisfying such applicable testing
standards before such gaming product can be offered for play to the public. Most
gaming jurisdictions rely upon and accept the certification of selected
independent laboratories that a gaming product meets the applicable testing
standards.
Regulatory approval for new or modified hardware and software changes takes
from 30 days to three months or more. On an annual basis, Gaming expects to
introduce approximately 25 new games to the market. However, no assurance can be
made with respect to the rate of new model introductions.
During 1993, 1994 and 1995, Gaming spent $3.0 million, $3.5 million, and
$3.7 million, respectively, on product research and development.
SALES AND MARKETING. Gaming uses a direct sales force, an independent
distributor network and GmbH to sell its products. Gaming's sales staff of
approximately 20, which operates offices in Nevada, New Jersey, Mississippi,
Illinois and Florida, generated approximately 84% of new machine sales over the
past three years. Gaming currently uses distributors for sales to certain
specific markets in the United States as well as certain European jurisdictions.
Gaming's agreements with distributors do not specify minimum purchases but
generally provide that Gaming may terminate such agreements if certain
performance standards are not met. Approximately 8% of new gaming machine unit
sales over the past three years have been generated through independent
distributors (including foreign distributors) and 8% have been generated through
GmbH.
In addition to offering an expansive product line, Gaming provides
customized services in response to specific casino requests. These services
include high quality silkscreen printing of gaming machine glass, customized
game development and interior design services. Gaming also offers customized
design services that utilize computer aided design and studio software programs.
Gaming's design department can generate a casino floor layout and can create a
proposed slot mix for its customers. In many of the emerging markets, Gaming
provides assistance to customers including the selection of related equipment
such as slot stands, chairs, etc. and a recommended layout of the casino floor
as well as a mix of machine models. Sales to established casinos in Nevada
normally require completion of a successful trial period for the machines in the
casino.
Approximately 75% of Gaming's slot and video gaming machine sales are on
terms of 90 days or less. Approximately 25% of Gaming's sales, primarily in
certain emerging markets such as riverboat and Indian gaming casinos, are
financed over extended periods as long as 36 months and bear interest at rates
ranging from 8% to 14%. International sales are generally consummated on a cash
basis or financed over a period of one year or less. In addition, in certain
situations, Gaming has participated in the financing of other gaming related
equipment manufactured by third parties in the emerging markets. Management
believes that financing of customer sales has become an increasingly important
factor in certain emerging markets. See "--Competition."
CUSTOMERS. The demand for slot machines and video gaming machines varies
depending on new construction and renovation of casinos and other facilities
with needs for new equipment. Since machines are not replaced each year, many
current customers will need only product maintenance in the near future. Growth
will depend on Gaming's ability to obtain new customers and take advantage of
the newly emerging markets. For the year ended December 31, 1995, Gaming's
largest customer accounted for approximately 5% of Gaming's sales while Gaming's
ten largest customers, excluding GmbH, accounted for approximately 25% of
Gaming's revenues. During that period, sales to GmbH accounted for approximately
9% of Gaming's revenues.
ASSEMBLY OPERATIONS. Gaming's Las Vegas facility was built in 1990
specifically for the design, manufacture and distribution of gaming equipment.
The 150,000-square foot facility was designed to meet fluctuating product design
demands and volume requirements, and management believes the facility enables
Gaming to increase production without significant capital expenditures.
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<PAGE>
Management believes that its assembly operations allow for rapid generation
of different models to fill orders quickly and efficiently. Another major
advantage of the existing plant operation is the system by which machines can be
altered in many ways including the size, type and color of glass, sound and
payoff patterns to produce a "customized" product for each customer. Gaming
keeps an inventory of parts that allow machines to be altered quickly to conform
with a particular customer's design/feature request. Gaming designs all of the
major assemblies that are incorporated into the final machine configuration.
COMPETITION. The market for gaming machines in North America is dominated
by a single competitor, IGT. There are a number of other well established,
well-financed and well-known companies producing machines that compete with each
of Gaming's lines in each of Gaming's markets. The other major competitors are
Universal Distributing of Nevada, Inc., Sigma Games, Inc., WMS and in the
international marketplace, companies who market gaming machines under the brand
names of Aristocrat, Atronic, Cirsa and Novomatic. In addition, certain
technology-oriented companies, including CDS and Sega Enterprises Ltd., have
recently announced their intention to enter the gaming machine business.
Management believes that some of these competitors generally have greater
capital resources than Gaming. Competition among gaming product manufacturers,
particularly with respect to sales of gaming machines into new and emerging
markets, is based on competitive customer pricing and financing terms, appeal to
the player, quality of the product and having an extensive distribution and
sales network.
The future success of the Company, to a large extent, will be dependent upon
the ability of Gaming to design, manufacture and market technologically
sophisticated products that achieve high levels of player acceptance. The
development of a successful new product or product design by a competitor could
adversely affect sales of Gaming's products and force Gaming to respond quickly
with its own competing products. In addition, management believes that customer
financing terms have become an increasingly important competitive factor in
certain emerging markets. Competitive conditions sometimes require Gaming to
grant extended payment terms on gaming machines and other gaming equipment.
While these financings are normally collateralized by such equipment, the resale
value of the collateral in the event of a default may be less than the amount
financed. Accordingly, Gaming will have greater exposure to the financial
condition of its customers in emerging markets than has historically been the
case in established markets like Nevada and Atlantic City. Also, because certain
of Gaming's competitors generally have greater financial resources than Gaming,
Gaming will need to rely on third party financing arrangements in order to
compete in providing competitive financing to customers. See "--Sales and
Marketing."
SYSTEMS
PRODUCTS. Systems designs, assembles, and sells a computerized monitoring
system ("SDS 6000") for slot and video gaming machines which provide casino
operators with on-line real time data relative to a machine's accounting,
security, and maintenance functions. The SDS 6000 also provides data to, and
receives data from, other third party player tracking computer and software
applications allowing casinos to track their players to establish and compile
individual player profitability and other demographic information. SDS 6000 is
comprised primarily of (1) hardware consisting of microcontroller based printed
circuit boards which are installed within the slot and video machines as well as
card reader displays and keypads which provide casinos the ability to track
player gaming activity and to monitor access to slot and video machines by the
casino's employees, (2) application software developed by Systems which provides
access to the slot machine's activity data gathered by the microcontroller
hardware, and (3) third party mini-computers on which the application software
resides. Systems also provides software and hardware support services, including
maintenance, repair and training for purchasers of its monitoring systems.
PRODUCT DEVELOPMENT. Systems' product development is divided into two
areas, hardware and software. The major areas of hardware development include
microcontroller circuit board design and programming as well as user interface
devices such as card readers, keypads and displays. Hardware development efforts
are focused upon the casino operator in terms of functionality, product
reliability and ease of maintenance and customer appeal in terms of appearance
and ease of use. Development cycles for hardware can vary between a few months
for minor revisions to more than a year for major design changes or for changes
made by various slot manufacturers with which Systems' product must communicate
and be
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<PAGE>
physically integrated. Software development results in (1) periodic product
releases that include new features which extend and enhance the SDS 6000
product, (2) periodic maintenance releases which enable casino operators to
correct problems or improve the usability of the system and (3) documentation
needed to install and use the system.
In 1995, the hardware and software groups from Systems, as well as engineers
from Gaming, coordinated efforts to develop a form of cashless wagering that
uses bar-coded coupons which can be read by the bill validators in Gaming's slot
machines which are connected to an SDS 6000 system. Testing and regulatory
approval is being pursued by Systems in anticipation of a 1996 release to casino
operators. In 1996, Systems and Gaming development groups will continue to
direct development efforts towards other forms of cashless wagering for use on
Gaming's slot machines and the SDS 6000 system.
During 1993, 1994 and 1995, Systems spent $1.4 million, $1.7 million and
$1.9 million, respectively on product research and development.
SALES AND MARKETING. Systems has a direct sales force which produces the
majority of its sales. Gaming's sales force and Gaming's independent distributor
network produce the balance of Systems' sales, primarily in situations where
customers are making slot machine and computerized slot monitoring system
purchase decisions at the same time. Worldwide, Systems has approximately 60,000
GMUs installed, or in the process of being installed, of which approximately
53,000 are in the United States. Over the past three years, Systems' own sales
force has generated approximately 78% of its sales.
Systems offers its customers the option of signing separate hardware and
software maintenance agreements at the time of sale. These agreements are for
periods of one year and automatically renew unless otherwise canceled in writing
by the customer or Systems. After an initial warranty period, typically 90 days,
the customer is invoiced a monthly hardware and software maintenance fee which
provides essentially for repair and/or replacement of malfunctioning hardware
and software, software version upgrades, and on-call support for software.
Systems offers limited financing terms, normally less than one year, for
sales to new installations. Most sales, however, are invoiced on a net 30 days
basis.
CUSTOMERS. The demand for computerized slot monitoring systems is driven
either by regulatory requirements in a given jurisdiction and/or by a casino
operator's competitive need to properly track their players' activity and
establish and compile individual player profitability and other demographic
information, all of which is of particular importance to casinos in developing
marketing strategies. Systems' revenues are derived equally from selling to new
installations as well as to existing customers who are either expanding their
casino floors or are upgrading their hardware to a new product release. For the
year ended December 31, 1995, Systems' ten largest customers (which includes
certain multi-site casino operators that have corporate agreements with Systems)
accounted for approximately 92% of Systems' revenues. Due to the high initial
costs of installing a computerized monitoring system, customers for such systems
generally have tended not to change suppliers once they have installed such a
system. Future growth will be based on further expansion in the established and
emerging markets as well as continued development efforts by Systems to provide
customers with new and innovative hardware and software product offerings.
COMPETITION. Although there are numerous companies providing computerized
slot monitoring systems to casino operators, the competition currently consists
of IGT, CDS, and to a lesser extent, by Gaming Systems International and Acres
Gaming. Competition is keen in this market due to the number of providers and
the limited number of casinos and the jurisdictions in which they operate.
Pricing, product feature and function, accuracy, and reliability are all main
factors in determining a provider's success in selling its system. Systems
believes the future success of its operations will be determined by its ability
to bring new and innovative products to the market place and at the same time
maintain a base of loyal existing customers.
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GERMAN OPERATIONS
INDUSTRY OVERVIEW
Management believes that the German amusement game industry, a historically
stable market, consists of approximately 200,000 wall machine units and 50,000
token machine units. German regulations require the replacement of wall machines
after a period of up to four years, ensuring replacement sales in Germany. As a
result, the annual market sales are approximately 50,000 units with fluctuations
resulting primarily from economic conditions and regulatory changes. In May
1993, the maximum initial coin drop in wall machines was increased from 30
pfennigs to 40 pfennigs. This regulatory change caused some customers to defer
purchases prior to this regulatory proposal pending its outcome. During
mid-1994, the German government effected a tax law revision based on a European
Court ruling, whereby V.A.T. charged to the operators of wall machines was
significantly reduced. Management believes this tax law revision, offset in part
by increased leisure taxes, caused the aggregate new wall machine unit sales to
increase to approximately 47,000 units in 1994. Effective January 1, 1996, a
regulatory change took effect requiring all arcade operators to have at least 15
square meters of space for each wall machine and a maximum of 10 machines per
arcade. Starting in mid-1995, arcade operators began removing wall machines from
their arcades to meet the requirements of this new regulation. Despite this
adverse impact, the demand for new wall machines remained at approximately
47,000 units in 1995. All wall machines manufactured since 1992 have meters that
monitor the amount inserted by players and paid out by the machine; from the end
of 1996 on, all wall machines in use are required to have such meters, which
management believes should lead to an increase in demand for new, metered wall
machines in the latter half of 1996. See "--Operations of Wulff--Products." See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--BGII Results of Operations" and "Gaming Regulation and
Licensing--Germany."
One of the most important markets for wall machines in Germany is the arcade
market. A significant number of arcades are owned by competitors of Wulff who
are able to introduce their own machines into the arcades and generally do not
purchase wall machines from Wulff. Wulff's two largest competitors, NSM, AG and
Gauselmann, AG, own arcades containing approximately 15% of the wall machines in
Germany. Management believes Wulff's share of the installed base of German wall
machines market was approximately one-quarter of the market for each of the last
three years. On an ongoing basis, the German legislative authorities regulate
and monitor the wall machine industry so as to ensure certain manufacturing
standards and the fairness of each machine to users. The most significant
legislation presently affecting the wall machine industry relates to prescribed
licensing procedures, the use, installation and operation of wall machines and
the taxation of wall machines. There have been no recent material changes in
these ongoing legislative regulations. See "Risk Factors--Operating
History--Recent Losses" and "Gaming Regulation and Licensing--Germany."
Token machines, unlike wall machines, are not designed to pay off money.
Instead, a player wins games or tokens. Therefore, the strict German licensing
requirements governing wall machines are not currently applied to token
machines, although it cannot be ruled out that this may change in the future due
to legislative changes or changes in administrative practice. Furthermore,
management believes that the token machine market has reached its potential and
that sales will decline because token machines are not subject to the four-year
operation limit set by German regulations. See "Gaming Regulation and
Licensing-- Germany."
OPERATIONS OF WULFF
PRODUCTS. Wulff's manufacturing operations were founded in Berlin in 1950
and sold to BEC in 1972. Wulff produces and distributes a variety of models of
wall machines, under the trade name "Bally Wulff", for operation in arcades,
hotels, restaurants and taverns primarily in Germany. These wall machines are
coin-operated, armless gaming devices similar to slot machines that award
winnings for matching numbers or symbols on three to five wheels or drums and
differ primarily in appearance, graphic design, theme, pay-table and customer
appeal. Each game costs up to 40 pfennigs (approximately $0.28, assuming an
exchange rate of $1=DM 0.6987 as of December 31, 1995 hereinafter) to play,
although the player may deposit larger amounts to provide continuous play but
not to increase payoffs. German regulations limit the maximum payout to ten
times the player's stake (DM 4.00 or approximately $2.80 per game). Current
models of wall
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machines provide the player the opportunity to win 100 special games on one
play, which increases the
potential amount that can be won on the minimum coin drop. German regulations
require a minimum payback of 60% for wall machines, although many machines are
generally programmed to pay back at higher rates to encourage play. Effective
January 1, 1997, all wall machines in use must have meters that monitor the
amount inserted by players and paid out by the machine. See "Gaming Regulation
and Licensing-- Germany."
In addition to manufacturing wall machines, Wulff distributes wall machines
and other recreational and amusement coin-operated machines manufactured by
third parties to provide a more extensive line of products to its customers.
These machines include pool tables, dart games, pinball machines, jukeboxes and
arcade games and are distributed primarily for use in arcades, restaurants,
hotels and taverns. One of BGII's indirect subsidiaries, GmbH distributes
traditional slot machines, manufactured primarily by Gaming, principally to
customers in Europe, Russia and, through its branch office in Johannesburg,
South Africa, the African continent. The following table sets forth the
percentage of Wulff's revenues by product line during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Wall machines manufactured by Wulff...................................... 42.8% 50.8% 37.5%
Recreational and amusement machines and third party wall machines
distributed............................................................. 36.4 20.0 22.3
Slot machines distributed................................................ 5.0 6.3 11.2
Other (primarily used machines, parts and services)...................... 15.8 22.9 29.0
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Wulff also manufactures token machines for operation in arcades, hotels,
restaurants and taverns in Germany. See "Gaming Regulation and
Licensing--Germany."
PRODUCT DEVELOPMENT. Management believes that Wulff's wall machines are
viewed as premium products because of their quality, dependability, ease of
service and proven ability to attract players and generate revenue. Wulff
designs its machines to appeal to each of the three categories of participants
in the distribution process-- Wulff's sales representatives and independent
distributors, the owner/operators of the machines, and the players. The sales
representatives and distributors require machines with broad appeal that are
easy to demonstrate and sell. The owner/operators desire reasonably priced
machines that are easy to collect from and service and that are proven revenue
generators. The players prefer entertaining machines that are simple to play and
have unique features.
Wulff's management has formed design teams which are responsible for
generating ideas for creative new machines. These teams are comprised of
representatives of each department involved in the production and distribution
of machines, such as art design, engineering, manufacturing, marketing and
sales. The design teams meet for three days each calendar quarter at a site away
from Wulff's headquarters. The teams analyze machines currently being marketed
by Wulff and its competitors to assess their strengths and weaknesses and then
suggest ideas for new machines. These ideas are reviewed to determine which
machines should be produced on a trial basis. Wulff typically pursues 15 to 20
projects at any given time, and approximately 12 to 15 machines are submitted
for licensing each year. These new machines are built in limited quantities and
then test marketed for three to six months. Generally, less than one-half of the
new machines tested are put into full scale production. Management believes this
process of generating new ideas and then turning only a limited number of the
ideas into machines which will reach the mass market is responsible for the high
quality of Wulff's machines and their continued acceptance and success in the
marketplace. Because the machines have a reputation for quality, Wulff is often
able to produce and market a particular model for up to two years, which
management believes, based upon its experience in the relevant marketplace and
feedback from customers, exceeds the industry average.
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During 1993, 1994 and 1995, Wulff spent approximately $3.3 million, $3.5
million, and $3.6 million, respectively, on product research and development.
SALES AND MARKETING. Wulff sells approximately 94% of its products through
its own sales force of 56 people located in its 23 regional sales offices.
Independent German distributors account for approximately 6% of sales.
Approximately 97% of Wulff's sales of new wall machines are in the German
market. The sales offices are operated as independent profit centers and are
assigned geographic areas for which they are responsible for sales, servicing
the machines and assisting in collecting customers' accounts receivable
balances. GmbH maintains a sales office in Hanover for the distribution of
traditional slot machines, principally in Europe, and has an office in
Johannesburg, South Africa for the sale and distribution of traditional slot
machines into the African continent.
Wulff devotes substantial time, money and effort marketing and promoting its
products. Wulff takes an active part in the annual Amusement Game Fair which is
held each January in Frankfurt, Germany, at which Wulff introduces new products.
The wall machines manufactured and sold by Wulff generally sell for prices
ranging from DM 5,000 to DM 8,000 (approximately $3,493 to $5,590). A majority
of machines distributed by Wulff are paid for in full within 90 days after the
sale. Remaining sales of machines are financed by Wulff generally over a
12-month period, with interest rates of up to 12%. For this reason, Wulff
establishes an internal credit rating and credit limit for each customer. Under
Wulff's conditions of sale, title to a machine is retained by Wulff until the
machine has been paid for in full. In addition, Wulff demands collateral as
security. Currently, Wulff provides customer financing for approximately 20% of
its sales, and management expects this practice to increase during the latter
half of 1996. In approximately 60% of its sales, Wulff accepts wall machines
and/or other recreational and amusement equipment as trade-ins toward the
purchase of new machines. To the extent possible, the used machines are then
resold.
CUSTOMERS. Each of Wulff's top ten customers in 1994 has maintained its
relationship with Wulff for over three years. For the fiscal year ended December
31, 1995, no single customer accounted for more than 3% of Wulff's sales, while
Wulff's top ten customers accounted for approximately 10% of Wulff's sales.
Wulff's customer base for wall machines may be divided into two categories
which differ based on the preferences of their clientele. Arcade operators are
generally interested in purchasing the newest products in the hopes that a new
innovation will result in a high level of public demand to play the new "hot"
product. Hotels, restaurants and taverns, on the other hand, are generally more
inclined to purchase lower-priced existing models with proven earnings records
to provide as an amenity to customers.
ASSEMBLY OPERATIONS. Wulff's manufacturing process is primarily an assembly
operation. Its manufacturing facility consists of a four-story, 100,000-square
foot building in Berlin, Germany. Wulff purchases its key raw materials,
sub-assemblies and fabricated parts from a variety of suppliers, and most parts
are purchased from multiple suppliers. While there exists no formal long-term
contract commitments to any single supplier, Wulff has placed certain standing
orders with suppliers through 1996 to help assure the availability of specific
quantities on an as-needed basis. These orders are cancelable by Wulff at any
time without penalty. Most of the component parts are standard on all models of
all Wulff's wall machines, which promotes easy conversion from the production of
one model to another in response to customer demand. Except in connection with
certain promotions, Wulff generally maintains low inventory levels of assembly
parts, and the amount of work-in-process is generally less than the number of
machines sold in one week.
Because of its manufacturing structure, Wulff is capable of substantially
increasing its wall machine output without significant capital expenditures.
Wulff continues to improve its manufacturing efficiency and productivity through
the use of computer-aided design systems, automated production equipment and
devotion of substantial resources to product quality control.
COMPETITION. Germany's wall machine manufacturing industry is dominated by
Wulff and two of its competitors, NSM, AG and Gauselmann, AG. Management
believes these three entities collectively account for more than 90% of the
entire market. Wulff competes with many companies in the distribution of coin-
operated amusement games, some of which are larger and have greater resources
than Wulff. Wulff's two
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major competitors own and operate a significant number of arcades, which may
give them a competitive advantage arising from a built-in market for their games
and the ability to test market new games in their own arcades. Increased foreign
competition in Germany may have an adverse impact on the Company's future wall
machine revenues. Management believes that the primary competitive factors in
the wall machine coin-operated amusement game market are the quality and depth
of the product line, price and customer service which includes the ability to
fill orders quickly and efficiently.
Management believes that the market for token machines has expanded rapidly,
from sales of approximately 3,900 units in 1993 to approximately 16,700 units in
1995. Management believes that token machines have in recent years competed
directly with wall machines due to the lower prices and the popularity of the
token machines. Furthermore, management believes that the token machine market
may have reached its potential and that sales may decline because token machines
are not subject to the four-year operation limit set by German regulations. See
"Gaming Regulation and Licensing--Germany."
GAMING MACHINE MANAGEMENT OPERATIONS
NEVADA OPERATIONS
Alliance's Nevada gaming machine management operations involve the
selection, ownership, installation, operation and maintenance of video poker
devices, reel-type slot machines and other gaming machines in local
establishments such as taverns, restaurants, supermarkets, drug stores and
convenience stores operated by third parties ("local establishments").
Alliance's gaming machine management operations target local residents who
generally frequent establishments close to their homes.
The following table sets forth certain historical data concerning the
Alliance's Nevada gaming machine management operations:
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------- AT DECEMBER 31,
1991 1992 1993 1994 1995 1995
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Number of electronic gaming machines
owned...................................... 5,240 5,505 5,121 5,148 5,208 5,288
Number of locations......................... 527 552 508 496 516 521
</TABLE>
Alliance enters into gaming machine management agreements with local
establishments through either revenue-sharing arrangements or space lease
arrangements. In revenue-sharing arrangements, most common with taverns,
restaurants and convenience stores, Alliance does not pay rent, but rather
receives a percentage of the revenues from the electronic gaming machines. In
such arrangements, both the owner of the local establishment and Alliance must
have a gaming license. In space lease arrangements, most common with
supermarkets and drug stores, Alliance pays a fixed rental to the owner of the
local establishment and Alliance receives all of the revenues derived from the
gaming machines. In such arrangements, only Alliance (and not the establishment
owner) is required to hold a gaming license. Most of the local establishments
serviced by Alliance are restricted by law to operating no more than 15 gaming
machines.
Revenue-sharing arrangements accounted for approximately 80%, 86%, 86% and
86% of the Nevada gaming machine management revenues and 77%, 80%, 78% and 78%
of its operating Nevada gaming machines in 1993, 1994 and fiscal 1995 and the
six-month period ended December 31, 1995, respectively. At December 31, 1995,
the weighted average remaining term of Alliance's revenue-sharing arrangements
was approximately 3.9 years. Space lease arrangements accounted for
approximately 20%, 14%, 14% and 14% of the Nevada gaming machine management
revenues and 23%, 20%, 22% and 22% of its operating Nevada gaming machines in
1993, 1994 and fiscal 1995 and the six-month period ended December 31, 1995. At
December 31, 1995, the weighted average remaining term of Alliance's space
leases was 2.9 years.
Alliance has historically been able to renew or replace revenues from
expiring agreements with revenues generated by renewal or replacement contracts.
However, during the past few years, greater competitive pressures in the gaming
machine management business have increased the portion of gaming machine
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
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emphasize return on investment rather than increasing market share and has
undertaken a systematic review process to adjust its contract mix to emphasize
higher margin contracts and, where permissible, canceling or not renewing
unprofitable contracts.
SALES AND MARKETING. As the largest Nevada gaming machine management
operator, Alliance believes that it is able to differentiate itself from its
competitors through a full-service operation providing its customers marketing
assistance and promotional allowances and using its advanced design capabilities
to provide electronic gaming machines with features customized to customers'
needs, such as Gambler's Bonus.
Alliance has developed and is currently testing a new system called
"Gambler's Bonus". Gambler's Bonus is designed as a cardless slot players' club
and player tracking system, which allows multiple route locations to be linked
together into a distributed gaming environment. Through this technology,
Alliance is able to provide its players and customers with many of the same
gaming choices currently available only in a larger scale casino environment
such as multi-location progressive jackpots, bigger jackpot payouts and
traditional players' club enhancements. Additionally, Alliance will offer a
series of new and unique games available only to members of the Gambler's Bonus
players' club. Since launching Gamblers' Bonus, the gaming machines linked to
Gambler's Bonus have experienced an increase in net win per day per machine. As
of March 1, 1996, Alliance had 286 machines linked to the Gambler's Bonus
system, and management expects to have Gambler's Bonus in approximately 50
locations, or a total of 430 machines, by the end of March 1996 and 88
locations, or a total of 980 machines, by June 1996. Alliance believes Gambler's
Bonus will improve both the revenues and operating efficiencies of its Nevada
gaming machine management operations and has the potential to create additional
opportunities in the gaming machine management segment of the gaming industry.
Additionally, in keeping with the trends in the Nevada market, Alliance is
updating its gaming device base with bill-acceptor equipped electronic gaming
machines which are also expected to improve revenues and operating efficiencies.
CUSTOMERS. Alliance believes it has a diversified customer base with no one
customer accounting for more than 10% of Alliance's revenues generated from
Nevada gaming machine management operations during fiscal 1995, although
approximately 14.1% of such revenues was generated through an affiliated group
of such customers. The affiliated group consists of eight partnerships each
having one individual partner who is common to all such partnerships. For the
year ended December 31, 1995, Alliance's ten largest customers accounted for
approximately 20.7% of Alliance's revenues.
ASSEMBLY OPERATIONS. Alliance currently manufactures and distributes
electronic gaming machines in Nevada for use in its gaming machine management
operations. Alliance manufactured approximately 80% of the electronic gaming
machines currently used in its Nevada gaming machine management operations. The
manufacturing process generally involves the assembly of standard components
which are readily available from various sources. Alliance is not dependent upon
any one supplier for the material or components used in its manufacturing
operations.
COMPETITION. Alliance is subject to substantial direct competition for its
revenue-sharing and space lease gaming machine management locations from several
large gaming machine management operators and numerous small operators, located
principally in Las Vegas, Reno and the surrounding areas. Alliance and Jackpot
Enterprises, Inc. are the dominant gaming machine management operators in
Nevada. The principal method of competition for gaming machine management
operators includes the economic terms of the revenue-sharing or space lease
arrangement, the services provided and the reputation of the gaming machine
management operator. Price competition is intense and has reduced Alliance's
gross margin on such operations over the past several years as the percentage of
the gaming device revenues retained by local establishment owners has increased.
LOUISIANA OPERATIONS
In March 1992, Alliance obtained a contract to operate video poker gaming
devices in the greater New Orleans, Louisiana area through its controlled
subsidiary, VSI. Alliance entered into an operating agreement which runs through
May 2002 with Fair Grounds for Alliance to be the exclusive operator of video
poker devices at the only racetrack and ten associated OTB parlors in the
greater New Orleans area.
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Alliance selects, installs, manages and services video poker devices for each of
the ten facilities owned by Fair Grounds for which it receives a percentage of
the revenue generated by the devices. Alliance currently has installed 694 video
poker devices in Louisiana.
Under the Louisiana gaming laws and regulations, the majority stockholder of
any entity operating video poker devices in Louisiana must be a domiciled
resident of the State of Louisiana. As a result, Alliance owns 49% of the
capital stock of VSI and three prominent members of the Louisiana business and
legal community own the remaining 51%. Pursuant to the terms of the VSI Loan,
VSI may not pay cash dividends or make any distribution of its property. The VSI
Loan amortizes quarterly until due in full in September 1998 and may be prepaid
at any time without penalty. Alliance, however, owns all the voting stock of VSI
and the majority of its officers and directors are Alliance employees. Alliance
has a 71% interest in dividends of VSI in the event dividends are declared.
Alliance also formed two other Louisiana subsidiaries, Southern Video Services,
Inc. ("SVS") and Video Distributing Services, Inc. ("VDSI"). Both SVS and VDSI
are structured in a manner similar to VSI except that Alliance is entitled to
receive 60% of any SVS dividends. Under the terms of its contract with Fair
Grounds, Alliance must conduct any additional video poker operations in
Louisiana other than gaming at racetracks or OTB parlors through SVS. To date,
SVS and VDSI have not engaged in business in Louisiana. In addition, Alliance
and Fair Grounds may have certain mutual rights of first refusal to participate
in certain Louisiana riverboat gaming opportunities of the other party on terms
and conditions to be specified.
Alliance is prohibited by the Louisiana Act from engaging in both the
manufacture and operation of gaming machines in Louisiana and, therefore,
Alliance does not manufacture its own gaming machines for use in Louisiana.
Further, the Louisiana legislature recently passed a bill which could have the
effect of curtailing the Company's activities in Louisiana. See "Risk
Factors--Regulation by Gaming Authorities" and "Gaming Regulation and
Licensing-- Louisiana."
On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race
Course in New Orleans where Alliance operated 199 gaming machines prior to the
fire, 193 of which were destroyed in the fire. Alliance was fully insured for
all equipment, leasehold improvements, other assets and business income with the
exception of immaterial deductibles. From December 17, 1993 through December 31,
1995, Alliance recorded approximately $815,000 of income from business
interruption insurance proceeds. Alliance is discussing settlement of additional
business interruption claims with the insurance carrier.
SALES AND MARKETING. VSI has developed an extensive marketing program under
the name "The Players Room" which is designed to attract primarily local
residents to its facilities. Media placement has focused on newspaper and radio
advertising with promotions including a player's club, direct mailings and
offerings of a wide range of prizes.
Alliance intends to selectively expand its operations in the greater New
Orleans area by increasing the number of video poker devices in certain of its
existing locations as demand warrants, as well as investigating the addition of
new locations under its current contract with the Fair Grounds in areas where
competitive factors are favorable. Under the Louisiana Act, racetracks and OTB
parlors are permitted to install an unlimited number of video poker devices
while truckstops and taverns may install only limited numbers of such devices.
COMPETITION. Alliance is subject to extensive competition for contracts to
operate video poker devices and Alliance's racetrack and OTB parlors compete
with various truck stops and locations with liquor licenses throughout the New
Orleans area. Each truck stop is permitted to operate up to 50 video poker
devices and each tavern is permitted to operate up to three video poker devices.
In addition, Louisiana has authorized riverboat gaming statewide and several
riverboats are operating in Orleans Parish. Riverboats are permitted 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.
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CASINO OPERATIONS
RAINBOW CASINO. On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. The entire project consists of the
Rainbow Casino, which is a 24,000-square foot casino owned and operated by
Alliance containing approximately 589 gaming machines and 28 table games, and
also includes an 89-room Days Inn hotel and a 10-acre indoor and outdoor
entertainment complex called Funtricity Entertainment Park, which was developed
by a subsidiary of Six Flags Corporation. Both the hotel and entertainment park,
which were substantially completed in late May 1995, are operated by third
parties. The entire property, known as Vicksburg Landing, is the only
destination of its kind in Mississippi containing a casino/family entertainment
complex.
Through a wholly-owned subsidiary, Alliance originally purchased a 45%
limited partnership interest in RCVP, a Mississippi limited partnership which
owns the casino, all assets (including the gaming equipment) associated with the
casino and certain adjacent parcels of land. The 55% general partnership
interest in RCVP was held by RCC, an unaffiliated Mississippi corporation.
Pursuant to a management agreement dated October 29, 1993, which terminates on
December 31, 2010, Alliance through a wholly-owned subsidiary also serves as
manager of the casino. In connection with the completion of the casino and the
acquisition of its original 45% limited partnership interest, Alliance funded a
$3,250,000 advance to RCC on the same terms as RCC's financing from HFS (other
than the fact that such advance is subordinate to payments due to HFS, and the
HFS financing is secured). The HFS financing provided to RCC on August 3, 1993
consisted of a $7.5 million loan secured by a first priority lien on all of the
assets of the project. The terms of the HFS financing provide that, in
connection with the loan and certain marketing services provided by HFS to RCC,
RCC will pay to HFS a perpetual royalty based upon the casino's annual gross
gaming revenues of 12% on the first $40 million, 11% on the next $10 million,
and 10% thereafter.
On March 29, 1995, Alliance consummated certain transactions whereby
Alliance acquired from RCC the controlling general partnership interest in RCVP
and increased its partnership interest. In exchange for the commitments by NGM,
a subsidiary of National Gaming Corporation, and Alliance to provide additional
financing (up to a maximum of $2,000,000 each) to be used, among other things
for the completion of certain incomplete elements of the project which survived
the opening of the casino (for which RCC was to have been responsible, but
failed to satisfy) and for a $500,000 payment paid to HFS as a waiver fee, a
commitment by Alliance to fund any additional capital necessary for the
completion, upgrading or working capital of the project, the following occurred:
(i) a subsidiary of Alliance became the general partner and RCC became the
limited partner and (ii) the respective partnership interests were adjusted. As
of December 31, 1995, amounts outstanding under the HFS facility and the related
financings aggregated $9.7 million. As adjusted, RCC is entitled to receive 10%
of the net available cash flows after debt service and other items, as defined
(which amount increases to 20% of such amount if revenues exceed $35,000,000
(i.e. only on such incremental amount)), for a period of 15 years, such period
being subject to one year extensions for each year in which a minimum payment of
$50,000 is not made. In addition, if during any continuous 12-month period until
December 31, 1999 the casino achieved earnings from the project of at least
$10.5 million before deducting depreciation, amortization, royalty and income
taxes, then Alliance would be obligated to pay to certain principals of the
original partnership an amount aggregating $1 million in cash or shares of
Common Stock 180 days after the occurrence. The casino has achieved the required
earnings as adjusted, and Alliance is obligated to make the required payment or
issue the Common Stock by September 30, 1996. Also, Alliance's 5.2% royalty on
gross revenues was terminated on the date it became the general partner with
those of Alliance.
PLANTATION STATION. In April 1990, Alliance purchased, for an aggregate
purchase price of $9,700,000, substantially all of the assets of the Plantation
Station casino ("Plantation Station") located near the border of Reno and Sparks
in northern Nevada. Plantation Station is a 20,000 square-foot casino which
currently 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.
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SALES AND MARKETING. Alliance's casinos target the cost-conscious market.
Alliance promotes its casinos primarily by providing quality food at reasonable
prices and through special promotional events. Alliance believes its experience
with operating small casinos targeted to local markets will enable it to
effectively operate casinos in emerging gaming jurisdictions that have similar
characteristics.
COMPETITION. Gaming of all types is available throughout Nevada in numerous
locations, including many locations similar to those at which Alliance operates
gaming machines. All of these gaming opportunities may compete directly or
indirectly with Alliance's casino operations. Many of Alliance's competitors
possess substantially greater financial and other resources than Alliance. Many
of such competitors include large casino-hotels which offer more variety and
amenities and may be perceived to have more favorable locations than Alliance.
The operation of casinos is a highly competitive business. The principal
competitive factors in the industry include the quality and location of the
facility, the nature and quality of the amenities and customer services offered
and the implementation and success of marketing programs. Plantation Station's
primary casino operations focus on the local market rather than the tourist
market. The Rainbow Casino generally appeals to both locals and visitors.
Accordingly, Alliance believes that the principal competition for Plantation
Station's operations comes from larger "locals" casinos. The Rainbow Casino
appeals to both locals and visitors to historic Vicksburg, Mississippi. The
Rainbow Casino is the fourth gaming facility to open in Vicksburg, Mississippi
and as such, faces substantial direct competition for gaming customers in the
region.
BUSINESS DEVELOPMENT ACTIVITY
Through a wholly-owned subsidiary, Native American Investment, Inc.,
Alliance has a contract to develop Class II and III gaming opportunities with an
Indian tribe in California. Class II gaming includes bingo, pulltabs and
non-banking card games that are already permitted in a state, and is subject to
the concurrent jurisdiction of the National Indian Gaming Commission ("NIGC")
and the applicable Indian tribe. Class III gaming is a residual category
composed of all forms of gaming that are not Class I gaming (which consists of
non-commercial social games played solely for prizes of minimal value or
traditional forms of Indian gaming) or Class II gaming, including casino-style
gaming. The contract is subject to negotiations resulting in satisfactory
compacts with the state and approval of the contract by the National Indian
Gaming Commission. The Governor of California has to date refused to negotiate a
compact covering Class III electronic gaming machines and house-banked games in
California and is currently engaged in related litigation over the scope of
gaming issues with certain Indian tribes. There can be no assurance as to
ultimate outcome of these litigation activities or the successful completion or
operation of any part of this project.
On March 27, 1996, the United States Supreme Court ruled that a portion of
the Indian Gaming Regulatory Act was unconstitutional. As a result, Federal
courts cannot oversee negotiations between Indian tribes and state officials
about the scope of on-reservation gaming and Indian tribes cannot file suits
against states or state officials. Management of Alliance believes that this
ruling will have a materially adverse effect upon its Native American casino
development activities in California. Accordingly, management is considering
whether the current net book value of its investment in Native American
Investment, Inc., of $1,800,000 may not be fully recoverable under current
circumstances, necessitating a write-off of part or all of that balance during
the current quarter.
Alliance and Casino Magic Corporation, through wholly-owned subsidiaries,
are members in KGP and KFP, both Kansas limited liability companies. Under the
Option Agreement granted to KGP by Camptown and TRAK Southeast, KGP has been
granted the exclusive right, which right expires on September 13, 2013, to
operate gaming machines and/or casino-type gaming at Camptown's racing facility
in Frontenac, Kansas if and when such gaming is permitted in Kansas. In December
1994, Camptown received a $3,205,000 loan from Boatmens' Bank which was
guaranteed by KFP. Alliance and Casino Magic Corporation each invested
$1,580,000 in KFP which was used to purchase a certificate of deposit to
collateralize its guarantee. Construction of Camptown's racing facility was
completed and the facility opened for business in May 1995. The racing facility
was temporarily closed on November 5, 1995 due to poor financial results.
Camptown filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code
in January 1996 and has stated an intention to reopen for business following
bankruptcy reorganization. Boatmen's Bank demanded payment
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of the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan
and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed
Boatmen's Bank's position in the loan to Camptown which is secured by a second
mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK
Southeast and Camptown continue to be bound by the Option Agreement. KFP intends
to vigorously pursue all of its rights and remedies which may include, among
other things, seeking authority from the bankruptcy court to commence a
foreclosure action. In the case of a foreclosure action, KFP would be required
to assume or pay the existing first mortgage of approximately $2,000,000 if KFP
becomes the purchaser at any such sale. The Kansas legislature has considered
gaming bills during the 1996 session although none have passed. There can be no
assurance that gaming of any type will ever be legalized in Kansas and
management intends to continue to evaluate the recoverability of its investment.
As described in "Unaudited Pro Forma Condensed Combined Financial
Information," the Company intends to reduce Alliance development expenses, which
related to mergers, acquisitions and joint ventures, following the Transaction.
The reduction reflects the elimination of costs that were being incurred prior
to Alliance's accomplishment of its strategic plan to acquire a major electronic
gaming machine manufacturing company. To accomplish this reduction the Company
intends to reduce payroll costs and fees paid to consultants and legal costs
related to non-BGII transactions Alliance had been pursuing.
PATENTS, COPYRIGHTS AND TRADE SECRETS
Alliance has copyrighted both the source code and the video presentation of
its games and registered many of these copyrights with the U.S. Copyright Office
under the Copyright Act of 1976. Game version upgrades and new games are
currently in the process of United States patent and copyright registration.
Such copyrights expire at various dates from September 2056 to October 2065. In
addition, some of the games have Federal and/or state trademarks registered with
the U.S. Patent and Trademark Office. Some of the games (either currently used
or reserved for future development) also are covered by patents filed with the
U.S. Patent and Trademark Office. Such patents expire at various dates from May
2008 to March 2012.
BGII is obligated under several patent agreements to pay royalties ranging
from approximately $50 to $200 per game depending on the components in the
gaming machines. Additionally, based on an amendment to the trademark licensing
agreement between BGII and BEC dated March 31, 1995, BGII is obligated to pay a
royalty on new machines sold of $25 to $30 per machine beginning on March 31,
1995 with a minimum annual royalty payment of $500,000 for the initial five-year
term of the amended agreement, which is subject to annual renewals thereafter.
Royalty expense for the years ended December 31, 1993, 1994 and 1995 was $1.1
million, $2.9 million and $3.0 million, respectively.
Pursuant to a Trademark and License Agreement, as amended, between BEC and
BGII (the "License Agreement"), BGII licenses the name "Bally" from BEC for use
in the businesses of BGII. In 1992, BGII paid $3.5 million to BEC in the form of
an offset against a tax receivable which was owed by BEC to BGII for the
licensing rights. See "Notes to BGII's Consolidated Financial
Statements--Summary of Significant Accounting Policies--Intangible Assets." On
March 27, 1995, BEC filed an action in the United States District Court,
District of New Jersey seeking to revoke BGII's right to the use of the Bally
trade name under the terms of the License Agreement. On March 31, 1995, BGII and
BEC entered into a Trademark License and Settlement Agreement pursuant to which
the above-described action was settled. BGII agreed to pay BEC a per machine
royalty of $25 on the first 20,000 new machines sold annually on or after March
31, 1995 and $30 per machine for new machine unit sales in excess of 20,000
gaming machines, with a minimum annual royalty of $500,000 per year for the
initial five year term of the amended agreement and subject to annual renewal
thereafter. In addition, BGII agreed to rebate to BEC an amount for every new
gaming machine sold to BEC or its affiliates for two years. As part of the
settlement, BGII retained its right to the use of the Bally trade name for an
initial period of five years with annual extensions thereafter at the option of
BGII. The settlement has not had a significant impact on BGII's financial
position, results of operations 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
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a result of the foregoing, it was immediately terminating the License Agreement.
BGII does not believe that it has violated the terms of the License Agreement
and BGII will defend its position against BEC's claims. See the description of
related litigation under "Risk Factors--Bally Trade Name" and "--Litigation
Relating to the Merger."
In July 1992, BGII reached an agreement for an exclusive license until
December 31, 2005, subject to extension, of a patent relating to the use of
credit cards in gaming machines and acquired 1% of the stock of Scotch Twist,
Inc., the private company which granted this license in exchange for the
issuance of 100,001 shares of BGII's common stock. The licensing agreement
requires BGII to commit $1.2 million in research and development costs related
to the patent, plus any costs related to obtaining required regulatory approvals
and licenses. As of December 31, 1995, approximately $1.0 million had been spent
relating to this commitment.
In connection with a settlement agreement entered between BEC, Gaming, BGI
Enterprises, BGII and IGT on December 16, 1992, BGII sold its interest in the
Casino Interlink Multiple Location Progressive System (the "Progressive System")
to IGT. BGII reserved certain rights in the sale, including the rights to
continue to sell the Progressive System (i) within Europe, (ii) for use in
single locations, and (iii) worldwide in lottery applications. BGII agreed to
discontinue general sales of the Progressive System or any similar system
outside of Europe for a period of five years. This agreement is binding on all
successors and assigns of BGII, including the Company.
The Company has registered the trademark "CEI" and its design and the logos
of United Gaming, Inc. and United Coin Machine Co. with the U.S. Patent and
Trademark Office.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1995, Alliance employed approximately 683 persons in the
State of Nevada and approximately 8 persons in various states related to its
business development activities, VSI employed approximately 73 persons in the
State of Louisiana, RCVP employed 374 persons in the State of Mississippi, and
BGII and its subsidiaries employed approximately 500 persons in various states
and 440 persons in Germany. None of such employees is covered by a collective
bargaining agreement. Wulff's employees, however, are covered by German
regulations which apply industry-wide and are developed, to some extent, through
negotiations between representatives of the metal working industry employers and
the trade union representing the employees. These regulations are in the nature
of collective bargaining agreements and cover the general terms and conditions
of such items as wages, vacations and work hours. The regulations codify what
are considered the common standards of employment in the German metal working
industry. The Company believes its relationships with its employees are
satisfactory.
LITIGATION RELATING TO THE MERGER
On or about June 19, 1995, three purported class actions were filed in the
Chancery Court of Delaware by BGII stockholders against BGII and its directors
(the "Fiorella, Cignetti and Neuman Actions") in connection with the
then-proposed merger of BGII with WMS (the "WMS Merger"). Also on or about June
19, 1995, a purported class action was filed in the Delaware Court of Chancery
by a BGII stockholder against BGII and its directors and Alliance (the "Strougo
Action") in connection with the tender offer and consent solicitation made by
Alliance (subsequently superseded by the execution of the Merger Agreement). On
or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman and
Strougo Actions (collectively, the "Stockholder Plaintiffs") filed with the
Court a motion to consolidate the four actions. On or about July 27, 1995,
certain of the Stockholder Plaintiffs filed an amended complaint that adopted
certain allegations concerning self-dealing by BGII directors in connection with
the merger agreement entered into with WMS (the "WMS Agreement"); added a claim
relating to BGII's alleged failure to hold an annual meeting as required; and
added WMS as defendant. The amended complaint also alleged that BGII intended,
in violation of Delaware law, to sell Wulff without first seeking stockholder
approval of the sale. 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
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certain circumstances; compelling an auction of BGII and the provision of due
diligence to Alliance; scheduling an immediate meeting of BGII stockholders; and
awarding compensatory damages. Management believes these claims to be without
merit and intends to vigorously defend these actions.
On October 23, 1995, WMS instituted a suit in New York State Court against
BGII for BGII's failure to pay $4.8 million upon termination of the WMS
Agreement. Management intends to vigorously defend this action. On November 22,
1995, BGII answered the complaint and brought counterclaims against WMS alleging
that WMS repudiated and breached the WMS Agreement by, among other things,
failing to act in good faith toward the consummation of the WMS Merger, advising
BGII that it would not perform as agreed but would impose new conditions on the
WMS Merger, acting in excess of its authority and undermining the ability of
BGII to perform the WMS Agreement. On February 8, 1996 WMS moved for summary
judgment. On April 2, 1996, BGII opposed WMS's motion and cross-moved for
summary judgment. Pursuant to the Merger Agreement, Alliance has agreed to
indemnify BGII against such a claim under certain circumstances.
On September 14, 1995, a stockholders' class and derivative action was
commenced by Richard Iannone, an Alliance stockholder, against Alliance, the
members of its current Board of Directors and certain of its former directors in
Federal District Court in Nevada asserting, among other matters, that Alliance
has wasted corporate assets in its efforts to acquire BGII by, among other
things, agreeing to onerous and burdensome financing arrangements that threaten
Alliance's ability to continue as a going concern and that Alliance had made
false and misleading statements and omissions in connection with that effort by
failing to disclose the need to refinance an additional $53 million of existing
BGII indebtedness, by failing to disclose how Alliance would recapitalize the
indebtedness of a combined Alliance/BGII and by failing to disclose the leading
role played by Richard Rainwater in Alliance's efforts to acquire control of
BGII which, given assurances made by Alliance to gaming regulators in Nevada
that the unlicensed Mr. Rainwater would not play an active role in the
management of Alliance, could expose Alliance to suspension or revocation of its
Nevada gaming license. In addition, the stockholder action against Alliance
alleges that (i) Alliance substantially inflated its results of operations by
selling gaming machines at inflated prices in exchange for promissory notes
(without any down payment) which Alliance knew could not be paid in full but
which Alliance nevertheless recorded at full value, (ii) Alliance doctored
reports sent to its route customers and (iii) the directors of Alliance had
caused Alliance to engage in self-dealing transactions with certain directors
which resulted in the exchange of Alliance assets for assets and services of
vastly lesser value. On September 21, 1995, a United States magistrate denied
the plaintiffs' request for expedited discovery, stating that Mr. Iannone was
not an adequate representative and was not likely to succeed on the merits. On
October 4, 1995, the defendants filed a motion to dismiss the action. On
December 18, 1995, the plaintiff filed an amended shareholder derivative
complaint. The plaintiff is no longer asserting any class claims. On March 5,
1996 the defendants filed a motion to dismiss the amended complaint.
In June 1995, BEC asserted that a certain agreement between BEC and BGII
(the "Noncompete Agreement") prohibits the use by BGII of the trade name "Bally"
if it is merged with a company that is in the casino business within or without
the United States and operates such business prior to January 8, 1999. BGII
believes such claim is entirely without merit since the restriction referred to
expired on January 8, 1996 and in any event does not relate to the use of the
"Bally" trade name, which is covered by the License Agreement. The restriction
in the Noncompete Agreement will not have any impact on the Company since the
Effective Time of the Merger contemplates a closing of the Merger after the
restriction in the Noncompete Agreement lapses. BEC has not reasserted this
position since it was informed by BGII in July 1995 that the restriction lapsed
on January 8, 1996. Consequently, management believes BEC has determined not to
contest BGII's position.
BEC has also asserted that a merger between BGII and the Merger Subsidiary
would violate the terms of the License Agreement. BGII has denied these claims
and management believes that the surviving company in the Merger will be
permitted to use the "Bally" trade name in accordance with the terms of such
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
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commenced an action against BEC in Federal District Court in Delaware seeking a
declaratory judgment, among other things, that the surviving company in the
Merger will be permitted to use the "Bally" trade name in accordance with the
terms of the License Agreement, and seeking injunctive relief (the "Alliance
Action"). On November 28, 1995, BEC commenced an action against BGII, Gaming,
Alliance and the Merger Subsidiary in Federal District Court in New Jersey to
enjoin the defendants from using the "Bally" trade name (the "BEC Action"). On
November 28, 1995, BEC filed a motion to dismiss, transfer to New Jersey, or
stay the Alliance Action pending resolution of the BEC Action. The BEC Action
alleges that BGII's continued use of the trade name after the Merger will (1)
constitute a prohibited assignment of BGII's rights to use the trade name and
(2) exceed the scope of the license granted to BGII because BGII will be under
the control of Alliance. On December 15, 1995, BEC filed a motion for a
preliminary injunction in the BEC Action. At a hearing on January 17, 1996, the
court declined to issue a preliminary injunction, but held BEC's motion in
abeyance pending the defendants' motion to dismiss and for summary judgment,
which the defendants had filed on December 26, 1995. Thereafter, the parties
advised the court that they are negotiating a settlement of the BEC Action. On
March 29, 1996, at the court's request, the parties entered into a consent order
providing for the administrative dismissal of the BEC Action, subject to its
reopening should the settlement not be consummated. If the parties do not agree
on a settlement, BGII, Gaming, Alliance and the Merger Subsidiary intend to
vigorously defend their position in these actions. However, there can be no
assurance that BEC will not be successful in its action to prohibit the
surviving corporation in the Merger from using the "Bally" trade name. The loss
of the "Bally" trade name may have a material adverse effect on the gaming
machine operations of the Company.
On February 16, 1996, BGII received notice from BEC alleging that BGII had
violated the License Agreement by, among other things, granting to Marine
Midland a security interest in general intangibles. In such notice, BEC also
stated that as a result of the foregoing, it was immediately terminating the
License Agreement. Management does not believe that BGII has violated the terms
of the License Agreement and the Company will defend its position against BEC's
claims.
OTHER LITIGATION
In 1994, after an intensive Federal investigation of Gaming's former
Louisiana distributor, eighteen individuals were indicted on charges of
racketeering and fraud against Gaming and the Louisiana regulatory system. Among
those indicted were the former distributor's stockholders, directors, employees
and others alleged to be associated with organized crime. Fifteen entered pleas
of guilty before trial and the remaining three were convicted in October 1995.
In addition, Alan Maiss, a former director and president of BGII, pled guilty to
misprision of a felony in connection with such investigation. BGII, its
subsidiaries and its current employees were not subject to such investigation.
Prior to the conclusion of the Federal criminal case, BGII's activities with
regard to its former VLT distributor in Louisiana were the subject of inquiries
by gaming regulators and a report by the New Jersey Division of Gaming
Enforcement dated August 24, 1995. The New Jersey Commission has indicated that
it will hold a hearing on the matter, but no date has been set at this time. The
New Jersey report made no specific recommendations for action by the New Jersey
Commission. The Gaming Authorities in Ontario, Canada, who have investigated the
matter, issued a gaming registration to Gaming on February 8, 1996.
On September 25, 1995, BGII was named as a defendant in a class action
lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf
of himself and all others similarly situated (the "plaintiffs"). The plaintiffs
filed suit against the Company and approximately 45 other defendants (each a
"defendant," and collectively the "defendants"). Each defendant is involved in
the gaming business as either a gaming machine manufacturer, distributor, or
casino operator. The class action lawsuit arises out of alleged fraudulent
marketing and operation of casino video poker machines and electronic slot
machines. The plaintiffs allege that the defendants have engaged in a course of
fraudulent and misleading conduct intended to induce people into playing their
gaming machines based on a false belief concerning how those machines actually
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
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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.
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GAMING REGULATION AND LICENSING
The manufacture and distribution of gaming machines and the operation of
gaming facilities are subject to extensive Federal, state, local and foreign
regulation. Although the laws and regulations of the various jurisdictions in
which the Company operates and into which the Company may expand its gaming
operations vary in their technical requirements and are subject to amendment
from time to time, virtually all of these jurisdictions require licenses,
permits, documentation of qualification, including evidence of financial
stability, and other forms of approval for companies engaged in the manufacture
and distribution of gaming machines and the operation of gaming facilities, as
well as for the officers, directors, major stockholders and key personnel of
such companies.
Any person which acquires a controlling interest in the Company would have
to meet the requirements of all governmental bodies which regulate the Company's
gaming business. A change in the make-up of the Company's Board of Directors and
management would require the various Gaming Authorities to examine the
qualifications of the new board and management. The past conduct of management,
which may be re-examined in conjunction with hearings in Nevada, New Jersey and
Louisiana, would normally not be a controlling factor in passing upon the
suitability of a successor group when that prior management group would no
longer be in control of the Company. Absent actual approval of the successor
interests controlling the Company after a merger or other acquisition, there can
be no assurances that governmental authorities would give required approvals to
any particular persons or groups.
NEVADA
The ownership and operation of casino gaming facilities in Nevada, and the
manufacture, distribution and operation of gaming machines and cashless wagering
systems for use or play in Nevada, or for distribution outside of Nevada, are
subject to (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (the "Nevada Act") and (ii) various local ordinances and regulations.
The Company's gaming, manufacturing, distributing and slot machine route
operations (herein referred to as "gaming machine management operations") are
subject to the licensing and regulatory control of the Nevada State Gaming
Control Board (the "Nevada Board"), the Nevada Gaming Commission (the "Nevada
Commission"), the County Liquor and Gaming Licensing Board (the "Clark County
Board") and various other county and city regulatory agencies, all of which are
collectively referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things, (i) the prevention of unsavory or unsuitable persons
from having any direct or indirect involvement with gaming at any time in any
capacity; (ii) the strict regulation of all persons, locations, practices,
associations and activities related to the operation of licensed gaming
establishments and the manufacture and distribution of gaming machines, cashless
wagering systems and associated equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective control over the financial practices of licensees,
including establishment of minimum procedures for internal fiscal affairs and
the safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities; (v)
the prevention of cheating and fraudulent practices; and (vi) providing a source
of state and local revenues through taxation and licensing fees. Change in such
laws, regulations and procedures could have an adverse effect on the gaming
related operations conducted by the Company.
Alliance and BGII are each registered with the Nevada Commission as
publicly-traded corporations ("Registered Corporations"). The Company's direct
and indirect subsidiaries conduct gaming operations at various locations,
conduct gaming machine management operations and manufacture and distribute
electronic gaming machines (collectively, the "Alliance Nevada Subsidiaries").
Gaming, the operating subsidiary for BGII's domestic gaming operations, which
manufactures and distributes electronic gaming machines, is also required to be
licensed by the Nevada Gaming Authorities. The licenses held by the Alliance
Nevada Subsidiaries and Gaming require the periodic payments of fees, or fees
and taxes, and are not transferable. Alliance and BGII have been found suitable
to own the stock of the Nevada Subsidiaries and Gaming, respectively, each of
which is a corporate licensee (individually, a "Corporate Licensee" and
collectively,
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"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 April 3,
1996 and before the Nevada Commission on April 25, 1996 to obtain the necessary
approvals.
All gaming machines and cashless wagering systems that are manufactured,
sold or distributed for use or play in Nevada, or for distribution outside of
Nevada, must be manufactured by licensed manufacturers and distributed or sold
by licensed distributors. All gaming machines manufactured for use or play in
Nevada must be approved by the Nevada Commission before distribution or exposure
for play. The approval process for gaming machines and cashless wagering systems
includes rigorous testing by the Nevada Board, a field trial and a determination
as to whether the gaming machines or cashless wagering system meets strict
technical standards that are set forth in the regulations of the Nevada
Commission. Associated equipment must be administratively approved by the
Chairman of the Nevada Board before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or the
Corporate Licensees in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and key employees of the Company who are actively and directly
involved in the licensed activities of the Corporate Licensees may be required
to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities who, in addition to
their authority to deny an application for a finding of suitability or
licensure, have jurisdiction to disapprove a change in a corporate position.
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,
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earnings generated during the supervisor's appointment (except for reasonable
rental of the casino) could be forfeited to the State of Nevada. Limitation,
conditioning or suspension of the gaming licenses of the Corporate Licensees or
the appointment of a supervisor could (and revocation of any gaming license
would) materially adversely affect the gaming related operations of the Company.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his or her suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a Registered
Corporation's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10% of a
Registered Corporation's voting securities apply to the Nevada Commission for a
finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor" as defined in the Nevada Act, which acquires more than
10%, but not more than 15%, of a Registered Corporation's voting securities may
apply to the Nevada Commission for a waiver of such finding of suitability if
such institutional investor holds the securities for investment purposes only.
An institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Registered Corporation, any change in
the Registered Corporation's corporate charter, bylaws, management, policies or
operations of the Registered Corporation, or any of its gaming affiliates, or
any other action which the Nevada Commission finds to be inconsistent with
holding the Registered Corporation's voting securities for investment purposes
only. Activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include: (i) voting on all matters voted
on by stockholders; (ii) making financial and other inquiries of management of
the type normally made by securities analysts for informational purposes and not
to cause a change in its management, policies or operations; and (iii) such
other activities as the Nevada Commission may determine to be consistent with
such investment intent. If the beneficial holder of voting securities who must
be found suitable is a corporation, partnership or trust, it must submit
detailed business and financial information including a list of beneficial
owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock beyond such period
of time as may be prescribed by the Nevada Commission may be guilty of a
criminal offense. The Company is subject to disciplinary action if, after it
receives notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or the Corporate Licensees, the Company (i)
pays that person any dividend or interest upon voting securities of the Company,
(ii) allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays remuneration in any
form to that person for services rendered or otherwise, or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities, including, if necessary, the immediate purchase of said voting
securities for cash at fair market value. Additionally, the Clark County Board
has taken the position that it has the authority to approve all persons owning
or controlling the stock of any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any debt
securities of a Registered Corporation, such as the Notes, 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
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(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
Common Stock, Preferred Stock and Notes, without the prior approval of the
Nevada Commission if the securities or proceeds therefrom are intended to be
used to construct, acquire or finance gaming facilities in Nevada, or to retire
or extend obligations incurred for such purposes. The Company has filed an
application for approval of the Offerings and related transactions, including
stock pledges, negative pledges, security interests and guarantees in connection
with the Note Offering. However, there can be no assurance that the Offerings
will be approved or that if approved, they will be approved on a timely basis.
Any such approval, if granted, does not constitute a finding, recommendation or
approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities offered.
Any representation to the contrary is unlawful. The Nevada Commission has also
imposed a requirement on Alliance and BGII that it must receive the prior
administrative approval of the Nevada Board Chairman for any offer for the sale
of an equity security in a private transaction such as the Private Placement.
The Company has filed a request for administrative approval of the Private
Placement. However, there can be no assurance that the Nevada Board Chairman
will approve the Private Placement or that he will approve it on a timely basis.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
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
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operations are conducted. Depending upon the particular fee or tax involved,
these fees and taxes are payable either monthly, quarterly or annually and are
based upon either (i) a percentage of the gross revenues received, (ii) the
number of gaming machines operated, or (iii) the number of games operated. A
casino entertainment tax is also paid by casino operations where entertainment
is furnished in connection with the selling of food or refreshments. The
Corporate Licensees that hold a license as an operator of a gaming device route
or a manufacturer's or distributor's license also pay certain fees to the State
of Nevada.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of its participation in such foreign gaming. The revolving fund
is subject to increase or decrease in the discretion of the Nevada Commission.
Thereafter, Licensees are required to comply with certain reporting requirements
imposed by the Nevada Act. Licensees are also subject to disciplinary action by
the Nevada Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to conduct the
foreign gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees
or employ a person in the foreign operations who has been denied a license or
finding of suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at establishments operated by a Corporate
Licensee are subject to licensing, control and regulation by applicable local
regulatory agencies. All licenses are revocable and are not transferable. The
agencies involved have full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action could (and revocation would) have
a material adverse affect upon the operations of the Corporate Licensees.
LOUISIANA
The manufacture, distribution, servicing and operation of video draw poker
devices ("Devices") in Louisiana is subject to the Louisiana Video Draw Poker
Devices Control Law and the Rules and Regulations promulgated thereunder (the
"Louisiana Act"). Licensing and regulatory control is provided by the Video
Gaming Division of the Gaming Enforcement Section of the Office of State Police
within the Department of Public Safety and Corrections (the "Division"). The
laws and regulations of the Division are based upon a primary consideration of
maintaining the health, welfare and safety of the general public and upon a
policy which is concerned with protecting the video gaming industry from
elements of organized crime, illegal gambling activities and other harmful
elements as well as protecting the public from illegal and unscrupulous gaming
to ensure the fair play of Devices. The Louisiana legislature recently passed a
bill which would allow each parish to decide whether to disallow video poker
devices, riverboat casinos and, in Orleans Parish, land-based casinos. If any
parish in which the Company operates elects to disallow video poker devices, the
Company would have to cease its video poker operations there by June 30, 1999.
The Company cannot predict which parishes will so elect; however, if all of the
parishes in which the Company operates so elect, the cessation of the Company's
video poker operations would have a material adverse effect on the operations of
the Company. See "Risk Factors -- Strict Regulation by Gaming Authorities."
Each of the indirect operating subsidiaries for the Company's gaming
operations in Louisiana, VSI and SVS, has been granted a license as a Device
owner by the Division. Another indirect subsidiary of the Company, VDSI, has
been granted a license as a distributor by the Division. Gaming has been granted
a license as a manufacturer by the Division. These gaming subsidiaries are
"Louisiana Licensees" under the terms of the Louisiana Act. The licenses held by
such Louisiana Licensees expire at midnight on June 30 of each year and must be
renewed annually through payment of fees. All license fees must be paid on or
before May 15 in each year licenses are renewable.
The Division may deny, impose a condition on or suspend or revoke a license,
renewal or application for a license for violations of any rules and regulations
of the Division or any violations of the Louisiana Act. In addition, fines for
violations of gaming laws or regulations may be levied against the Louisiana
Licensees and the persons involved for each violation of the gaming laws. The
issuance, condition, denial, suspension or
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revocation is a pure and absolute privilege and is at the discretion of the
Division in accordance with the provisions of the Louisiana Act. A license is
not property or a protected interest under the constitution of either the United
States or the State of Louisiana.
The Division has the authority to conduct overt and covert investigations of
any person involved directly or indirectly in the video gaming industry in
Louisiana. This investigation may extend to information regarding a person's
immediate family and relatives and their affiliations with certain organizations
or other business entities. The investigation may also extend to any person who
has or controls more than a 5% ownership, income or profits interest in an
applicant for or holder of a license or who is a key employee, or who has the
ability to exercise significant influence over the licensee. All persons or
entities investigated must meet all suitability requirements and qualifications
for a licensee. The Division may deny an application for licensing for any cause
which it may deem reasonable. The applicant for licensing must pay a filing fee
which also covers the cost of the investigation.
In order for a corporation to be licensed as a distributor by the Division,
a majority of the stock of the corporation must be owned by persons who have
been domiciled in Louisiana for a period of at least two years prior to the date
of the application.
In addition to licensure as a manufacturer of Devices under the Louisiana
Act, Gaming has been licensed by the Division as a manufacturer under the
Louisiana Riverboat Economic Development and Gaming Control Act (the "Louisiana
Riverboat Act"). Gaming's application for a permanent manufacturer's license as
it relates to the land-based casino was pending before LEDGC at the time the
operator of the land-based casino filed for bankruptcy reorganization and ceased
operations, resulting in the termination of funding for the LEDGC regulatory
operations and the effective closure of the LEDGC's operations. See "Risk
Factors--Ongoing BGII Regulatory Investigations" and "Business--Other
Litigation."
The Division notified Alliance that it would be necessary to obtain approval
from them prior to the Effective Time. To that effect, the Company has made all
requests necessary to obtain any such licenses, permits or approvals required to
be obtained prior to the Effective Time.
MISSISSIPPI
The manufacture, distribution, ownership and operation of gaming machines in
Mississippi is subject to extensive state and local laws and regulations,
including the Mississippi Gaming Control Act (the "Mississippi Act") and the
regulations (the "Mississippi Regulations") promulgated thereunder. The
Mississippi Gaming Commission (the "Mississippi Commission") oversees licensing
and regulatory compliance. Gaming in Mississippi can be legally conducted only
on vessels of a certain minimum size in navigable waters of the Mississippi
River or in waters of the State of Mississippi which lie adjacent and to the
south (principally in the Gulf of Mexico) of the counties of Hancock, Harrison
and Jackson, and only in counties in Mississippi in which the registered voters
have not voted to prohibit such activities. The voters in Jackson County, the
southeastern-most county of Mississippi, have voted to prohibit gaming in that
county. However, gaming could be authorized in Jackson County should the voters
fail to disapprove of gaming in that county in any referendum, which could be
held annually. The underlying policy of the Mississippi Act is to ensure that
gaming operations in Mississippi are conducted (i) honestly and competitively,
(ii) free of criminal and corruptive influences and (iii) in a manner which
protects the rights of the creditors of gaming operations. Gaming in the future
may also be legally conducted on American Indian lands in Mississippi as
regulated in part by the 1988 Indian Gaming Regulatory Act, which activity will
not be subject to the Mississippi Act.
The Mississippi Act requires that a person (including any corporation or
other entity) must be licensed to conduct gaming activities in Mississippi. A
license to own and operate gaming machines will be issued only for a specified
location which has been approved as a gaming site by the Mississippi Commission.
The Company through its interest in RCVP must apply for renewal of such
licenses, which renewal cannot be assured. Gaming holds a license to manufacture
and distribute gaming machines. The Mississippi Act also requires that each
officer or director of a gaming licensee, or other person who exercises a
significant influence over the licensee, either directly or indirectly, must be
found suitable by the Mississippi Commission. In addition, any employee of the
licensee who is directly involved in gaming must obtain a work permit from the
Mississippi Commission. The
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Mississippi Commission will not issue a license or make a finding of suitability
unless it is satisfied, only after an extensive investigation paid for by the
applicant, that the persons associated with the gaming licensee or applicant for
a license are of good character, honesty and integrity, with no relevant or
material criminal record. In addition, the Mississippi Commission will not issue
a license unless it is satisfied that the licensee is adequately financed or has
a reasonable plan to finance its proposed operations from acceptable sources,
and that persons associated with the applicant have sufficient business probity,
competence and experience to engage in the proposed gaming enterprise. The
Mississippi Commission may refuse to issue a work permit to a gaming employee
(i) if the employee has committed larceny, embezzlement or any crime of moral
turpitude, or knowingly violated the Mississippi Act or Mississippi Regulations,
or (ii) for any other reasonable cause. If an employee is denied a license, the
Company must terminate his or her employment.
The Merger must be approved in advance by the Mississippi Commission. A
hearing is scheduled before the Mississippi Commission on May 16, 1996 to obtain
the necessary approval.
The Mississippi Commission has the power to deny, limit, condition, revoke
and suspend any license, finding of suitability or registration, or fine any
person, as it deems reasonable and in the public interest, subject to an
opportunity for a hearing. The Mississippi Commission may fine any licensee or
person who was found suitable up to $100,000 for each violation of the
Mississippi Act or the Mississippi Regulations which is the subject of an
initial complaint, and up to $250,000 for each such violation which is the
subject of any subsequent complaint. The Mississippi Act provides for judicial
review of any final decision of the Mississippi Commission by petition to a
Mississippi Circuit Court, but filing of such petition does not necessarily stay
any action by the Mississippi Commission pending a decision by the Circuit
Court.
Each gaming licensee must pay a license fee to the State of Mississippi
based upon "gaming receipts" (generally defined as gross receipts less payouts
to customers as winnings). The license fee equals 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and up to $134,000
per month and 8% of gaming receipts over $134,000 per month. The foregoing
license fees are allowed as a credit against any Mississippi State income tax
liability for the year paid. An additional license fee, equal to $100 for each
table game conducted or planned to be conducted on the gaming premises, is
payable to the State of Mississippi 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
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misdemeanor. If a finding of suitability with respect to any person is not
applied for where required, or if it is denied a revoked by the Mississippi
Commission, the licensee is not permitted to pay such person of services
rendered, or to employ or enter into any contract with such person.
Dockside casinos may be required to be moved to a "safe harbor" in the event
of a threatened hurricane. The appropriate county civil defense director will
determine when such movement is required. In general, it is anticipated that
casino vessels will have to be moved in the event of a Class III or more severe
hurricane warning, where there is the possibility of 125 miles per hour wind
speeds. The movement of a casino barge will not necessarily insure protection
against damage or destruction by a hurricane. Furthermore, the removal of a
casino barge will generally require several days, and as a consequence, the
casino barge will be out of business during that movement, even if no hurricane
strikes the casino site.
Any permanently moored vessel used for casino operations must meet the fire
safety standard of the Mississippi Fire Prevention Code, the Life Safety Code
and the Standards for the Construction and Fire Protection of Marine Terminals,
Piers and Wharfs of the National Fire Protection Association. Additionally, any
establishment to be constructed for dockside gaming must meet the Southern
Standard Building Code or the local building code, if such a local building code
has been implemented at the casino's site.
While unpowered and permanently moored vessels do not require certification
by the United States Coast Guard, the Mississippi Commission has engaged the
American Bureau of Shipping, an independent consulting agency, which will
inspect and certify all casino barges with respect to stability and single
compartment flooding integrity, in accordance with the Mississippi Regulations.
The law and regulations permitting and governing Mississippi casino gaming
were adopted during 1990 and 1991, and the first casinos opened in August 1992.
Consequently, the interpretation and application of Mississippi law and
regulations may evolve over time, and any such changes may have an adverse
effect on Mississippi licensees.
NEW JERSEY
BGII's subsidiary, Gaming, is licensed by the New Jersey Commission as a
gaming-related casino service industry ("CSI") in accordance with the New Jersey
Casino Control Act (the "Casino Control Act").
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.
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Alliance and BGII and their key personnel have obtained, or applied for, all
government licenses, registrations, findings of suitability, permits and
approvals necessary for the manufacture and distribution, and operation where
permitted, of their gaming machines in the jurisdictions in which Alliance and
BGII currently do business. The Company and the holders of its securities may be
subject to the provisions of the gaming laws of each jurisdiction where BGII or
its subsidiaries are licensed and/or conduct business, including, without
limitation, the States of Arizona, Colorado, Connecticut, Illinois, Indiana,
Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada,
New Jersey, New Mexico, South Dakota, Wisconsin, and the local regulatory
authority within each such state as well as Australian, Canadian and other
foreign gaming jurisdictions in which BGII and its subsidiaries are licensed or
conduct business. Following the consummation of the Merger, the Company and its
officers and directors will be required to apply for any government licenses,
permits and approvals necessary or required by each of these jurisdictions.
Holders of common stock of an entity licensed to manufacture and sell gaming
machines, and in particular those with holdings in excess of 5%, should note
that local laws and regulations may affect their rights regarding the purchase
of such common stock and may require such persons or entities to make certain
regulatory filings, or seek licensure, findings of qualification or other
approvals. In some cases this process may require the holder or prospective
holder to disclose and/or provide consents to disclose personal and financial
data in connection with necessary investigations, the costs of which are
typically borne by the applicant. The investigatory and approval process can
take three to six months to complete under normal circumstances. See "Risk
Factors--Strict Regulation by Gaming Authorities."
FEDERAL REGISTRATION. The operating subsidiaries of the Company that are
involved in gaming activities are required to file annually with the Attorney
General of the United States in connection with the sale, distribution or
operation of gaming machines. All currently required filings have been made.
GERMANY
German legislative authorities regulate and monitor the wall machine
industry so as to ensure certain manufacturing standards and the fairness of
each machine to users. The most significant legislation presently 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.
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In April 1993, the German government increased the maximum coin drop per
game effective May 7, 1993 from 30 pfennig (approximately $0.21) to 40 pfennigs
(approximately $0.28) although 30-pfennig machines are still permitted to be
manufactured and sold.
The Spielverordnung (gaming ordinance) specifically governs wall machines.
These regulations limit game payouts to DM 4.00 (approximately $2.80 per game),
require a minimum payout percentage, detail where the machines may be installed,
how many may be installed and by whom, which games are prohibited, the technical
requirements of the machines and technical review and approval. Operators must
comply with regulations which stipulate how many machines may operate within
defined square foot areas (15 square meters per machine, with a maximum of ten
machines per location). The Spielverordnung was modified in 1985 to achieve a
significant reduction of gaming machines. Gaming halls which through December
19, 1985 had more gaming machines than permitted under the revised regulations,
have a transition period through December 31, 1995 to comply with the revised
regulations. Such facilities were allowed to keep the 1985 number of wall
machines until December 31, 1990. During the period January 1, 1991 to December
31, 1995 they are entitled to two-thirds of such total number, but they must be
in compliance with the new limits by January 1, 1996. In taverns, restaurants,
hotels and certain other establishments, no more than two gaming machines are
permitted. See "Risk Factors--Operating History--Recent Losses."
The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate)
governs the zoning classification of land and the type and density of
development within the various zoning classifications. Effective January 27,
1990, the Baunutzungsverordnung was amended essentially to restrict the
development of larger gaming halls to core commercial areas, limit the
permissibility of smaller gaming halls in various types of mixed use zones and
to ban gaming halls in most types of residential and all types of industrial use
areas. Prior to such amendment, gaming halls, regardless of size, were generally
allowed in core, business, mixed and industrial zones. In addition, on a case by
case basis, each local zoning agency is authorized to exclude certain types of
otherwise permissible uses, including gaming halls.
Subject to certain exceptions, V.A.T. of 15% is generally assessed on the
sale or supply of any goods and services in Germany. Since the total amount paid
for particular goods or services is considered to be the gross price in
calculating such tax, the actual rate is 13.04%. With respect to operators of
gaming machines, prior to January 1, 1994, V.A.T. was to have been assessed at a
rate of 0.1304 times a multiplier of, with respect to the period from January 1,
1991 through December 31, 1992, 2.0 times the amount remaining in the cash box
after payoffs to players and, with respect to the period from January 1, 1993
through December 31, 1993, 2.5 times the amount remaining in the cash box after
payouts to players. Commencing January 1, 1994 the tax rate was changed to
0.1304 times the cash handled by a machine. During mid-1994, the German
government effected a tax law revision based on a European Court ruling whereby
V.A.T. charged to the operators of wall machines was significantly reduced. See
"Business--German Operations--Industry." In accordance with the ruling, for all
cases arising on or after, or that were pending on, July 5, 1994, the basis for
taxation has been the cash remaining in the machines. The rule requiring a
minimum payout percentage is applied to the amount remaining in the cash box net
of such V.A.T. Depending on the municipality in which a machine is located,
operators may also have to pay a monthly leisure tax on each machine of up to DM
600 (approximately $419).
The business conducted by Wulff had benefitted from the Berlin Promotion
Act, a special tax statute which was intended to support the economy of West
Berlin in various ways. With the reunification of Germany, the need for benefits
provided by the law is perceived to have decreased. Consequently, the German
government has enacted amendments to the Berlin Promotion Act which are designed
to phase out, over a number of years, most of the tax benefits and incentives
provided by the law. These tax benefits and incentives have been changed in five
ways: (i) the V.A.T. rebates of up to 10% to enterprises located in West Berlin
for sales to German customers outside West Berlin were eliminated by January 1,
1994, which began with an initial 30% decrease on January 1, 1992, and continued
with further decreases of 20% on July 1, 1992, 25% on January 1, 1993 and 25% on
January 1, 1994; (ii) the V.A.T. rebates of 4.2% for German (other than West
Berlin) enterprises which purchase goods from West Berlin taxpayers' enterprises
were abolished effective July 1, 1991; (iii) special accelerated depreciation
allowances which permitted West Berlin taxpayers to pay to write off 75% of the
cost of qualifying fixed assets at any time during the first three years after
acquisition have been modified to limit the write off to 50%; (iv) certain
special investment subsidies have
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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.
MANAGEMENT
The name, age, present principal occupation or employment and five-year
employment history of each of the directors and executive officers of the
Company as of April 1, 1996 is set forth below. No director or executive officer
is related by blood, marriage or adoption to any other director or executive
officer.
ALLIANCE
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Steve Greathouse 45 Chairman of the Board, President and Chief Executive Officer
Anthony DiCesare 33 Director and Executive Vice President--Development
Craig Fields 49 Vice Chairman of the Board
Joel Kirschbaum 44 Director and Consultant
David Robbins 36 Director
Alfred H. Wilms 51 Director
Christopher Baj 36 Director
Shannon L. Bybee 56 Executive Vice President--Government Affairs and Special Advisor to the
Board of Directors
John W. Alderfer 51 Senior Vice President--Finance and Administration; Chief Financial
Officer and Treasurer
David D. Johnson 44 Senior Vice President, General Counsel and Secretary
Robert L. Miodunski 45 Senior Vice President--Nevada Route Group
Robert M. Hester 40 Vice President--Human Resources and Administration
Johnann F. McIlwain 49 Vice President--Marketing
Robert L. Saxton 42 Vice President--Casino Group
Robert A. Woodson 46 Vice President--Regulatory Compliance
</TABLE>
Steve Greathouse joined the Company as President and Chief Executive Officer
in August 1994, was appointed a director in October 1994, and became Chairman of
the Board in March 1995. Mr. Greathouse, who has held various positions in the
gaming industry since 1974, most recently served as the President of the
Harrah's Casino Hotels Division of The Promus Companies Incorporated from
September 1993 to July 1994. In this position, Mr. Greathouse had responsibility
for Harrah's resorts in Las Vegas, Laughlin, Reno, Lake Tahoe and Atlantic City.
From July 1991 to September 1993, Mr. Greathouse served as President and (from
1990) Chief Operating Officer of Harrah's Southern Nevada, overseeing the
operations of Harrah's Las Vegas and Harrah's Laughlin. From 1990 to July 1991,
Mr. Greathouse served as Executive Vice President of Harrah's Southern Nevada.
Mr. Greathouse is an active member and has served as the Chairman of the Board
of the Nevada Resort Association and is on the Executive Committee of United Way
of Southern Nevada. He has also served as a member of the Board of Directors of
the Las Vegas Convention and Visitors Authority and on the Executive Committee
of the Nevada Development Authority.
Anthony L. DiCesare was employed by KIC from April 1991 to July 1994 and
joined the Company as Executive Vice President--Development and as a director in
July 1994. Prior to that time and following his graduation from business school
in 1989 he was employed as an associate at Wasserstein, Perella & Co., Inc. from
September 1989 to April 1991, where he worked in the Mergers and Acquisitions
group.
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Dr. Craig Fields was appointed a director in October 1994 and became Vice
Chairman of the Board in March 1995. Dr. Fields was employed by the U.S.
Department of Defense Advanced Research Projects Agency ("ARPA") from 1974 to
1990. He joined the Microelectronics and Computer Technology Corporation ("MCC")
in 1990 as President and later became Chairman and CEO. He left MCC in 1994, and
serves as director of two publicly-traded corporations in addition to the
Company, Ensco, Inc. and Projectavision, Inc.
Joel Kirschbaum was appointed a director in July 1994 and served as Chairman
of the Board from July 1994 to March 1995. Mr. Kirschbaum is the sole
stockholder, director and officer of KIC, which is the sole general partner in
Kirkland, and of GSA, Inc. ("GSI"), the sole general partner in GSA. He has been
engaged in operating the businesses of KIC and Kirkland since January 1991 when
KIC and Kirkland were established, and GSI and GSA since June 1993. Prior to
that time, he worked at Goldman, Sachs & Co. for 13 years, during the last six
of which he was a General Partner. When he established KIC and Kirkland, Mr.
Kirschbaum resigned his general partnership interest in Goldman, Sachs & Co. and
became a limited partner. Mr. Kirschbaum resigned his limited partnership
interest in Goldman, Sachs & Co. in November 1993.
David Robbins was appointed a director in July 1994. Mr. Robbins has been an
attorney with O'Sullivan, Graev & Karabell from September 1995 to the present.
From May 1993 to September 1995, Mr. Robbins was an attorney with Kramer, Levin,
Naftalis, Kamin & Frankel. From September 1984 to May 1993, Mr. Robbins was an
attorney with Cahill Gordon & Reindel.
Alfred H. Wilms has served as a director of the Company since November 1983.
He served as Chief Executive Officer of the Company from December 1984 to July
1994 and as Chairman of the Board of the Company from August 1986 to July 1994.
From 1976 through 1989, Mr. Wilms served as President of Wilms Distributing
Company, Inc. and Wilms Export Company, N.V., a Belgian company engaged in the
distribution of amusement and gaming equipment. From 1971 through 1976, Mr.
Wilms held various positions with Bally Continental, including positions in
research and development, marketing, sales, gaming operation and management,
and, from 1974 through 1979, he served as a director of Bally Manufacturing
Corp. Mr. Wilms is currently President and a director of Aqualandia, the largest
waterpark in Europe; President and a director of Gibsa, a real estate company
located in Spain; and a director of Jardin Parks, a real estate company located
in Spain. Mr. Wilms is a citizen and resident of Belgium.
Christopher Baj has provided financial and operational consulting services
to various clients since April 1987 to the present. From January 1993 to
December 1995, Mr. Baj was also employed as the senior manager of Stanley L.
Levin, CPA. From April 1987 to December 1992, Mr. Baj was employed as the senior
consultant at Levin, Callaghan & Nawrocki, CPA's. Mr. Baj is a Certified Public
Accountant.
Shannon L. Bybee joined the Company in July 1993 and served as President and
Chief Operating Officer until July 1994. In July 1994, Mr. Bybee assumed the
roles of Executive Vice President--Government Affairs and Special Advisor to the
Board of Directors and also took a position as Associate Professor with the
William F. Harrah College of Hotel Administration and the UNLV International
Gaming Institute at the University of Nevada, Las Vegas. Mr. Bybee currently
serves as a member of the board of directors of The Claridge Hotel and Casino
Corporation, a position he has held since August 1988. Prior to his association
with the Company, Mr. Bybee had served as Chief Executive Officer of The
Claridge Hotel and Casino Corporation from August 1989 to July 1993. From 1983
to 1987 Mr. Bybee served as Senior Vice President and from 1978 to 1981 as Vice
President of Golden Nugget, Inc. (now Mirage Resorts, Inc.).
John W. Alderfer joined the Company in September 1990 as Vice President,
Chief Financial Officer and Treasurer. Mr. Alderfer was subsequently promoted to
Senior Vice President--Finance and Administration, in December 1993. Prior to
joining the Company, Mr. Alderfer was the Chief Financial Officer of The Bicycle
Club, a Los Angeles--based card casino, from February 1989 to September 1990.
David D. Johnson joined the Company as Senior Vice President, General
Counsel and Secretary in March 1995. Previously, Mr. Johnson developed extensive
gaming industry experience representing a diverse group of casino clients as a
Senior Partner at Schreck, Jones, Bernhard, Woloson & Godfrey, a Nevada law
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firm where he was employed from January 1987 to April 1995. Prior to joining
Schreck, Jones, Bernhard, Woloson & Godfrey, Mr. Johnson served as Chief Deputy
Attorney General for the gaming division of the Nevada Attorney General's
Office. Mr. Johnson serves as Vice Chairman of the Executive Committee of the
Nevada State Bar's Gaming Law Section and is an officer and founding member of
the Nevada Gaming Attorneys Association.
Robert L. Miodunski joined the Company as Senior Vice President--Nevada
Route Group in March 1994. From January 1991 to March 1994, Mr. Miondunski was
President of Mulholland-Harper Company, a sign manufacturing and service
company. From 1984 through 1990, Mr. Miodunski held various positions with
Federal Signal Company, the most recent being Vice President and General Manager
of the Midwest Region of the Sign Group.
Robert M. Hester joined the Company in October 1993 as Director of Human
Resources and was promoted to Vice President--Human Resources and Administration
in December 1993. From 1989 to 1993, Mr. Hester was Director of Human Resources
for Sam's Town Hotel and Casino in Las Vegas.
Johnann F. McIlwain joined the Company in June 1994 as Vice
President--Marketing. From 1991 to 1992, Ms. McIlwain was Vice President of
Marketing of Greenwood, Inc. a Philadelphia-based gaming and entertainment
company. From 1989 to 1991, she was Director of Marketing Services for
Hospitality Franchise Systems, Inc. in Parsippany, New Jersey. Prior to joining
Hospitality Franchise Systems, Inc. Ms. McIlwain served as Director of
Advertising for the Resorts International Casino Hotel and the Trump Taj Mahal
Casino Hotel.
Robert L. Saxton joined the Company in 1982 as Corporate Controller and was
elected Vice President--Casino Group in December 1993. Since joining the
Company, Mr. Saxton has held various management positions with the Nevada Route
Group and is currently responsible for casino operations. He also serves as
President of the Company's Louisiana subsidiaries.
Robert A. Woodson joined the Company in 1988 as Director of Gaming
Compliance and was promoted to Vice President--Regulatory Compliance in
September 1993. Prior to joining the Company, Mr. Woodson was with the
Investigation Division of the State of Nevada Gaming Control Board for 10 years.
Following consummation of the Merger, the Company intends to evaluate the
composition of its Board of Directors to insure that the Board includes
individuals having appropriate skills and experience in light of the expanded
scope of the Company's operations following the Merger. With the exception of
Hans Kloss, who will continue as President of BGII and Managing Director of
Wulff, and Robert Conover, who will continue as President of Systems, and
Richard Gillman and Neil Jenkins, who will not continue with the Company, the
current executive officers of BGII, if any, who will be employed by the Company
after the Merger have not yet been determined. The Company expects that a
substantial number of BGII officers will remain employed by the Company
following consummation of the Merger.
Hans Kloss has been a Director of BGII since August 1991 and President and
Chief Operating Officer of BGII since May 1993. Mr. Kloss has been the Managing
Director of BGII's German subsidiaries, Bally Wulff Automaten GmbH and Bally
Wulff Vertriebs GmbH, since 1981 and has been employed by those companies since
1970.
Robert Conover is the President of Systems and has held that position since
November 1990. Mr. Conover also serves as Vice-President and Chief Information
Officer of BEC and has served as such since December 1992. Mr. Conover is also
Senior Vice-President in charge of Management Information Systems Operations at
the BEC subsidiaries that operate casino hotels, and has held that position
since 1983.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
HOLDERS AND MANAGEMENT
The following table sets forth certain information as of April 1, 1996 with
respect to the beneficial ownership of the Common Stock, which constitutes the
Company's only outstanding class of voting securities, by (i) each person who,
to the knowledge of the Company, beneficially owned more than 5% of the Common
Stock, (ii) each director of the Company, (iii) the named executive officers of
the Company (as defined in the Exchange Act) and (iv) all executive officers and
directors of the Company as a group:
<TABLE>
<CAPTION>
POST-TRANSACTION
AMOUNT OF PRE-TRANSACTION PERCENT OF
SHARES PERCENT OF CLASS(1) CLASS(1)(2)(3)
--------------- --------------------- -----------------------
<S> <C> <C> <C>
Alfred H. Wilms.............................. 7,034,082(4) 46.9% 26.2%
Donaldson, Lufkin & Jenrette Securities 1,695,500(5) 11.6% 6.4%
Corporation ................................
277 Park Avenue
New York, New York 10172
Joel Kirschbaum ............................. 1,333,333(6) 10.3% 5.4%
Kirkland Investment Corporation
Kirkland-Ft. Worth Corporation
Investment Partners, L.P.
535 Madison Avenue
New York, New York 10022
Gaming Systems Advisors, L.P. ............... --(7) -- --
535 Madison Avenue
New York, New York 10022
Steve Greathouse............................. 333,333(8) 1.9% 1.4%
Anthony L. DiCesare.......................... --(9) -- --
Craig Fields................................. 125,000(10) * *
David Robbins................................ 20,000(11) * *
Christopher Baj.............................. -- -- --
Shannon L. Bybee............................. 210,000(12) 1.6% *
John W. Alderfer............................. 162,000(13) 1.2% *
David D. Johnson............................. 66,667(14) -- --
Robert L. Miodunski.......................... 56,667(15) * *
All executive officers and directors as a
group....................................... 9,321,082(16) 46.5% 29.3%
</TABLE>
- ------------------------
* Less than 1%.
(1) Excludes the effect of (a) the issuance of (i) 2,750,000 shares subject to
warrants to KIC in connection with the Kirkland Investment, (ii) 1,250,000
shares subject to warrants to GSA pursuant to the GSA Advisory Agreement on
September 21, 1993 and 2,500,000 shares subject to additional warrants
issuable to GSA upon consummation of the Merger, both of which become
exercisable in equal amounts only when the stock price reaches $11, $13 and
$15, and (iii) 750,000, 250,000 and 30,000 shares subject to warrants
issued to Donaldson, Lufkin & Jenrette Securities Corporation, Oppenheimer
& Co. Inc. ("Oppenheimer") and L.H. Friend, Weinress & Frankson, Inc.
("Friend"), respectively, in connection with the issuance of the
Convertible Debentures, and (iv) 250,000 shares subject to warrants issued
to Canyon Partners, Inc., in September 1995, and (b) shares covered by
employee stock options other than those deemed beneficially owned by
executive officers and directors.
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(2) Assumes the issuance of approximately 692,000 shares to BGII stockholders
in the Merger, approximately 1,176,000 shares in the Private Placement,
approximately 932,000 shares in partial satisfaction of BGII employee
contract termination costs and performance unit awards, and approximately
9,000,000 shares in the Convertible Exchange Offer and the Automatic
Conversion.
(3) Excludes the effect of BGII obligations assumed by Alliance with respect to
each outstanding stock option and warrant to purchase shares of BGII common
stock, which options and warrants represented an aggregate of 752,500 and
1,498,000 shares of BGII common stock, respectively.
(4) Includes 2,000,000 shares represented by the warrants issued to Mr. Wilms.
Mr. Wilms' mailing address is 4380 Boulder Highway, Las Vegas, Nevada
89121. See "Certain Relationships and Related Transactions."
(5) Donaldson, Lufkin & Jenrette Securities Corporation and certain affiliated
entities filed on February 14, 1995, as amended on February 14, 1996, a
Schedule 13G indicating ownership as of December 31, 1995, of (i) 1,193,500
shares issuable upon conversion of Convertible Debentures held by it, (ii)
500,000 shares which may be acquired upon exercise of certain warrants
issued to Donaldson, Lufkin & Jenrette Securities Corporation and (iii)
2,000 shares. Excludes warrants exercisable for 250,000 shares issued to
Donaldson, Lufkin & Jenrette Securities Corporation which will vest when
the price of the Common Stock reaches $13 per share following consummation
of the Merger or any similar transaction.
(6) Based upon information contained in a Schedule 13D filed on June 23, 1994,
as amended on September 28, 1995 and November 6, 1995, and provided to
Alliance by such persons (except as to percent of class) which indicated
that each of them held sole voting and disposition over all such shares. Of
such shares, certain amounts have been or may be sold or distributed to
Friend, Mr. DiCesare and, possibly, certain other persons, as set forth in
the Schedule 13D provided to Alliance by Mr. Kirschbaum, KIC, Kirkland and
GSA.
(7) Based upon information contained in a Schedule 13D filed on June 23, 1994,
as amended on September 28, 1995 and November 6, 1995 and provided to
Alliance by such person jointly with Mr. Kirschbaum, KIC and Kirkland.
(8) Includes options to purchase shares of Common Stock pursuant to the
Alliance 1991 Plan, a portion of which vested in 1995 and excludes warrants
exercisable for 250,000 shares portions of which became 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 became exercisable only when the stock
price reaches $11, $13 and $15 and options exercisable in equal amounts for
150,000 shares which will be issued within 30 days of the consummation of
the Merger. See "Certain Relationships and Related Transactions."
(11) Pursuant to options granted to Mr. Robbins by Kirkland. Based on
information contained in the Schedule 13D referred to in Note 5 above.
(12) Includes 210,000 shares subject to options that are currently exercisable
or will become exercisable within 60 days.
(13) Includes 162,000 shares subject to options that are currently exercisable
or will become exercisable within 60 days.
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(14) Includes 66,667 shares subject to options that are currently exercisable or
will become exercisable within 60 days.
(15) Includes 17,000 shares subject to options that are currently exercisable or
will become exercisable within 60 days.
(16) Includes 2,676,000 shares subject to options and warrants that are
currently exercisable or will become exercisable within 60 days.
STOCKHOLDERS AGREEMENT
On July 14, 1994, as contemplated by the Stockholders Agreement dated as of
September 21, 1993 by and among the Company, KIC, GSA, Kirkland and Mr. Wilms
(as amended, the "Stockholders Agreement"), the Alliance Board of Directors was
reconfigured to consist of four persons designated by KIC (Messrs. Kirschbaum,
DiCesare, David Robbins and Jay R. Gottlieb) and three persons designated by Mr.
Wilms (Messrs. Wilms, David A. Scheinman and Sidney Sosin). The Stockholders
Agreement and related transactions are more fully described in the Alliance
Forms 8-K dated June 25, 1993, September 21, 1993 and July 14, 1994 and in its
Information Statement dated June 29, 1994. On October 20, 1994, the Stockholders
Agreement was amended to reconfigure the Board of Directors of Alliance to
consist of four persons designated by KIC (Messrs. Kirschbaum, DiCesare, Robbins
and Gottlieb), one person designated by Mr. Wilms (Mr. Wilms) and two new
directors designated by a majority of the Board of Directors of Alliance. The
Stockholders Agreement obligates Mr. Wilms to vote his shares for such persons
nominated by KIC. On October 20, 1994 Mr. Greathouse and Dr. Fields were
appointed to the Board to fill vacancies created upon the resignation of Messrs.
Scheinman and Sosin. As amended, the Stockholders Agreement also provides that
Mr. Wilms may designate two persons (currently Messrs. Scheinman and Sosin) (the
"Advisors") who will be observers of, and advisors to, the Board of Directors
and who will be entitled to attend all of the Alliance Board of Directors'
meetings and receive all information furnished to members of the Board. Mr.
Wilms and/or at least one Advisor will be entitled to attend all meetings of the
committees of Alliance's and its subsidiaries' Boards of Directors. In addition,
Mr. Wilms is contractually obligated until September 21, 1997 to vote his shares
of Common Stock in favor of four nominees of KIC to the Alliance Board of
Directors. See "Certain Relationships and Related Transactions."
OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES
Immediately following the Transaction (and assuming $50.0 million principal
amount of Convertible Debentures are exchanged and converted to Common Stock
pursuant to the Automatic Conversion), the Company will have outstanding
options, warrants and convertible securities which will be exercisable in the
aggregate for approximately 16,800,000 shares of Common Stock, as described
below.
ALLIANCE
OPTIONS. Alliance has two stock option plans currently in effect: the United
Gaming, Inc. 1991 Long-Term Incentive Plan (previously defined as the Alliance
1991 Stock Option Plan) and the Gaming and Technology, Inc. 1984 Employee Stock
Option Plan (previously defined as the Alliance 1984 Stock Option Plan).
Pursuant to these two plans, an aggregate of 5,000,000 shares of Common Stock
are issuable, as to which options covering 2,168,834 shares were outstanding and
options covering 987,310 shares were exercisable as of December 31, 1995. In
addition, Alliance has agreed to issue to Dr. Fields options exercisable for
150,000 shares within 30 days of the consummation of the Merger.
WARRANTS. Alliance has issued warrants to purchase shares of Common Stock to
the following persons in the amounts set forth below:
(1) Mr. Wilms: warrants to purchase 2,000,000 shares at a purchase price of
$2.50 per share (and in certain circumstances in a "cashless" transaction), and
which expire on September 1, 1998, issued in connection with the VSI Loan;
(2) Kirkland: warrants to purchase 2,750,000 shares at a purchase price of
$1.50 per share, divided equally among warrants which become exercisable when
the price of the Common Stock reaches $11, $13 and $15 per share and which
expire on September 21, 1999, issued in connection with the Kirkland Investment;
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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 in connection with Alliance's retention of GSA for
financial advisory services, and additional warrants to purchase 2,500,000
shares issuable on the same terms (other than their respective expiration dates)
upon consummation of the Merger;
(4) Donaldson, Lufkin & Jenrette Securities Corporation: warrants to
purchase 500,000 shares of Common Stock at a purchase price of $8.25 per share,
issued in connection with the issuance of the 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 Convertible Debentures;
(6) Canyon Partners, Inc. and Cerberus Partners, L.P.: warrants to purchase
250,000 shares of Common Stock at a purchase price of $3.75 per share, issued in
connection with a firm commitment by Cerberus Partners, L.P. and affiliates of
Canyon Partners, Inc. to Alliance in September 1995 relating to financing for
Alliance's tender offer and consent solicitation;
(7) Mr. Greathouse: warrants to purchase 250,000 shares on terms
substantially the same as the warrants issued to GSA described in clause (3)
above and which expire on August 15, 2000, issued in connection with his
employment;
(8) Dr. Fields: warrants to purchase 250,000 shares on terms substantially
the same as the warrants issued to GSA described in clause (3) above and which
expire on September 21, 2000, issued in connection with an agreement between Dr.
Fields and Alliance upon his becoming a director; and
(9) Friend: warrants to purchase 30,000 shares of Common Stock at a purchase
price of $8.25 per share divided equally among warrants which become exercisable
when the price of the Common Stock reaches $11, $13 and $15 per share and which
expire on September 21, 1999, issued in connection with the issuance of the
Convertible Debentures.
BGII
OPTIONS. BGII has three stock option plans currently in effect: the 1991
Incentive Plan (previously defined as the BGII 1991 Incentive Plan), the 1991
Non-employee Directors' Option Plan (previously defined as the BGII 1991
Directors' Plan) and the 1994 Stock Option Plan for Non-Employee Directors
(previously defined as the BGII 1994 Plan). Under the BGII 1991 Incentive Plan,
852,500 options were issued to employees of BGII, including 365,000 options held
by executive officers. Under the BGII 1991 Directors' Plan, 100,000 options were
issued to non-employee directors of BGII. Under the BGII 1994 Plan, 100,000
options were issued to non-employee directors of BGII.
Pursuant to the Merger Agreement, Alliance will assume BGII's obligations
with respect to each outstanding option, and such options will be exercisable
for the Merger consideration per share of BGII common stock subject to such
options, except that at the election of any employee of BGII (other than Messrs.
Gillman, Jenkins and Kloss) immediately prior to the effective time, any such
options held (not more than 552,500 in the aggregate) will be instead
exercisable for a number of shares of Common Stock equal to the number of shares
of BGII common stock subject thereto at an exercise price equal to the Alliance
Average Trading Price. See "The Merger and Related Financings."
WARRANTS. BGII issued warrants to purchase 1.2 million shares of BGII
common stock at a purchase price of $12.50 per share, exercisable after the BGII
common stock has traded at or above a price of $20 per share for 20 consecutive
trading days and under certain other circumstances, expiring on July 29, 1998,
which were issued in connection with the private placement of its 10 3/8% Senior
Secured Notes due July 1998. In addition, BGII issued warrants to purchase
300,000 shares of BGII common stock at a purchase price of $15 per share,
exercisable during a four-year period ending November 11, 1996, issued to the
underwriters of the initial public offering of BGII's common stock, of which
2,000 warrants have been exercised.
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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."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1992, Mr. Wilms committed to provide the VSI Loan to Alliance's
majority controlled subsidiary, VSI. As consideration for Mr. Wilms commitment,
Alliance issued to Mr. Wilms a warrant to purchase 200,000 shares of Alliance
Common Stock at a purchase price of $2.50 per share and agreed to issue an
additional warrant to purchase 1.8 million shares of Common Stock at a purchase
price of $2.50 per share upon funding of the full amount of such loan. Mr. Wilms
is entitled to one demand and unlimited piggyback registration rights covering
resale for the Common Stock underlying the warrants (previously defined as the
Wilms Warrants). The exercise price of the warrants was determined based on an
analysis of, and a fairness opinion with respect to, the transaction and on the
price range of the Common Stock during a period prior to announcement of
Alliance's expansion into Louisiana. The VSI Loan, as amended, requires
quarterly interest and principal payments with an interest rate equal to 2%
above the London InterBank Offered Rate, adjusted quarterly. The VSI Loan is
currently held by CTC, a Belgian corporation owned by Mr. Wilms and members of
his family.
At June 30, 1993, Mr. Wilms had funded $6.0 million of the VSI Loan. On
August 2, 1993, the Board unanimously approved (except that Mr. Wilms abstained
from voting) the execution of a new Loan and Security Agreement (the "Amended
VSI Loan") and amendment of the Wilms Warrants. CTC assumed Mr. Wilms' rights
and obligations under the Amended VSI Loan. The Amended VSI Loan grants CTC a
security interest in substantially all of VSI's present and future personal
property; provided, however, that CTC's security interest will be subordinated
to certain purchase money indebtedness incurred by VSI in the purchase from
unaffiliated persons of inventory or equipment, and working capital loans to VSI
from unaffiliated persons. Pursuant to the terms of the VSI Loan, VSI may not
pay cash dividends or make any distributions of its property. The Amended VSI
Loan matures on September 21, 1998 and provides for quarterly principal payments
beginning September 1, 1993, rising from approximately $280,000 to $360,000 over
its term. CTC has funded the full $6.5 million original principal amount of the
Amended VSI Loan and Alliance has issued to Mr. Wilms the warrant to purchase
1.8 million shares of Common Stock. Pursuant to the Amended VSI Loan, the
maturity date of the VSI loan was extended one year and the terms of the Wilms
Warrants were also amended to extend their exercise period to September 1, 1998
and to provide for a "cashless" exercise of the Wilms Warrants under certain
circumstances. No change was made in the interest rate applicable to the VSI
Loan or in the number of shares or the exercise price of the Wilms Warrants.
Alliance agreed to pay Mr. Wilms out-of-pocket expenses incurred in connection
with the transactions with Kirkland, the restructuring of the VSI Loan and the
related documentation in an aggregate amount of $201,750. As of December 31,
1995 the aggregate amount of the Amended VSI Loan outstanding was approximately
$3.4 million.
Under the terms of the Letter Agreement, dated as of June 25, 1993, between
Kirkland, KIC, Alliance and, as to certain provisions, Mr. Wilms, and the
related Securities Purchase Agreement, dated as of September 21, 1994, Alliance
agreed to make payments to Kirkland at the rate of $350,000 per year in
reimbursement to Kirkland for its aggregate costs and expenses in conducting its
business as related to Alliance. Such payments aggregated approximately
$272,000, $346,000 and $597,000 in fiscal years 1993 through 1995, respectively.
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In connection with the closing of the Kirkland Investment and the related
Nevada licensing process (completed June 23,1994), Alliance is obligated to
reimburse Kirkland for an aggregate of approximately $312,000 in out-of-pocket
expenses.
Pursuant to a letter agreement dated June 25, 1993 among GSA, Alliance and
Mr. Wilms, Alliance engaged GSA to assist it in among other things, identifying
opportunities for strategic transactions and in structuring and negotiating such
transactions. In connection with its retention of GSA for financial advisory
services, Alliance has issued to it warrants to purchase 1,250,000 shares of
Common Stock with an exercise price of $1.50 per share. Upon consummation of the
Merger, GSA will be entitled to receive additional warrants to purchase
2,500,000 shares of Common Stock on the same terms. Joel Kirschbaum, a director
of and consultant to Alliance, is the president, sole director and sole
stockholder of GSI, the sole general partner of GSA. Mr. DiCesare, a director
and Executive Vice President-Development of Alliance, has the right to receive
20% of the warrants (which percentage may increase in certain circumstances) to
be distributed to GSI by GSA in connection with the consummation of the Merger.
The Stockholders Agreement contains certain registration rights running in
favor of Kirkland, KIC, GSA, Mr. Wilms and their respective transferees,
including up to four demand registration rights each (and additional demand
rights for Mr. Wilms under certain circumstances), at the expense of the
Company, and provisions granting Mr. Wilms the right to participate in certain
offerings of securities by the Company and by KIC and its transferees.
Pursuant to an agreement with Alliance, Dr. Fields, Vice Chairman of the
Alliance Board, will within 30 days of the consummation of the Merger receive
options to purchase 150,000 shares of Common Stock.
David Robbins, a director of Alliance appointed to the Board of Directors in
July 1994, was employed until July 1995 by the law firm of Kramer, Levin,
Naftalis, Nessen, Kamin & Frankel which has represented Alliance in various
matters. The firm received fees from Alliance of $1,046,000 and $493,000 in
fiscal 1994 and 1995, respectively.
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
CONVERTIBLE DEBENTURES
GENERAL. Alliance has outstanding $85 million aggregate principal amount of
7 1/2% Convertible Subordinated Debentures due 2003. The Convertible Debentures
pay 7 1/2% interest per annum payable on a semi-annual basis. The Convertible
Debentures are convertible into shares of Common Stock at any time prior to
maturity (unless previously redeemed) at a conversion price of $10.00 (the
"Conversion Price") with each $1,000 principal amount being convertible into 100
shares of Common Stock. The Company may, at its option, redeem the Convertible
Debentures at a redemption price equal to the principal amount of such
Convertible Debentures, together with accrued interest, plus a specified
redemption premium. The Convertible Debentures also contain certain required
redemption obligations at the option of the holders of the Convertible
Debentures. The following description of the Convertible Debentures does not
purport to be complete and is subject to and qualified in its entirety by
reference to the agreements related to such Convertible Debentures which have
been filed as exhibits to Alliance's Form S-2 Registration Statement No.
33-72990 and subsequent amendments thereto.
CHANGE IN CONTROL. Upon the occurrence of a Change in Control (as defined
in the Convertible Debentures), each holder of Convertible Debentures will have
the right to require the Company to purchase all or any of such holder's
Convertible Debentures at 101% of the principal amount thereof, plus accrued
interest to the date of such purchase. The Merger will not constitute a Change
of Control under the Convertible Debentures.
SUBORDINATION. The Convertible Debentures are subordinated in right of
payment to all indebtedness of Alliance, including the principal of and premium,
if any, and interest on such indebtedness, whether
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outstanding or created in the future, for borrowed money, for indebtedness
incurred in connection with acquisitions, and for money owned or reimbursement
obligations under letters of credit or under any lease of real or personal
property, which obligations are capitalized on Alliance's books.
SUBSIDIARY INDEBTEDNESS
Set forth below is a brief summary of certain indebtedness of the
subsidiaries of the Company, which will remain outstanding after the Merger. The
following description does not purport to be complete and is subject to and
qualified in its entirety by reference to the agreements related to such
indebtedness which have been filed as exhibits to, or incorporated by reference
in, the Registration Statement of which this Prospectus forms a part.
VSI LOAN
In March 1992, Alfred H. Wilms committed to provide to VSI, a subordinated
loan of up to $6.5 million. 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 Amended VSI Loan is
secured by liens in favor of 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. As of December 31, 1995,
there was an outstanding balance of $3.4 million on this loan. See "Certain
Relationships and Related Transactions."
RAINBOW CASINO
In connection with the completion of the Rainbow Casino, HFS provided
financing to RCC on August 3, 1993, consisting of a $7.5 million loan secured by
a first priority lien on all of the assets of the project. Such assets are also
pledged to secure a royalty payment required to be made by RCVP to an affiliate
of HFS. 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. See
"Business--Casino Operations."
On March 29, 1995, in exchange for commitments by Alliance and NGM, to
provide additional financing (up to a maximum of $2.0 million each) to be used,
among other things, for the completion of certain elements of the project. RCVP
issued promissory notes to each of Alliance and NGM equal to the amount of such
commitments. As of December 31, 1995, amounts outstanding under the HFS facility
and the related financings aggregated $9.7 million. As adjusted, RCC is entitled
to receive 10% of the net available cash flows (which amount shall increase to
20% of cash flow from gaming revenues above $35.0 million (I.E., only on such
incremental amount)), for a period of 15 years, such period being subject to one
year extensions for each year in which a minimum payment of $50,000 is not made.
In addition, if during any continuous 12-month period until December 31, 1999
the casino achieved earnings from the project of at least $10.5 million before
deducting depreciation, amortization, royalty and income taxes, then Alliance
would be obligated to pay to certain principals of the original partnership an
amount aggregating $1 million in cash or shares of Common Stock 180 days after
the occurrence. The casino has achieved the required earnings as adjusted, and
Alliance is obligated to make the required payment or issue the Common Stock by
September 30, 1996.
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DESCRIPTION OF THE NOTES
Set forth below is a summary of certain provisions of the Notes. The Notes
will be issued pursuant to an indenture (the "Indenture") to be dated as of
, 1996 by and among Alliance Gaming Corporation and
, as trustee (the "Trustee"), a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The Notes are also governed by certain provisions
contained in the Trust Indenture Act. The following summary of certain
provisions of the Indenture and the Collateral Agreements does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Indenture and the Collateral Agreements, including the definitions
therein of certain terms used below. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to them in the Indenture.
Wherever particular provisions of the Indenture are referred to in this summary,
such provisions are incorporated by reference as a part of the statements made
and such statements are qualified in their entirety by such reference. For
purposes of this summary, the term "the Company" refers to Alliance Gaming
Corporation following the Merger.
GENERAL
The Notes will be senior, secured, general obligations of the Company,
limited in aggregate principal amount to $140.0 million and secured as set forth
under "-- Security for the Notes" below. The term "Subsidiaries" as used herein,
however, does not include Unrestricted Subsidiaries. The Notes will be issued
only in fully registered form, without coupons, in denominations of $1,000 and
integral multiples thereof.
The Notes will mature on , 2003. The Notes will bear interest at
the rate per annum stated on the cover page hereof from the date of issuance or
from the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually on and of each year,
commencing , 1996, to the persons in whose names such Notes are
registered at the close of business on the or immediately
preceding such Interest Payment Date. Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for registration of transfer or exchange, at the
office or agency of the Company maintained for such purpose, which office or
agency shall be maintained in the Borough of Manhattan, The City of New York. At
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at the addresses set forth upon the registry books of
the Company. No service charge will be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Until otherwise designated by the Company, the Company's office or agency will
be the corporate trust office of the Trustee at , New
York, New York.
SECURITY FOR THE NOTES
Subject to certain limited exceptions, the obligations of the Company with
respect to the Notes will be secured by the following: (i) an exclusive pledge
of all Equity Interests in a direct subsidiary of Alliance which will be created
to hold the equity interests of BGII and its subsidiaries and (ii) except as set
forth below, an exclusive Lien on certain of the Company's and its Subsidiaries'
unencumbered assets, whether currently owned or acquired in the future and which
currently include the assets comprising Alliance's Nevada gaming machine
management and casino operations; (collectively, the "Collateral"). The Company
will enter into security agreements, mortgages, deeds of trust and certain other
collateral assignment agreements (collectively, the "Collateral Agreements")
that will provide for the grant of a security interest in or pledge of the
Collateral to the Trustee, as collateral agent, for the benefit of the holders
of the Notes. Such pledges and security interests will secure the payment and
performance when due of all of the obligations of the Company under the
Indenture, the Notes and the Collateral Agreements.
In accordance with the foregoing description, the Collateral will not
include certain assets of the Company and its Subsidiaries, including without
limitation the following: (i) the assets of RCVP, VSI, SVS and VDSI (which
entities are partially owned); (ii) the assets of Wulff; (iii) BGII's
headquarters site,
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accounts receivable and inventory of Gaming (which are anticipated to secure a
working capital facility as described below); (iv) assets which are not
assignable by their terms or pursuant to restrictions imposed by Gaming
Authorities (E.G., gaming licenses, cash used in the operation of casinos and
certain intangible assets); and (v) encumbered assets of the Company and its
Subsidiaries, (E.G., certain furniture, fixtures and equipment). The Indenture
will contain certain covenants limiting the ability of the Company and its
Subsidiaries to incur Indebtedness. Subject to certain limitations, the
Indenture permits the inventory and accounts receivable of Gaming, Wulff and
their Subsidiaries to be used to secure up to $50 million principal amount
permitted to be outstanding under one or more working capital facilities. See
the covenant "LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND
DISQUALIFIED CAPITAL STOCK" below. In addition, substantially all of the assets
of RCVP and VSI, and certain of the assets of Wulff, will continue to be pledged
to secure Indebtedness and other obligations of such persons. See
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Certain Other Indebtedness." As a
result, such encumbered assets will be available to satisfy obligations in
respect of the Notes, if at all, only after such secured obligations are
satisfied in full.
Following an Event of Default, the Trustee, on behalf of the Holders of the
Notes, in addition to any rights or remedies available to it under the
Indenture, may take such action as it deems advisable to protect and enforce its
rights in the Collateral, including the institution of foreclosure proceedings.
The ability of the holders of the Notes to operate certain businesses of the
Company or any Subsidiary after any foreclosure on the Collateral is subject to
(x) restrictions under certain gaming regulations, including the approval of
certain Gaming Authorities and (y) such other restrictions as may be applicable
under the laws of other jurisdictions. See "Gaming Regulation and Licensing." If
the Trustee takes possession of or otherwise acquires any of such facilities,
the Trustee would be required to obtain a license from the Gaming Authorities of
the relevant jurisdiction or jurisdictions to operate such facilities. Because
potential bidders must satisfy licensing requirements, the number of potential
bidders in a foreclosure sale will be less than in foreclosure of other types of
facilities and such requirements may delay the sale of, and may adversely affect
the sales price for, such businesses and other Collateral. In addition, the
ability of the holders of Notes to realize upon the Collateral may be subject to
certain other bankruptcy law or fraudulent transfer limitations in the event of
a bankruptcy. Enforcement of each of the terms of the Indenture, the Collateral
Agreements and the other documents and instruments executed in connection
therewith is also subject to general principles of equity.
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Trustee to foreclose on the Collateral upon the occurrence
of an Event of Default will likely be significantly impaired if a bankruptcy
case under Title 11 of the Bankruptcy Code is commenced by or against the
Company prior to such foreclosure. Once such a case is commenced, the Bankruptcy
Code prohibits a secured creditor, such as the Trustee, from commencing or
pursuing a foreclosure on its collateral without bankruptcy court approval.
Moreover, the bankruptcy court may decline to grant such approval, even if the
debtor is in default under the applicable debt instruments, if it concludes that
there exists or that the debtor can provide "adequate protection" for the
interest of such secured creditor. The meaning of the term "adequate protection"
may vary according to circumstances, but it is intended in general to protect
the value of the secured creditor's interest in the collateral, as of the
commencement of the case, and may include cash payments or the granting of
additional security, if and at such times as the court in its discretion
determines, for any diminution in the value of the collateral as a result of the
stay of foreclosure during the pendency of the bankruptcy case. In view of the
lack of a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict, in the
event of the bankruptcy of the Company, whether and for how long payments under
the Notes would be delayed, whether or when the Trustee would be permitted to
foreclose on the Collateral or whether or to what extent holders of the Notes
would be compensated for any delay in payment or loss of value of the Collateral
through the requirement of "adequate protection." See "Risk Factors --
Fraudulent Transfer Considerations."
RANKING; HOLDING COMPANY STRUCTURE
The Notes rank PARI PASSU in right of payment with all existing and future
senior indebtedness of the Company. The Company has no independent operations
and its only significant assets are expected to be its
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equity interests in subsidiaries. The Notes are effectively subordinated (I.E.,
"structurally subordinated") to indebtedness and other obligations directly
incurred by subsidiaries of the Company (to the extent of the assets of the
subsidiary or subsidiaries which have incurred, or are liable with respect to,
such indebtedness or other obligations). After giving effect to the Merger and
the Offerings and the application of the estimated proceeds therefrom, at
December 31, 1995, on a PRO FORMA basis, the Company would have had $
million of indebtedness outstanding, including the Notes, and its subsidiaries
would have had approximately $ million of indebtedness outstanding,
substantially all of which would have been effectively senior to the Notes.
Dividends and distributions received with respect to equity interests in
subsidiaries of the Company are the sole source of funds which will be available
to the Company to meet its obligations, including its obligations pursuant to
the Indenture. The payment of such dividends and distributions by subsidiaries,
however, is restricted by certain covenants contained in debt agreements and
other agreements to which such subsidiaries or their direct or indirect owners
may be subject [(including without limitation the restrictions contained in the
Indenture)] and may be restricted by other agreements entered into in the future
and by applicable law. There can be no assurance that the operating results of
the Company's subsidiaries at any given time will be sufficient to pay dividends
or make other distributions to the Company.
REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 200 , upon not less than 30 days nor
more than 60 days notice to each holder of Notes, at the following redemption
prices (expressed as percentages of the principal amount) if redeemed during the
12-month period commencing of the years indicated below, in each case
(subject to the right of Holders of record on a Record Date to receive interest
due on an Interest Payment Date that is on or prior to such Redemption Date)
together with accrued and unpaid interest thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
............................................................................. %
............................................................................. %
............................................................................. %
and thereafter............................................................... 100.000%
</TABLE>
At any time on or before , 1997, the Company may also redeem the
Notes in whole at a redemption price equal to % of the aggregate principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of redemption, with the net proceeds of a bank financing. In addition, at any
time on or before , 199 , the Company may redeem up to 35% of the
original aggregate principal amount of the Notes at a redemption price equal to
% of the principal amount thereof, together with accrued and unpaid interest,
if any, to the date of redemption, with the net proceeds of an Equity Offering
of the Company.
The Notes will also be redeemable in whole or in part, at any time upon not
less than 30 nor more than 60 days prior notice (or such earlier date as may be
required by any Gaming Authority) at 100% of the principal amount thereof,
together with accrued and unpaid interest through the date on which the holder
receives notice of disqualification (or such lesser price as such Gaming
Authority may require), pursuant to a Required Regulatory Redemption. In certain
circumstances, holders of the Notes may be required to qualify under regulations
adopted by certain Gaming Authorities as a financial source to and as holders of
securities of the Company. See "Gaming Regulation and Licensing." The Indenture
will provide that if any Gaming Authority requires that a holder (whether the
record or beneficial owner) so qualify and if such holder does not so qualify,
then such holder must dispose of his interest in the Notes within 30 days after
receipt of notice of such finding, or within such earlier time as such Gaming
Authority may require.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed,
or, if the Notes are not so listed, on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
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The Notes will not have the benefit of any mandatory redemption or sinking
fund.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Note to be redeemed to such Holder's last address as then shown upon the
registry books of the Registrar. Any notice which relates to a Note to be
partially redeemed must state the portion of the principal amount equal to the
unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless the Company defaults in the payment
thereof.
CERTAIN COVENANTS
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture will provide that in the event that a Change of Control has
occurred, each holder of Notes will have the right, at such holder's option,
pursuant to an irrevocable and unconditional offer by the Company (the "Change
of Control Offer"), to require the Company to repurchase all or any part of such
holder's Notes (PROVIDED, that the principal amount of such Notes must be $1,000
or an integral multiple thereof) on a date (the "Change of Control Purchase
Date") that is no later than 60 days after the occurrence of such Change of
Control, at a cash price (the "Change of Control Purchase Price") equal to 101%
of the principal amount thereof, (subject to the right of Holders of record on a
Record Date to receive interest due on an Interest Payment Date that is on or
prior to such Change in Control Purchase Date) together with accrued interest to
the Change of Control Purchase Date. The Change of Control Offer will be made
within 30 days following a Change of Control and will remain open for 20
Business Days following its commencement (the "Change of Control Offer Period").
Upon expiration of the Change of Control Offer Period, the Company shall
purchase all Notes properly tendered in response to the Change of Control Offer.
As used herein, 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 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 the Company'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 Company that is not approved by at least a
majority of the Continuing Directors (A) in which the Company is not the
continuing or surviving corporation or (B) pursuant to which any Voting Stock of
the Company 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 Company.
An "Exempt Person" is defined as (A) the Company, any Subsidiary of the
Company or any employee benefit plan or stock ownership plan of either the
Company or any Subsidiary of the Company or (B) any of Kirkland, KIC, GSA or Mr.
Wilms, or any of their respective Affiliates, or any successor to any of
Kirkland, KIC or GSA or any of their respective Affiliates by merger, sale or
transfer of assets or similar transaction, or by a transfer from Mr. Wilms to
any estate planning vehicle controlled by Mr. Wilms or established for the
benefit of Mr. Wilms' family or his estate.
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Purchase Price (together with accrued and unpaid
interest) of all Notes so tendered and (iii) deliver to the Trustee Notes so
accepted together with an Officers' Certificate listing the Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
the Holders of Notes so accepted payment in an amount equal to the Change of
Control Purchase Price (together with accrued and unpaid interest), and the
Trustee will promptly authenticate and mail or deliver to such Holders a new
Note equal in principal amount to any unpurchased portion of the
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Note surrendered. Any Notes not so accepted will be promptly mailed or delivered
by the Company to the Holder thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. No assurance can be given that the Company will have sufficient
funds available to purchase all of the Notes were they to be tendered in
response to an offer made as a result of a Change of Control. See "Risk Factors
- -- Change of Control."
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire Notes tendered upon the
occurrence of a Change of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture will provide that, except as set forth below in this covenant,
the Company will not, and will not permit any of its Subsidiaries to, directly
or indirectly, issue, assume, guaranty, incur, become directly or indirectly
liable with respect to, or otherwise become responsible for, contingently or
otherwise (individually and collectively, to "incur" or, as appropriate, an
"incurrence"), any Indebtedness or any Disqualified Capital Stock.
Notwithstanding the foregoing:
(a) if (i) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect on a PRO FORMA
basis to, such incurrence of Indebtedness or Disqualified Capital Stock and (ii)
on the date of such incurrence (the "Incurrence Date"), the Consolidated
Coverage Ratio of the Company for the Reference Period immediately preceding the
Incurrence Date, after giving effect on a PRO FORMA basis to such incurrence of
such Indebtedness or Disqualified Capital Stock and, to the extent set forth in
the definition of Consolidated Coverage Ratio, the use of proceeds thereof,
would be at least 2.0 to 1 (the "Debt Incurrence Ratio"), then the Company or
any Subsidiary may incur such Indebtedness or Disqualified Capital Stock,
[PROVIDED, that except in the case of Permitted Indebtedness and Acquired
Indebtedness, such Indebtedness incurred pursuant to this clause (a) has an
Average Life to Stated Maturity that exceeds the remaining Average Life to
Stated Maturity of the Notes and has a Stated Maturity for its final scheduled
principal or (in the case of Disqualified Capital Stock) redemption payment, as
applicable, later than the Stated Maturity for the final scheduled principal
payment of the Notes;]
(b) the Company or any Subsidiary may incur Indebtedness evidenced by the
Notes and represented by the Indenture up to the amounts specified therein as of
the date thereof;
(c) the Company or any Subsidiary may incur Purchase Money Indebtedness
(including any Indebtedness issued to refinance, replace or refund such
Indebtedness) on or after the Issue Date, PROVIDED, that (i) the aggregate
amount of such Indebtedness incurred on or after the Issue Date and outstanding
at any time pursuant to this paragraph (c) shall not exceed $ million, and
(ii) such Indebtedness shall not constitute less than 75% nor more than 100% of
the cost (determined in accordance with GAAP) to the Company or such Subsidiary,
as applicable, of the property so purchased or leased;
(d) the Company or any Subsidiary, as applicable, may incur Refinancing
Indebtedness with respect to any Indebtedness or Disqualified Capital Stock, as
applicable, described in clauses (a) and (b) of this covenant or with respect to
Indebtedness which is outstanding on the Issue Date (after giving effect to the
Transaction and the Wulff Restructuring) so long as such Refinancing
Indebtedness is secured only by the assets (if any) that secured the
Indebtedness so refinanced;
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(e) Gaming, Wulff and their Subsidiaries may incur Indebtedness under one or
more working capital facilities in an aggregate amount outstanding at any time
(including any Indebtedness which refinances, replaces or refunds such
Indebtedness) of $50.0 million;
(f) the Company or any Subsidiary may incur Permitted Indebtedness;
(g) the Company or any Subsidiary may incur Indebtedness in an aggregate
amount outstanding at any time (including any Indebtedness issued to refinance,
replace, or refund such Indebtedness) of up to $ million.
(h) the Company or any Subsidiary may incur Acquired Indebtedness, provided,
however, that if any such Indebtedness ceases to be non-recourse debt, such
event shall be deemed to constitute an incurrence of Indebtedness;
(i) the Company or any Subsidiary may incur Capitalized Lease Obligations
which do not exceed, as determined in accordance with GAAP, $ million in
amount in the aggregate at any one time outstanding;
(j) the Company or any Subsidiary may incur Indebtedness in connection with
one or more commercial letters of credit or banker's acceptances issued for the
account of the Company of any Subsidiary for the purchase of goods or services
in the ordinary course of business;
(k) the Company or any Subsidiary may incur Indebtedness in respect of
performance, completion, guarantee, surety or similar bonds, provided by the
Company or any Subsidiary in the ordinary course of business;
(l) the Company or any Subsidiary may post a bond or surety obligation in
order to prevent the loss or material impairment of or to obtain a Gaming
License or as otherwise required by an order of any Gaming Authority to the
extent required by applicable law and consistent in character and amount with
customary industry practice; and
(m) the Company or any Subsidiary may incur Indebtedness reimbursement
obligations with respect to letters of credit in respect of workers'
compensation claims.
In the event that the aggregate principal amount of Convertible Debentures
outstanding following the Convertible Exchange Offer and the Automatic
Conversion is reduced by at least $50.0 million, the principal amount of working
capital facilities permitted to be incurred by Gaming, Wulff and their
Subsidiaries under clause (e) above will be increased to a total of $85.0
million [of which $50.0 million will be applicable to Gaming and its
Subsidiaries and $35.0 million will be applicable to Wulff and its
Subsidiaries.]
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes a Subsidiary of the Company
(including upon designation of any subsidiary or other person as a Subsidiary)
or is merged with or into or consolidated with the Company or a Subsidiary of
the Company shall be deemed to have been incurred at the time such Person
becomes such a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company, as applicable.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, make any Restricted Payment
if, after giving effect to such Restricted Payment on a pro forma basis, (1) a
Default or an Event of Default shall have occurred and be continuing, (2) the
Company is not permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt Incurrence Ratio in paragraph (a) of the covenant
"LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK," or (3) the aggregate amount of all Restricted Payments made by the
Company and its Subsidiaries, including after giving effect to such proposed
Restricted Payment, from and after the Issue Date, would exceed the sum of (a)
50% of the aggregate Consolidated Net Income of the Company for the period
(taken as one accounting period) commencing on the first day of the first full
fiscal quarter commencing after the Issue Date, to and including the last day of
the fiscal quarter ended immediately prior to the date of each such calculation
(or, in the event Consolidated Net Income for such period is a deficit, then
minus 100% of
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such deficit), plus (b) 100% of the aggregate net proceeds received after the
Issue Date, including the fair value of property other than cash (as determined
in good faith by the Board of Directors), from the issuance (other than to a
Subsidiary) of Capital Stock (other than Disqualified Capital Stock) or the
Company (whether upon the exercise of options, warrants or other rights or
otherwise) plus (c) the principal amount of Indebtedness of the Company that has
been converted or exchanged into Capital Stock (other than Disqualified Capital
Stock) of the Company, together with the aggregate cash proceeds received by the
Company at the time of such conversion or exchange; plus (d) any dividends,
distributions or other similar payments paid to the Company or any Subsidiary by
any Unrestricted Subsidiary or in respect of any Restricted Investment after the
Issue Date; provided that Consolidated Net Income, for purposes of clause (a)
above only, will be reduced by the amount of any such dividend, distributions or
other similar payments; plus (e) the amount of any repayment (other than a
dividend, distribution or other similar payment) to the Company or a Subsidiary
of any loan or advance to an Affiliate to the extent such loan or advance
resulted in the making of a Restricted Payment; plus (f) the amount of any cash
contributions to the Company's capital subsequent to the Issue Date; plus (g)
$15,000,000.
The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit (A) the redemption by the Company of any Equity
Interest (including a Required Regulatory Redemption) if (i) counsel to the
Company delivers an opinion that failure to so redeem would subject the Company
to a materially adverse action by a Gaming Authority (or, if applicable, a
failure so to act with a materially adverse consequence to the Company) and (ii)
the Company determines (as evidenced by a Board of Directors resolution
delivered to the Trustee) that such adverse action or failure so to act would be
likely to have a material adverse effect on the Company, (B) Restricted
Investments for , PROVIDED, that, after giving PRO FORMA effect to such
Investment, the aggregate amount of all such Investments made on or after the
Issue Date that are outstanding (after giving effect to any such Investments
that are returned or repaid to the Company or to any Subsidiary, without
restriction, in cash or property on or prior to the date of any such
calculation) at any time does not exceed $ million, (C) the payment of
scheduled dividends on the Preferred Stock (including dividends on any Preferred
Stock issued as dividends) to the extent such dividends are not permitted to be
paid in kind pursuant to the terms thereof, (D) a Qualified Exchange, or (E) the
payment of any dividend on Qualified Capital Stock within 60 days after the date
of its declaration if such dividend could have been made on the date of such
declaration in compliance with the foregoing provisions; (F) the purchase of
Capital Stock held by employees of the Company or any Subsidiary pursuant to any
stock ownership or option plan in an aggregate amount not to exceed $5.0 million
in any one fiscal year; (G) any redemption or purchase by the Company or any
Subsidiary of Equity Interests of the Company required by a Gaming Authority in
order to preserve a Gaming License; (H) any redemption pursuant to a Required
Regulatory Redemption; (I) Restricted Investments in Native American Gaming in
an aggregate amount not to exceed $10.0 million at any one time outstanding; (J)
Restricted Investments in any jurisdiction or in any joint venture agreements to
the extent necessary in the good faith judgment of the Company to secure a
Gaming License or to comply with local law requirements; (K) the payment of any
dividend or distribution by RCVP, VSI, SVS and VDSI; (L) payments required by,
or made pursuant to, the Amended VSI Loan or the Rainbow Debt Agreements, both
as in existence on the Issue Date (after giving effect to the Transaction and
the Wulff Restructuring); (M) scheduled interest payments made in respect of the
Convertible Debentures; (N) payments made in respect of any acquisition,
provided, that such acquisition is made from the net proceeds received after the
Issue Date, including the fair value of any property other than cash (as
determined in good faith by the Board of Directors), from the issuance (other
than to a Subsidiary) of Capital Stock (other than Disqualified Capital Stock)
of the Company (whether upon the exercise of options, warrants or other rights
or otherwise) and warrants, rights or options on Capital Stock (other than
Disqualified Capital Stock) of the Company; (O) Investments of up to [$2.0
million] to purchase, retire or otherwise acquire all or part of any outstanding
Equity Interests in either of KGP or KFP that the Company or a Subsidiary does
not own on the Issue Date; (P) loans or advances to officers, directors and
employees of the Company or any Subsidiary after the Issue Date in an aggregate
amount not to exceed $2.5 million at any one time outstanding; and (Q) Exempted
Affiliate Transactions. The full amount of any Restricted Payment
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made pursuant to the foregoing clauses (B), (H), (I) and (K) of the immediately
preceding sentence, however, will be deducted in the calculation of the
aggregate amount of Restricted Payments available to be made referred to in
clause (3) of the immediately preceding paragraph.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, assume or suffer to
exist any consensual restriction on the ability of any Subsidiary of the Company
to pay dividends or make other distributions to or on behalf of, or to pay any
obligation to or on behalf of, or make or pay loans or advances to or on behalf
of, the Company or any Subsidiary of the Company, except (a) restrictions
imposed by the Notes or the Indenture, (b) restrictions imposed by applicable
law or by Gaming Authorities on entities possessing a Gaming License, (c)
existing restrictions under Indebtedness outstanding on the Issue Date (after
giving effect to the Transaction and the Wulff Restructuring), (d) restrictions
under any Acquired Indebtedness not incurred in violation of the Indenture or
any agreement relating to any property, asset, or business acquired by the
Company or any of its Subsidiaries, which restrictions in each case existed at
the time of acquisition, were not put in place in connection with or in
anticipation of such acquisition and are not applicable to any person, other
than the person acquired, or to any property, asset or business, other than the
property, assets and business so acquired, (e) restrictions with respect solely
to a Subsidiary of the Company imposed pursuant to a binding agreement which has
been entered into for the sale or disposition of all or substantially all of the
Equity Interests or assets of such Subsidiary, PROVIDED, that such restrictions
apply solely to the Equity Interests or assets of such Subsidiary which are
being sold and (f) restrictions on transfer contained in Permitted Liens,
PROVIDED, that such restrictions relate only to the transfer of the property
subject thereto. Notwithstanding the foregoing, customary provisions restricting
subletting or assignment of any lease or assignment of any license entered into
in the ordinary course of business, consistent with industry practice shall not
in and of themselves be considered a restriction on the ability of the
applicable Subsidiary to transfer such agreement.
LIMITATION ON LIENS
The Indenture will provide that the Company will not, and will not permit
any Subsidiary to, create, incur, assume or suffer to exist any Lien of any
kind, other than Permitted Liens, upon any of their respective assets now owned
or acquired on or after the date of the Indenture or upon any income or profits
therefrom.
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, in one or a series of related transactions, convey,
sell, transfer, assign or otherwise dispose of, directly or indirectly, any of
their respective property, business or assets (other than assets securing
Indebtedness permitted by the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock"), including by merger or
consolidation (in the case of a Subsidiary), and including any sale or other
transfer or issuance of any Equity Interests of any Subsidiary of the Company,
whether by the Company or a Subsidiary of either or through the issuance, sale
or transfer of Equity Interests by a Subsidiary of the Company (an "Asset
Sale"), unless (l)(a) within 270 days after the date of such Asset Sale, the Net
Cash Proceeds therefrom (the "Asset Sale Offer Amount") are applied to the
optional redemption of the Notes in accordance with the terms of the Indenture
or to the repurchase of the Notes pursuant to an irrevocable, unconditional cash
offer (the "Asset Sale Offer") to repurchase Notes at a purchase price (the
"Asset Sale Offer Price") of 100% of principal amount, together with accrued and
unpaid interest to the date of payment, made within 240 days of such Asset Sale
or (b) within 270 days following such Asset Sale, the Asset Sale Offer Amount is
invested in assets and property (other than notes, bonds, obligation and
securities) which will immediately constitute or be a part of a Related Business
of the Company or such Subsidiary (if it continues to be a Subsidiary)
immediately following such transaction, (2) with respect to any Asset Sale or
related series of Asset Sales involving securities, property or assets with an
aggregate fair market value in excess of $5.0 million, at least 75% of the
consideration for such Asset Sale or series of related Asset Sales consists of
Cash or Cash Equivalents, (3) no Default or Event of Default shall have occurred
and be continuing at the time of, or would occur after giving effect, on a PRO
FORMA basis, to, such Asset Sale, and (4) the Board of Directors of the Company
determines in good faith that the Company or such Subsidiary, as applicable,
receives fair market value for such Asset Sale.
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The Indenture will provide that an Asset Sale Offer may be deferred until
the accumulated Net Cash Proceeds from Asset Sales not applied to the uses set
forth in (l)(b) above (the "Excess Proceeds") exceeds $15.0 million and that
each Asset Sale Offer shall remain open for 20 Business Days following its
commencement (the "Asset Sale Offer Period"). Upon expiration of the Asset Sale
Offer Period, the Company shall apply the Asset Sale Offer Amount plus an amount
equal to accrued interest to the purchase of all Notes properly tendered (on a
pro rata basis if the Asset Sale Offer Amount is insufficient to purchase all
Notes so tendered) at the Asset Sale Offer Price (together with accrued
interest). To the extent that the aggregate amount of Notes tendered pursuant to
an Asset Sale Offer is less than the Asset Sale Offer Amount, the Company may
use any remaining Net Cash Proceeds for general corporate purposes as otherwise
permitted by the Indenture, and following each Asset Sale Offer the Excess
Proceeds amount shall be reset to zero. For purposes of (2) above, total
consideration received means the total consideration received for such Asset
Sales minus the amount of (a) Indebtedness assumed or repaid by a transferee as
required thereunder and (b) property that within 90 days of such Asset Sale is
converted into Cash or Cash Equivalents).
Notwithstanding the foregoing provisions of the prior paragraph:
(i) the Company and its Subsidiaries may, in the ordinary course of
business, convey, sell, lease, transfer, assign or otherwise dispose of
inventory acquired and held for resale in the ordinary course of business;
(ii) the Company and its Subsidiaries may convey, sell, lease, transfer,
assign or otherwise dispose of assets pursuant to and in accordance with the
limitation on mergers, sales or consolidations provisions in the Indenture;
(iii) the Company and its Subsidiaries may sell or dispose of damaged,
worn out or other obsolete property in the ordinary course of business so
long as such property is no longer necessary for the proper conduct of the
business of the Company or such Subsidiary, as applicable;
(iv) the Subsidiaries may convey, sell, lease, transfer, assign or
otherwise dispose of assets to the Company or any of its Subsidiaries;
(v) The Company or any Subsidiary may make any disposition that is a
Restricted Payment or that is a dividend or distribution permitted under the
covenant described above under "LIMITATION ON RESTRICTED PAYMENTS" or any
Investment that is not prohibited thereunder or any disposition of cash or
Cash Equivalents; and
(vi) the Company or any Subsidiary may make any single disposition, or
related series of dispositions, of assets with an aggregate fair market
value (as determined in good faith by the Company) of less than $10.0
million.
All Net Cash Proceeds from an Event of Loss shall be invested or used to
repurchase Notes, all within the period and as otherwise provided above in
clause (1) of the first paragraph of this covenant.
In addition to the foregoing, the ability of the Company and its
Subsidiaries to, directly or indirectly, make any Asset Sale of any of the
Equity Interests of any Subsidiary is restricted pursuant to the covenant
"RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK" BELOW.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable Federal
and state securities laws.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Company may not, and may not permit any Subsidiary to, directly or
indirectly, enter into any transaction or series of transactions after the Issue
Date with any Affiliate of the Company (other than a Company or a Subsidiary),
unless (i) such transaction or series of transactions is on terms no less
favorable to the Company or such Subsidiary than those that could be obtained in
a comparable arm's-length transaction with an entity that is not an Affiliate;
(ii) if such transaction or series of transactions involves the approval of a
management or consulting agreement between the Company or any Subsidiary, on the
one hand, and an
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Unrestricted Subsidiary, on the other hand, then such agreement must be on terms
and conditions that are reasonable to the Company or such Subsidiary as
determined by the Board of Directors; (iii) if such transaction or series of
transactions (a) involves aggregate consideration equal to or greater than $1.0
million or (b) involves the approval of a management or consulting agreement
between the Company or any Subsidiary, on the one hand, and any Person other
than a Subsidiary or an Unrestricted Subsidiary, on the other hand, a committee
of independent directors of the Company shall approve by resolution certifying
that such transaction or series of transactions complies with clause (i) above;
and (iv) if such a transaction or series of transactions involves aggregate
consideration equal to or greater than $10.0 million, the Company receives a
written opinion from an investment banking firm of national standing or, in the
case of a transaction involving a sale or transfer of assets subject to
valuation such as real estate, an appraisal by a nationally recognized appraisal
firm, that such transaction or series of transactions is fair to the Company
from a financial point of view (provided that the Company will not be required
to obtain such an opinion with respect to any management or consulting agreement
described in clauses (ii) or (iii) above).
This covenant will not apply to (a) transactions between the Company or any
Subsidiary and any employee of the Company or any Subsidiary that is entered
into in the ordinary course of business, (b) the payment of reasonable and
customary regular fees and expenses to directors of the Company, (c) Exempted
Affiliate Transactions, (d) the sharing of costs and expenses between the
Company and any Subsidiary or between such Subsidiary and Unrestricted
Subsidiaries, (e) Restricted Payments permitted by the provisions of the
Indenture described above under the covenant "LIMITATION ON RESTRICTED
PAYMENTS," (f) purchases of Equity Interests (other than Disqualified Stock) by
any stockholder of the Company (or an Affiliate of a stockholder of the
Company), provided that such Equity Interests do not bear cash dividends, (g)
management services provided to an Unrestricted Subsidiary whose sole purpose is
to develop, construct and operate a new gaming facility, provided that the
Company or such Subsidiary, as the case may be, is reimbursed by the
Unrestricted Subsidiary for all costs and expenses (including without limitation
payroll) it incurs in providing such services, or (h) any other transactions
that do not involve, in the aggregate for all such transactions, the payment of
more than $250,000 in consideration in any one calendar year.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture will provide that the Company will not, directly or
indirectly, consolidate with or merge with or into another person or sell,
lease, convey or transfer all or substantially all of its assets (computed on a
Consolidated basis), whether in a single transaction or a series of related
transactions, to another person or group of affiliated persons or adopt a plan
of liquidation, unless (i) either (a) the Company is the continuing entity or
(b) the resulting, surviving or transferee entity or, in the case of a plan of
liquidation, the entity which receives the greatest value from such plan of
liquidation is a corporation organized under the laws of the United States, any
state thereof or the District of Columbia and expressly assumes by supplemental
indenture all of the obligations of the Company in connection with the Notes and
the Indenture; (ii) no Default or Event of Default shall exist or shall occur
immediately after giving effect on a PRO FORMA basis to such transaction; and
(iii) immediately after giving effect to such transaction on a PRO FORMA basis,
the Consolidated resulting, surviving or transferee entity or, in the case of a
plan of liquidation, the entity which receives the greatest value from such plan
of liquidation would immediately thereafter be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Debt Incurrence Ratio set forth in
paragraph (a) of the covenant "LIMITATION ON INCURRENCE OF ADDITIONAL
INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK."
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company or consummation of a plan of liquidation in
accordance with the foregoing, the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer is
made or, in the case of a plan of liquidation, the entity which receives the
greatest value from such plan of liquidation shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named therein as the Company, and the Company shall be released from the
obligations under the Notes and the Indenture except with respect to any
obligations that arise from, or are related to, such transaction.
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For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company shall be deemed to
be the transfer of all or substantially all of the properties and assets of the
Company.
LIMITATION ON LINES OF BUSINESS
The Indenture will provide that neither the Company nor any of its
Subsidiaries shall directly or indirectly engage to any substantial extent in
any line or lines of business activity other than that which, in the good faith
judgment of the Board of Directors of the Company is a Related Business.
MAINTENANCE OF INSURANCE
The Indenture will provide that, from and at all times after the Issue Date
until the Notes have been paid in full, the Company will, and will cause its
Subsidiaries to, have and maintain in effect insurance with responsible carriers
against such risks and in such amounts as is customarily carried by similar
businesses with such deductibles, retentions, self insured amounts and
coinsurance provisions as are customarily carried by similar businesses of
similar size, including, without limitation, property and casualty, and, with
respect to insurance on the Collateral, shall have provided insurance
certificates evidencing such insurance to the Trustee prior to the Issue Date
and shall thereafter provide such certificates prior to the anniversary or
renewal date of each such policy, which certificate shall expressly state the
expiration date for each policy listed. All insurance with respect to the
Collateral required under the Indenture (except worker's compensation) shall
name the Company and the Trustee as additional insureds or loss payees, as the
case may be, with losses in excess of $ million payable jointly to the
Company and the Trustee (unless a Default or Event of Default has occurred and
is then continuing, in which case all losses are payable solely to the Trustee),
with no recourse against the Trustee for the payment of premiums, deductibles,
commissions or club calls, and for at least 30 days notice of cancellation. All
such insurance policies will be issued by carriers having an A.M. Best &
Company, Inc. rating of A- or higher and a financial size category of not less
than X, or if such carrier is not rated by A.M. Best & Company, Inc., having the
financial stability and size deemed appropriate by an opinion from a reputable
insurance broker.
RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK
The Indenture will provide that the Company will not sell, and will not
permit any of its Subsidiaries to issue or sell, any Equity Interests of any
Subsidiary of the Company to any person other than the Company or a Wholly-owned
Subsidiary of the Company, except for (i) directors' qualifying shares or shares
owned by foreign nationals, in each case to the extent required by applicable
law; (ii) Equity Interests of RCVP, VSI, SVS and VDSI outstanding on the Issue
Date (after giving effect to the Transaction and the Wulff Restructuring) and
not owned by Wholly-owned Subsidiaries; (iii) the issuance and sale of all, but
not less than all, of the Equity Interests of any Subsidiary of the Company or
any of its Subsidiaries in compliance with the other provisions of the
Indenture; [and (iv) Equity Interests issued by a Person prior to the time (a)
such Person becomes a Subsidiary of the Company, (b) such Person merges with or
into a Subsidiary of the Company or (c) a Subsidiary of the Company merges with
or into such Person; provided that such Capital Stock was not issued by such
Person in anticipation of the type of transaction contemplated by clauses (a),
(b) or (c)].
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture will prohibit the Company and its Subsidiaries from being
required to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation under the Investment Company Act.
REPORTS
The Indenture will provide that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder, within 15 days after it is or
would have been required to file such with the Commission, annual and quarterly
financial statements substantially equivalent to financial statements that would
have been included in reports filed with the Commission, if the Company were
subject to the requirements of Section 13 or 15(d) of
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the Exchange Act, including, with respect to annual information only, a report
thereon by the Company's certified independent public accountants as such would
be required in such reports to the Commission, and, in each case, together with
a management's discussion and analysis of financial condition and results of
operations which would be so required.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will define an Event of Default as (i) the failure by the
Company to pay any installment of interest on the Notes as and when the same
becomes due and payable and the continuance of any such failure for 30 days,
(ii) the failure by the Company to pay all or any part of the principal, or
premium, if any, on the Notes when and as the same becomes due and payable at
maturity, redemption, by acceleration or otherwise, including, without
limitation, payment of the Change of Control Purchase Price or the Asset Sale
Offer Price, or otherwise, (iii) the failure by the Company or any Subsidiary to
observe or perform any other covenant or agreement contained in the Notes or the
Indenture and, subject to certain exceptions, the continuance of such failure
for a period of 60 days after written notice is given to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding, (iv) certain events of
bankruptcy, insolvency or reorganization in respect of the Company or any of its
Significant Subsidiaries, (v) a default in Indebtedness of the Company or any of
its Subsidiaries with an aggregate principal amount in excess of $15.0 million,
(vi) final unsatisfied judgments not covered by insurance aggregating in excess
of $15.0 million, at any one time rendered against the Company or any of its
Subsidiaries and not stayed, bonded or discharged within 60 days, and (vii) an
event of default under any Collateral Agreement. The Indenture provides that if
a Default occurs and is continuing, the Trustee must, within 90 days after the
occurrence of such default, give to the Holders notice of such default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to the Company or any
Significant Subsidiary,) then in every such case, unless the principal of all of
the Notes shall have already become due and payable, either the Trustee or the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by notice in writing to the Company (and to the Trustee if given by
Holders) (an "Acceleration Notice"), may declare all principal, determined as
set forth below, and accrued interest thereon to be due and payable immediately.
If an Event of Default specified in clause (iv), above, relating to the Company
or any Significant Subsidiary occurs, all principal and accrued interest thereon
will be immediately due and payable on all outstanding Notes without any
declaration or other act on the part of Trustee or the Holders. The Holders of a
majority in aggregate principal amount of Notes generally are authorized to
rescind such acceleration if all existing Events of Default, other than the
non-payment of the principal of, premium, if any, and interest on the Notes
which have become due solely by such acceleration and except a default with
respect to any provision requiring a supermajority approval to amend, which
default may only be waived by such a supermajority, have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a default
with respect to any provision requiring a supermajority approval to amend, which
default may only be waived by such a supermajority, and except a default in the
payment of principal of or interest on any Note not yet cured or a default with
respect to any covenant or provision which cannot be modified or amended without
the consent of the Holder of each outstanding Note affected. Subject to the
provisions of the Indenture relating to the duties of the Trustee, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Holders, unless such
Holders have offered to the Trustee reasonable security or indemnity. Subject to
all provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the Notes at the time 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.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will provide that the Company may, at its option and at any
time within one year of the Stated Maturity of the Notes, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and
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discharged the entire Indebtedness represented, the Collateral shall be released
from the Liens in favor of the Notes and the Indenture shall cease to be of
further effect as to all outstanding Notes, except as to (i) rights of Holders
to receive payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due from the trust funds; (ii) the
Company's obligations with respect to such Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and
the maintenance of an office or agency for payment and money for security
payments held in trust; (iii) the rights, powers, trust, duties, and immunities
of the Trustee, and the Company's obligations in connection therewith; and (iv)
the Legal Defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, the Collateral shall be
released from the Liens in favor of the Notes and certain events (not including
non-payment, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, U.S. legal tender, non-callable government securities
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such Notes on the stated date for
payment thereof or on the redemption date of such principal or installment of
principal of, premium, if any, or interest on such Notes, and the holders of
Notes must have a valid, perfected, exclusive security interest in such trust;
(ii) in the case of Legal Defeasance, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to such
Trustee confirming that (A) the Company has received from, or there has been
published by the Internal Revenue Service, a ruling or (B) since the date of the
Indenture, there has been a change in the applicable Federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the holders of such Notes will not recognize income, gain or loss
for Federal income tax purposes as a result of such Legal Defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to such Trustee confirming that the holders of such Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Covenant Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other material
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound; (vi) the
Company shall have delivered to the Trustee an officers' certificate stating
that the deposit was not made by the Company with the intent of preferring the
holders of such Notes over any other creditors of the Company or with the intent
of defeating, hindering, delaying or defrauding any other creditors of the
Company or others; and (vii) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that the
conditions precedent provided for in, in the case of the officers' certificate,
clauses (i) through (vi) of this paragraph and, in the case of the opinion of
counsel, clauses (i) (with respect to the validity and perfection of the
security interest), (ii), (iii) and (v) of this paragraph have been complied
with.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of, premium, if any,
and interest on the Notes when due, then the obligations of the Company under
the Indenture and the Collateral Agreements will be revived, and no such
defeasance will be deemed to have occurred.
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AMENDMENTS AND SUPPLEMENTS
The Indenture will contain provisions permitting the Company and the Trustee
to enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding, the
Company and the Trustee are permitted to amend or supplement the Indenture or
any supplemental indenture or modify the rights of the Holders; PROVIDED, that
no such modification may without the consent of holders of at least 66-2/3% in
aggregate principal amount of the Notes at the time outstanding modify the
provisions (including the defined terms used therein) of the covenant
"REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE IN CONTROL" in a
manner adverse to the Holders; and PROVIDED, FURTHER, that no such modification
may, without the consent of each Holder affected thereby: (i) change the Stated
Maturity on any Note, or reduce the principal amount thereof or the rate (or
extend the time for payment) of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the coin or
currency in which, any Note or any premium or the interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment on
or after the Stated Maturity thereof (or, in the case of redemption, on or after
the Redemption Date), or reduce the Change of Control Purchase Price or the
Asset Sale Offer Price, or alter the provisions (including the defined terms
used therein) regarding the right of the Company to redeem the Notes in a manner
adverse to the Holders, or (ii) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
amendment, supplemental indenture or waiver provided for in the Indenture, or
(iii) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Holder of each outstanding Note
affected thereby.
NO PERSONAL LIABILITY OF STOCKHOLDERS, EMPLOYEES, OFFICERS, DIRECTORS
The Indenture will provide that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company or any
successor entity shall have any personal liability in respect of the obligations
of the Company under the Indenture or the Notes by reason of his or its status
as such stockholder, employee, officer or director, except to the extent such is
an issuer of any Note.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of the Company,
including by designation, or is merged or consolidated into or with the Company
or one of its Subsidiaries.
"ACQUISITION" means the purchase or other acquisition of any person or
substantially all the assets of any person by any other person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"ADJUSTED CONSOLIDATED NET INCOME" means, with respect to any person for any
period, the Consolidated Net Income of such person for such period minus 100% of
the amount of any writedowns, writeoffs, or negative extraordinary charges not
otherwise reflected in Consolidated Net Income during such period.
"AFFILIATE" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, PROVIDED, that a Beneficial Owner of 10% or more of the total
voting power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to constitute
control.
"AVERAGE LIFE TO STATED MATURITY" means, as of the date of determination,
with respect to any security or instrument, the quotient obtained by dividing
(i) the sum of (a) the product of the number of years from the date of
determination to the date or dates of each successive scheduled principal (or
redemption) payment of such security or instrument and (b) the amount of each
such respective principal (or redemption) payment by (ii) the sum of all such
principal (or redemption) payments.
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"BENEFICIAL OWNER" or "beneficial owner" for purposes of the definition of
Change of Control has the meaning attributed to it in Rules 13d-3 and 13d-5
under the Exchange Act (as in effect on the Issue Date), whether or not
applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITAL STOCK" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"CAPITALIZED LEASE OBLIGATION" of any person means any obligation of such
person or its Subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"CASH EQUIVALENT" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (PROVIDED, that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits,
certificates of deposit, commercial paper and bankers' acceptances issued by the
parent corporation of any domestic commercial bank of recognized standing having
capital and surplus in excess of $500 million and commercial paper issued by
others rated at least A-2 or the equivalent thereof by Standard & Poor's Ratings
Services or at least P-2 or the equivalent thereof by Moody's Investors Service,
Inc. and in each case maturing within one year after the date of acquisition,
(iii) repurchase agreements that are secured by a perfected security interest in
the types of securities described in clause (i) above, and (iv) money market
funds investing principally in the types of securities described in clauses (i)
and (ii) above.
"CONSOLIDATED COVERAGE RATIO" of any person on any date of determination
(the "Transaction Date") means the ratio, on a PRO FORMA basis, of (a) the
aggregate amount of Consolidated EBITDA of such person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; PROVIDED, that for purposes of
such calculation, (i) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date shall
be assumed to have occurred on the first day of the Reference Period, (ii)
transactions giving rise to the need to calculate the Consolidated Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period, (iii) the incurrence of any Indebtedness or issuance of any Disqualified
Capital Stock during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date (and the application of the proceeds
therefrom to the extent used to refinance or retire other Indebtedness) shall be
assumed to have occurred on the first day of such Reference Period, (iv) the
Consolidated Fixed Charges of such person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a PRO FORMA basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless such
person or any of its Subsidiaries is a party to an Interest Swap or Hedging
Obligation (which shall remain in effect for the 12-month period immediately
following the Transaction Date) that has the effect of fixing the interest rate
on the date of computation, in which case such rate (whether higher or lower)
shall be used, (v) there shall be excluded from Consolidated Fixed Charges any
portion of such Consolidated Fixed Charges related to any amount of Indebtedness
that was outstanding during the Reference Period but is not outstanding on the
Transaction Date, except for Consolidated Fixed Charges actually incurred with
respect to Indebtedness borrowed (as adjusted pursuant to clause (iv)) under a
revolving credit or similar arrangement to the extent
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the commitment thereunder remains in effect on the Transaction Date and (iv) the
Consolidated Fixed Charges of such Person attributable to interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
will be computed based upon the average daily balance of such Indebtedness
during the Reference Period.
"CONSOLIDATED EBITDA" means, with respect to any person, for any period, the
Consolidated Net Income of such person for such period adjusted to add thereto
(to the extent deducted from net revenues in determining Consolidated Net
Income), without duplication, the sum of (i) Consolidated income tax expense,
(ii) Consolidated depreciation and amortization expense and (iii) Consolidated
Fixed Charges.
"CONSOLIDATED FIXED CHARGES" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such person and its
Consolidated Subsidiaries during such period, including (i) original issue
discount and non-cash interest payments or accruals on any Indebtedness, (ii)
the interest portion of all deferred payment obligations, and (iii) all
commissions, discounts and other fees and charges owed with respect to bankers'
acceptances and letter of credit financings and Interest Swap and Hedging
Obligations, in each case to the extent attributable to such period, (b) one-
third of Consolidated Rental Expense for such period attributable to operating
leases of such person and its Consolidated Subsidiaries, and (c) the amount of
dividends accrued or payable by such person or any of its Consolidated
Subsidiaries in respect of Disqualified Capital Stock (other than by
Subsidiaries of such person to such person or such person's Subsidiaries). For
purposes of this definition, interest on a Capitalized Lease Obligation shall be
deemed to accrue at an interest rate reasonably determined by the Company to be
the rate of interest implicit in such Capitalized Lease Obligation in accordance
with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
the net income (or loss) of such person and its Consolidated Subsidiaries
(determined on a Consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) all gains (but not losses) which are
extraordinary (as determined in accordance with GAAP), (b) the net income, if
positive, of any person, other than a Subsidiary, in which such person or any of
its Consolidated Subsidiaries has an interest, except to the extent of the
amount of any dividends or distributions actually paid in cash to such person or
a Consolidated Subsidiary of such person during such period, (c) the net income
or loss of any person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition, and (d) the net income, if
positive, of any of such person's Consolidated Subsidiaries to the extent that
(i) the declaration or payment of dividends or similar distributions and (ii)
the making of any loan or advance to the Company are not at the time permitted
by operation of the terms of its charter or bylaws or any other agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Consolidated Subsidiary.
"CONSOLIDATED RENTAL EXPENSE" of any Person, for any period and determined
without duplication, means the aggregate rental obligations of such Person and
its Consolidated Subsidiaries (not including taxes, insurance, maintenance and
similar expenses that the lessee is obligated to pay under the terms of the
relevant leases), determined on a Consolidated basis in conformity with GAAP,
payable in respect of such period under leases of real or personal property (net
of income from subleases thereof, not including taxes, insurance, maintenance
and similar expenses that the sublessee is obligated to pay under the terms of
such sublease), whether or not such obligations are reflected as liabilities or
commitments on a Consolidated balance sheet of such Person and its Subsidiaries
or in the notes thereto, excluding, however, in any event, that portion of
Consolidated Fixed Charges of such Person representing payments by such Person
or any of its Consolidated Subsidiaries in respect of Capitalized Lease
Obligations.
"CONSOLIDATED SUBSIDIARY" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are Consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
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"CONSOLIDATION" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its Subsidiaries if and to the extent the
accounts of such Person and each of its Subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP consistently
applied. The term "Consolidated" shall have a similar meaning.
"CONTINUING DIRECTOR" means a director of the Company who was either (i) a
member of the board of directors of the Company on the date hereof or (ii)
subsequently became a director of the Company and whose election or nomination
for election is approved or recommended by a vote of a majority of the board of
directors of the Company, which majority includes a majority of the then
existing Continuing Directors then on the board of directors of the Company.
"DISQUALIFIED CAPITAL STOCK" means, with respect to any person, Equity
Interests of such person that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time would be, required to be redeemed or
repurchased (including at the option of the holder thereof) by such person or
any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity
of the Notes (except that the Preferred Stock will not be Disqualified Capital
Stock).
"EQUITY INTEREST" of any Person means any shares, interests, participations
or other equivalents (however designated) in such Person's equity, and shall in
any event include any Capital Stock issued by, or partnership interests in, such
Person.
"EVENT OF LOSS" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"EXEMPTED AFFILIATE TRANSACTIONS" means (i) transactions between or among
the Company and/or its Subsidiaries or among Subsidiaries, (ii) the
continuation, extension or renewal of any transaction entered into between the
Company or any Subsidiary and any Affiliate on or prior to October 31, 1993,
(iii) transactions among the Company 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 Company, KIC, Kirkland, GSA or their respective Affiliates providing
for the payment by the Company of management or related fees in connection with
providing services to the Company 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 Company of consulting fees or similar fees in an
aggregate amount not to exceed $500,000 per annum, (vi) any agreement between
the Issuer and Mr. Kirschbaum or any of his Affiliates providing for the
granting of options or warrants, provided that such options or warrants will not
be payable in cash, notes payable or property, and (vii) transactions entered
into in connection with the Wulff Restructuring.
"FAIR MARKET VALUE" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy and, with respect to any redemption of Notes pursuant
to the applicable gaming laws, means (a) the last sales price regular way on the
last trading day prior to the date of determination of such value on the largest
national securities exchange (or, if said security is not listed on a national
securities exchange, on which such Notes shall have traded on such trading day,
or (b) if no such sales of such Notes occurred on such trading day, the mean
between the "bid" and "asked" prices on such national securities exchange or as
quoted on the Nasdaq, as the case may be, on such last trading day, or (c) if
the Notes are not listed or quoted on any national securities exchange or
Nasdaq, the average of the closing bid and asked prices on such day in the
over-the-counter market as reported by NASDAQ or, if bid and asked price for the
Notes have not been reported through NASDAQ, the average of the bid and asked
prices on such day as furnished by any New York Stock Exchange member firm
regularly making a market in the Notes, selected for such purpose by the Company
or (d) if none of the clauses (a) through (c) are applicable, the fair market
value of such Notes as of the date of determination as
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determined in such manner as shall be satisfactory to the Company, which shall
be entitled to rely for such purpose on the advice of any firm of investment
bankers or securities dealers having familiarity with the Notes.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession as in effect on the Issue Date.
"GAMING AUTHORITY" means any governmental agency which regulates gaming in a
jurisdiction in which the Company or any of its Subsidiaries conducts gaming
activities or activities related to the design, manufacture or distribution of
gaming machines, equipment or systems.
"GAMING LICENSES" means every material license, material franchise, or other
material authorization required to own, lease, operate or otherwise conduct or
manage riverboat, dockside or land-based gaming (including any applicable liquor
licenses) or to design, manufacture or distribute gaming machines, equipment or
systems in any state or jurisdiction where the Company or any of its
Subsidiaries conducts such business.
"GSA" means Gaming Systems Advisors, L.P.
"GUARANTEED DEBT" of any person means, without duplication, all indebtedness
of any other person referred to in the definition of Indebtedness contained in
this section guaranteed directly or indirectly in any manner by such person, or
in effect guaranteed directly or indirectly by such person through an agreement
(a) to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (b) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to assure
the holder of such Indebtedness against loss, (c) to supply funds to, or in any
other manner invest in, the debtor (including any agreement to pay for property
or services without requiring that such property be received or such services be
rendered), (d) to maintain working capital or equity capital of the debtor, or
otherwise maintain the net worth, solvency or other financial condition of the
debtor or (e) otherwise to assure a creditor against loss; PROVIDED, that the
term "guarantee" shall not include endorsements for collection or deposit, in
either case in the ordinary course of business.
"INDEBTEDNESS" of any person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of such any person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such person or only to a portion thereof), (ii) evidenced by bonds,
notes, debentures or similar instruments, (iii) representing the balance
deferred and unpaid of the purchase price of any property or services, except
those incurred in the ordinary course of its business that would and continue to
constitute ordinarily a trade payable to trade creditors, (iv) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks, (v) for
the payment of money relating to any Capitalized Lease Obligation, or (vi)
evidenced by a letter of credit or a reimbursement obligation of such person
with respect to any letter of credit; (b) all net obligations of such person
under Interest Swap and Hedging Obligations; (c) all liabilities and obligations
of others of the kind described in the preceding clause (a) or (b) that such
person has guaranteed or that is otherwise its legal liability or which are
secured by any assets or property of such person and all obligations to
purchase, redeem or acquire any Equity Interests; (d) any and all deferrals,
renewals, extensions, refinancings and refundings (whether direct or indirect)
of, or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (a), (b) or (c), or this clause (d),
whether or not between or among the same parties; and (e) all Disqualified
Capital Stock of such Person (valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends).
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such
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price is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value to be determined in good faith by the
board of directors of the issuer (or managing general partner of the issuer) of
such Disqualified Capital Stock.
"INTEREST SWAP AND HEDGING OBLIGATION" means any obligation of any person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"INVESTMENT" by any person in any other person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
person; (b) the making by such person of any deposit with, or advance, loan or
other extension of credit to, such other person (including the purchase of
property from another person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other person) or any
commitment to make any such advance, loan or extension (but excluding accounts
receivable or deposits arising in the ordinary course of business); (c) other
than guarantees of Indebtedness of the Company to the extent permitted by the
covenant "LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED
CAPITAL STOCK," the entering into by such person of any guarantee of, or other
credit support or contingent obligation with respect to, Indebtedness or other
liability of such other person; (d) the making of any capital contribution by
such person to such other person; and (e) the designation by the Board of
Directors of the Company of any person to be an Unrestricted Subsidiary. Any
such designation constitutes an Investment in an amount equal to the sum of (x)
the net assets of such Subsidiary at the time of the designation, unless in the
case of this clause (x) the designation is made at the time of an Acquisition of
such Subsidiary by the Company or any of its Subsidiaries, in which case the
amount of consideration paid by the Company and its Subsidiaries to effect such
Acquisition (excluding Qualified Capital Stock of the Company or Alliance issued
in connection therewith) shall be included in lieu thereof and (y) the maximum
amount of Guaranteed Debt of the Company and its Subsidiaries in respect of the
designated Subsidiary which is to be outstanding immediately after such
designation.
"ISSUE DATE" means the date of first issuance of the Notes under the
Indenture.
"KIC" means Kirkland Investment Corporation.
"KIRKLAND" means Kirkland-Ft. Worth Investment Partners, L.P.
"LEGAL REQUIREMENTS" shall mean all applicable laws, statutes, codes, acts,
ordinances, orders, judgments, decrees, injunctions, rules, regulations,
permits, licenses, authorizations, directions and requirements of all
governments, departments, commissions, boards, courts, authorities, agencies,
officials and officers of governments, federal, state and municipal.
"LIEN" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"NET CASH PROCEEDS" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset
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Sales, reasonable and customary), expenses (including, without limitation, the
fees and expenses of legal counsel and investment banking fees and expenses)
incurred in connection with such Asset Sale or sale of Qualified Capital Stock,
and, in the case of an Asset Sale only, less the amount (estimated reasonably
and in good faith by the Company) of income, franchise, sales and other
applicable taxes required to be paid by the Company or any of its respective
Subsidiaries in connection with such Asset Sale.
"PERMITTED INDEBTEDNESS" means (a) Indebtedness incurred by the Company to
any Subsidiary, and any Indebtedness incurred by any Subsidiary of the Company
to any other Subsidiary or to the Company; PROVIDED, that, in the case of
Indebtedness of the Company, such obligations shall be unsecured and
subordinated in all respects to the Company's obligations pursuant to the Notes
and the date of any event that causes such Subsidiary to no longer be a
Subsidiary shall be an Incurrence Date; and (b) Interest Swap and Hedging
Obligations relating to Indebtedness of the Company or any Subsidiary, as the
case may be; PROVIDED the notional principal amount of such Interest Swap and
Hedging Obligation does not exceed the principal amount of the Indebtedness to
which such Interest Swap and Hedging Obligation relates.
"PERMITTED INVESTMENT" means (a) Investments in any of the Notes; (b) Cash
Equivalents; (c) intercompany notes to the extent permitted under the definition
of "Permitted Indebtedness"; (d) loans, advances or investments in existence on
the Issue Date (after giving effect to the Transaction and the Wulff
Restructuring); (e) any Investment consisting of the extension of gaming credit
to casino customers consistent with industry practice in the ordinary course of
business; (f) accounts and notes receivable if credited or acquired in the
ordinary course of business and payable or dischargeable on commercially
reasonable terms; (g) Investments in Subsidiaries (including Investments as a
direct result of which a person becomes a Subsidiary); (h) Investments
consisting of non-cash proceeds from Asset Sales permitted by the Indenture; and
(i) loans and capital contributions to RCVP, VSI, SVS, VDSI, KGP, KFP or Wulff,
in an amount not to exceed $ outstanding at any one time.
"PERMITTED LEASES" means the following:
(a) any Capitalized Lease Obligation of the Company or any Subsidiary
incurred in accordance with the covenant "LIMITATION ON INCURRENCE OF
ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK"; and
(b) any lease of the Company or any of its Subsidiaries, as tenant or
subtenant, existing on the date of the Indenture and listed on a schedule
thereto, including any modifications, amendments, renewals or supplements
thereof, PROVIDED, that the aggregate annual rent and other costs
thereunder are not increased thereby, except as such rent or costs may be
increased during any renewed lease term pursuant to the terms of such
leases as they exist on the date of the Indenture.
"PERMITTED LIEN" means (a) Liens existing on the Issue Date (after giving
effect to the Transaction and the Wulff Restructuring); (b) Liens imposed by
governmental authorities for taxes, assessments or other charges not yet subject
to penalty or which are being contested in good faith and by appropriate
proceedings, if adequate reserves with respect thereto are maintained on the
books of the company in accordance with GAAP; (c) statutory liens of carriers,
warehousemen, mechanics, materialmen, landlords, repairmen or other like Liens
arising by operation of law in the ordinary course of business, PROVIDED, that
(i) the underlying obligations are not overdue for a period of more than 60
days, or (ii) such Liens are being contested in good faith and by appropriate
proceedings and adequate reserves with respect thereto are maintained on the
books of the Company in accordance with GAAP; (d) Liens securing the performance
of bids, trade contracts (other than borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other obligations of
a like nature incurred in the ordinary course of business; (e) easements,
rights-of-way, zoning, similar restrictions and other similar encumbrances or
title defects which, singly or in the aggregate, do not in any case materially
detract from the value of the property, subject thereto (as such property is
used by the Company or any of its Subsidiaries) or interfere with the ordinary
conduct of the business of the Company or any of its Subsidiaries; (f) Liens
arising by operation of law in connection with judgments, only to the extent,
for an amount and for a period not resulting in an Event of Default with respect
thereto; (g) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security legislation;
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(h) Liens securing the Notes; (i) Liens securing Indebtedness of a person
existing at the time such person becomes a Wholly-owned Subsidiary or is merged
with or into the Company or a Wholly-owned Subsidiary or Liens securing
Indebtedness incurred in connection with an Acquisition, PROVIDED, that such
Liens were in existence prior to the date of such acquisition, merger or
consolidation, were not incurred in anticipation thereof, and do not extend to
any other assets; (j) Liens arising from Indebtedness permitted to be incurred
under clause (c) or (e) of the covenant "LIMITATION ON INCURRENCE OF ADDITIONAL
INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK," PROVIDED, that such Liens relate
to the property which is subject to such Indebtedness; (k) leases or subleases
granted to other persons in the ordinary course of business not materially
interfering with the conduct of the business of the Company or any of its
Subsidiaries or materially detracting from the value of the relative assets of
the Company or any Subsidiary; and (l) Liens securing Refinancing Indebtedness
incurred to refinance any Indebtedness that was previously so secured in a
manner no more adverse to the Holders of the Notes than the terms of the Liens
securing such refinanced Indebtedness, PROVIDED, that the Indebtedness secured
is not increased and the lien is not extended to any additional assets of
property.
"PERMITTED VSI INVESTMENTS" means the payment in cash, shares of Common
Stock and/or notes payable to a holder of equity interests in VSI in exchange
for the right to receive such holder's percentage of cash flow of VSI under the
applicable agreements governing the distribution of VSI's income.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness of such person to any
seller or other person incurred to finance the acquisition (including in the
case of a Capitalized Lease Obligation, the lease) of any after acquired real or
personal tangible property which is directly related to a Related Business of
the Company and which is incurred concurrently with such acquisition and is
secured only by the assets so financed.
"QUALIFIED CAPITAL STOCK" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Equity Interests or Indebtedness of the
Company with the Net Cash Proceeds received by the Company from the
substantially concurrent sale of Qualified Capital Stock or any exchange of
Qualified Capital Stock for any Equity Interests or Indebtedness issued on or
after the Issue Date.
"RAINBOW DEBT AGREEMENTS" means those agreements entered into by Alliance or
its Subsidiaries in connection with the financing for the Rainbow Casino,
including without limitation with HFS or WGM, and in existence on the date
hereof.
"REFERENCE PERIOD" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture.
"REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of reasonable and customary fees and expenses incurred in connection
with the Refinancing) the lesser of (i) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, of the Indebtedness or
Disqualified Capital Stock so refinanced and (ii) if such Indebtedness being
refinanced was issued with an original issue discount, the accreted value
thereof (as determined in accordance with GAAP) at the time of such Refinancing;
PROVIDED, that (A) such Refinancing Indebtedness of any Subsidiary of the
Company shall only be used to refinance outstanding Indebtedness or Disqualified
Capital Stock of such Subsidiary, (B) such Refinancing Indebtedness shall (x)
not have an Average Life to Stated Maturity shorter than the Indebtedness or
Disqualified Capital Stock to be so refinanced at the time of such Refinancing
and (y) in all respects, be no less subordinated or junior, if applicable, to
the rights of Holders of the Notes than was the Indebtedness or Disqualified
Capital Stock to be refinanced and (C) such Refinancing Indebtedness shall have
no installment
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of principal (or redemption payment) scheduled to come due earlier than the
Stated Maturity of any installment of principal of the Indebtedness or
Disqualified Capital Stock to be so refinanced which was scheduled to come due
prior to the Stated Maturity of the Notes or a final Stated Maturity or
redemption date, as applicable, no earlier than the final Stated Maturity or
redemption date, as applicable, of the Indebtedness or Disqualified Capital
Stock to be so refinanced.
"RELATED BUSINESS" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date (after
giving effect to the Transaction and the Wulff Restructuring), including the
management and operation of gaming machines and casinos, the design, manufacture
and distribution of gaming machines, equipment, monitoring and systems and
amusement equipment, and other gaming-related business, including but not
limited to amusements, arcades and lottery-related activities, and any and all
businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses.
"REQUIRED REGULATORY REDEMPTION" means a redemption by the Company of any of
a holder's Notes pursuant to, and in accordance with, any order of any Gaming
Authority with appropriate jurisdiction and authority relating to a Gaming
License, or to the extent necessary in the reasonable, good faith judgment of
the Company to prevent the loss, failure to obtain or material impairment to or
to secure the reinstatement of, any material Gaming License, where such
redemption or acquisition is required because the holder or beneficial owner of
such Note is required to be found suitable or to otherwise qualify under any
gaming laws and is found unsuitable, or not found suitable or so qualified
within a reasonable period of time.
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than Permitted Investments.
"RESTRICTED PAYMENT" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Equity Interests
of such person, (b) any payment on account of the purchase, redemption or other
acquisition or retirement for value of Equity Interests of such person or any
Subsidiary or parent of such person, (c) other than with the proceeds from the
substantially concurrent sale of, or in exchange for, Refinancing Indebtedness,
any purchase, redemption, or other acquisition or retirement for value of, any
payment in respect of any amendment of the terms of or any defeasance of, any
Subordinated Indebtedness, directly or indirectly, by such person or a parent or
Subsidiary of such person prior to the scheduled maturity, any scheduled
repayment of principal, or scheduled sinking fund payment, as the case may be,
of such Indebtedness and (d) any Restricted Investment by such person; PROVIDED,
HOWEVER, that the term "Restricted Payment" does not include (i) any dividend,
distribution or other payment on or with respect to Capital Stock of an issuer
to the extent payable solely in shares of Qualified Capital Stock of such
issuer; (ii) any dividend, distribution or other payment, directly or
indirectly, to the Company, or to any of its Subsidiaries, by any of its
Subsidiaries; or (iii) any exchange, repurchase or retirement of Convertible
Debentures by the Company.
"SIGNIFICANT SUBSIDIARY" shall have the meaning provided under Regulation
S-X of the Securities Act, as in effect on the Issue Date.
"STATED MATURITY," when used with respect to any Note, means , 2003
and, when used with respect to any other Indebtedness or Disqualified Capital
Stock, means the dates specified in such other instrument as the fixed date on
which the principal thereof or such installment of principal is due and payable.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company that is
subordinated in right of payment to the Notes in any respect.
"SUBSIDIARY," with respect to any person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances, to elect
directors is at the time, directly or indirectly, owned by such person, by such
person and one or more Subsidiaries of such person or by one or more
Subsidiaries of such person, (ii) any other person (other than a corporation) in
which such person, one or more Subsidiaries of such person, or such person and
one or more Subsidiaries of such person, directly or indirectly, at the date of
determination thereof has at least majority ownership interest, or (iii) a
partnership in which such person
137
<PAGE>
or a Subsidiary of such person is, at the time, a general partner and in which
such person, directly or indirectly, at the date of determination thereof has at
least a majority ownership interest. Notwithstanding the foregoing, an
Unrestricted Subsidiary shall not be a Subsidiary of the Company or of any
Subsidiary of the Company. Unless the context otherwise requires, Subsidiary
means each direct and indirect subsidiary of the Company.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939, as amended.
"UNRESTRICTED SUBSIDIARY" means any direct or indirect subsidiary of the
Company that does not own any Capital Stock of, or own or hold any Lien on any
property of, the Company or any other Subsidiary of the Company and that, at the
time of determination, shall be an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company); PROVIDED, that neither immediately prior
thereto nor after giving PRO FORMA effect to such designation would there exist
a Default or Event of Default. The Board of Directors of the Company may
designate any Unrestricted Subsidiary to be a Subsidiary, PROVIDED, that (i) no
Default or Event of Default is existing or will occur as a consequence thereof
and (ii) immediately after giving effect to such designation, on a PRO FORMA
basis, the Company could incur at least $1.00 of Indebtedness pursuant to the
Debt Incurrence Ratio in paragraph (a) of the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock." Each such
designation shall be evidenced by filing with the Trustee a certified copy of
the resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"WHOLLY-OWNED SUBSIDIARY" means a Subsidiary all the Equity Interests of
which are owned by the Company or one or more Wholly-owned Subsidiaries of the
Company, except for directors' qualifying shares or shares owned by foreign
nationals, in each case to the extent required by applicable law.
"WULFF RESTRUCTURING" means the transfer, immediately following the
consummation of the Merger, of the Equity Interests of Wulff from BGII to a
German limited partnership, the general partner of which will be an indirect
German subsidiary of Alliance, and all transactions related to the organization
and capital structure of such entities.
UNDERWRITING
Subject to certain conditions contained in the Underwriting Agreement,
Jefferies & Company, Inc. and Ladenburg, Thalmann & Co. Inc. (the
"Underwriters") have severally agreed to purchase from the Company $140,000,000
aggregate principal amount of the Notes. The principal amount of Notes each
Underwriter has agreed to purchase is set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
<S> <C>
Jefferies & Company, Inc....................................................
Ladenburg, Thalmann & Co. Inc...............................................
----------------
Total................................................................... $ 140,000,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all the Notes if
any are taken.
The Underwriters have advised the Company that the Underwriters propose to
offer the Notes directly to the public initially at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of % of the principal amount. Any
Underwriter may allow, and such dealers may reallow, a discount not in excess of
% of the principal amount to any other Underwriter and to certain other
dealers. After the initial public offering of the Notes, the public offering
price and other selling terms may be changed by the Underwriters.
Prior to this Note Offering, there has been no public market for the Notes.
The Company does not intend to list any of the Notes on a national securities
exchange or to seek the admission thereof for trading in Nasdaq. The
Underwriters have advised the Company that they currently intend to make a
market in the
138
<PAGE>
Notes, but are not obligated to do so and may discontinue any such market-making
at any time without notice. Accordingly, there can be no assurance as to the
liquidity of, or that an active trading market will develop for, the Notes.
Alliance and its subsidiaries have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act or
to contribute to payments the Underwriters may be required to make in respect
thereof.
Jefferies & Company, Inc. has acted, and may in the future act, as financial
advisor to Alliance and its affiliates, for which it has received, and may in
the future receive, customary fees. Further, from time to time, Ladenburg,
Thalmann & Co. Inc. has acted, and may in the future act, as financial advisor
to BGII and its affiliates, for which it has received, and may in the future
receive, customary fees. Alliance and BGII has agreed to pay Jefferies &
Company, Inc. and Ladenburg, Thalmann & Co. Inc., respectively customary fees
(plus reimbursement of reasonable out-of-pocket expenses) for advisory services
rendered in connection with the Merger and related transactions. The
Underwriters are also acting as underwriters for the Preferred Stock Offering.
LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby are
being passed upon for the Company by Schreck, Jones, Bernhard, Woloson &
Godfrey, Chartered, Las Vegas, Nevada, and Milbank, Tweed, Hadley & McCloy, New
York, New York, and for the Underwriters by Skadden, Arps, Slate, Meagher &
Flom, Los Angeles, California.
The statements as to matters of law and legal conclusions concerning Nevada
gaming laws included under the caption "Gaming Regulation and Licensing--Nevada"
have been prepared by Schreck, Jones, Bernhard, Woloson & Godfrey, Chartered,
Las Vegas, Nevada, gaming counsel for the Company.
The statements as to matters of law and legal conclusions concerning
Louisiana gaming laws included under the captions "Risk Factors--Strict
Regulation of Gaming Authorities" and "Gaming Regulation and
Licensing--Louisiana" have been prepared by Hoffman, Sutterfield, Ensenat, a
Professional Corporation, New Orleans, Louisiana, gaming counsel for the
Company.
The statements as to matters of law and legal conclusions concerning
Mississippi gaming laws included under the caption "Gaming Regulation and
Licensing--Mississippi" have been prepared by Paul H. Johnson, Esq., Jackson,
Mississippi, gaming counsel for the Company.
The statements as to matters of law and legal conclusions concerning New
Jersey gaming laws included under the captions "Risk Factors--Strict Regulation
of Gaming Authorities" and "Gaming Regulation and Licensing--New Jersey" have
been prepared by Kozlov, Seaton, Romanini & Brooks, Cherry Hill, New Jersey,
gaming counsel for the Company.
The statements as to matters of law and legal conclusions concerning German
gaming laws included under the caption "Gaming Regulation and
Licensing--Germany" have been prepared by Bruckhaus, Westrick, Stegeman, Berlin,
Germany, German counsel for the Company.
139
<PAGE>
EXPERTS
The consolidated financial statements of Alliance Gaming Corporation and
subsidiaries as of June 30, 1994 and 1995, and for each of the years in the
three-year period ended June 30, 1995 included herein have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP
refers to a change in the method of accounting for income taxes, effective July
1, 1993. As noted under "Forecast of Operating Income and Adjusted Operating
Cash Flow," KPMG Peat Marwick LLP has not examined the Forecast presented under
"Forecast of Operating Income and Adjusted Operating Cash Flow" and,
accordingly, does not express an opinion or any other form of assurance with
respect thereto.
The consolidated balance sheets of BGII as of December 31, 1994 and 1995,
and the consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995 included
herein have been included herein in reliance upon the report of Coopers &
Lybrand L.L.P., independent accountants, appearing elsewhere herein, given on
the authority of that firm as experts in accounting and auditing. As noted under
"Forecast of Operating Income and Adjusted Operating Cash Flow," Coopers &
Lybrand L.L.P. neither examined nor compiled nor had any other involvement with
the preparation of the Forecast presented under "Forecast of Operating Income
and Adjusted Operating Cash Flow" and accordingly does not express an opinion or
any other form of assurance with respect thereto, nor do they assume any
responsibility for the Forecast.
AVAILABLE INFORMATION
Each of Alliance and BGII is subject to the informational requirements of
the Exchange Act, and in accordance therewith files reports, proxy statements
and other information with the Commission. The reports, proxy statements and
other information filed by Alliance and BGII may be inspected and copied at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and should be available at the
Commission's regional offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or part of such materials also may
be obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Alliance's Common Stock is and the Preferred Stock, when issued, will be,
listed on Nasdaq under the symbol "ALLY" and "ALLYP", respectively. Reports,
proxy statements and other information filed by Alliance and BGII may also be
inspected at the offices of the Nasdaq Stock Market, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
Alliance has filed with the Commission a Registration Statement on Form S-2
(together with any amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus, which is a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. Such additional information may be
inspected, without charge, at the Commission's principal office in Washington,
D.C. and copies may be obtained from the Commission upon payment of the
prescribed fee. Statements contained in this Prospectus or in any document
incorporated in this Prospectus by reference as to the contents of any contract
or other document referred to herein or therein are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
140
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ALLIANCE GAMING CORPORATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ F-2
Consolidated Balance Sheets as of June 30, 1994 and 1995............................................ F-3
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-5
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 1993, 1994 and
1995............................................................................................... F-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-20
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1995 (audited) and December 31, 1995
(unaudited)........................................................................................ F-21
Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 1994
and 1995........................................................................................... F-22
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1994
and 1995........................................................................................... F-23
Notes to Unaudited Condensed Consolidated Financial Statements...................................... F-24-F-28
BALLY GAMING INTERNATIONAL, INC.
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
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Alliance Gaming Corporation
We have audited the consolidated balance sheets of Alliance Gaming
Corporation and subsidiaries as of June 30, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alliance
Gaming Corporation and subsidiaries as of June 30, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 6 to the consolidated financial statements, effective
July 1, 1993 Alliance Gaming Corporation adopted the provisions of Financial
Accounting Standards Board's Statement of Financial Accounting Standard No. 109,
ACCOUNTING FOR INCOME TAXES.
KPMG Peat Marwick LLP
Las Vegas, Nevada
September 1, 1995
F-2
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 37,085 $ 13,734
Securities available for sale........................................................... 12,489 23,680
Receivables, net........................................................................ 5,924 3,316
Inventories............................................................................. 661 714
Prepaid expenses........................................................................ 4,420 4,148
Refundable income taxes................................................................. 361 361
Other................................................................................... 30 156
---------- ----------
Total current assets.................................................................. 60,970 46,109
---------- ----------
Property and equipment:
Land and improvements................................................................... 3,229 17,296
Building and improvements............................................................... 4,286 8,822
Gaming equipment........................................................................ 30,395 36,396
Furniture, fixtures and equipment....................................................... 9,632 11,582
Leasehold improvements.................................................................. 5,222 5,372
Construction in progress................................................................ 212 30
---------- ----------
52,976 79,498
Less accumulated depreciation and amortization.......................................... 24,293 29,146
---------- ----------
Property and equipment, net........................................................... 28,683 50,352
---------- ----------
Other assets:
Receivables, net........................................................................ 4,609 5,309
Excess of costs over net assets of an acquired business, net of accumulated amortization
of $295 (1994) and $585 (1995)......................................................... 3,789 3,842
Intangible assets, net of accumulated amortization of $4,145 (1994) and $5,516 (1995)... 13,527 12,405
Deferred tax assets..................................................................... 1,081 1,399
Investment in minority owned subsidiary................................................. 2,000 1,585
Other................................................................................... 4,757 5,347
---------- ----------
Total other assets.................................................................... 29,763 29,887
---------- ----------
$ 119,416 $ 126,348
---------- ----------
---------- ----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
JUNE 30, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................... $ 1,504 $ 3,995
Accounts payable........................................................................ 1,661 1,758
Accrued expenses, including related parties of $312 (1994) and $931 (1995).............. 6,879 8,610
---------- ----------
Total current liabilities............................................................. 10,044 14,363
---------- ----------
Long-term debt, less current maturities................................................... 89,222 97,402
Deferred tax liabilities.................................................................. 1,218 1,205
Other liabilities......................................................................... 3,587 2,750
---------- ----------
Total liabilities..................................................................... 104,071 115,720
---------- ----------
Commitments and contingencies
Minority interest......................................................................... 246 643
Stockholders' equity:
Common stock, $.10 par value; authorized 175,000,000 shares; issued 10,505,928 shares
(1994) and 11,654,150 shares (1995).................................................... 1,051 1,165
Special stock, $.10 par value; authorized 10,000,000 shares; issued 1,333,333 (1994 and
1995).................................................................................. 133 133
Paid-in capital......................................................................... 26,716 32,134
Unrealized loss on securities available for sale, net................................... (421) (316)
Accumulated deficit..................................................................... (12,380) (23,131)
---------- ----------
Total stockholders' equity............................................................ 15,099 9,985
---------- ----------
$ 119,416 $ 126,348
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Gaming:
Routes................................................................... $ 96,282 $ 102,830 $ 106,827
Casinos and taverns...................................................... 12,526 15,679 21,287
Food and beverage sales.................................................... 4,184 4,480 3,847
Net equipment sales........................................................ 99 65 27
---------- ---------- ----------
113,091 123,054 131,988
---------- ---------- ----------
Costs and expenses:
Cost of gaming:
Routes................................................................... 72,614 76,332 79,875
Casinos and taverns...................................................... 8,667 11,871 11,436
Cost of food and beverage.................................................. 2,876 3,084 2,795
Cost of equipment sales.................................................... 49 20 12
Selling, general & administrative.......................................... 12,667 13,555 14,633
Business development expenses.............................................. 900 1,192 7,843
Corporate expenses......................................................... 6,191 7,882 9,735
Bad debt expense........................................................... 461 705 400
Loss on abandoned small casinos............................................ -- 3,713 --
Loss on abandoned taverns.................................................. -- 2,638 --
Depreciation and amortization.............................................. 8,718 9,530 9,520
---------- ---------- ----------
113,143 130,522 136,249
---------- ---------- ----------
Operating loss............................................................... (52) (7,468) (4,261)
Other income (expense):
Interest income............................................................ 998 2,084 2,798
Interest expense........................................................... (5,046) (6,830) (8,133)
Minority share of income................................................... -- (506) (397)
Equity in income of affiliate.............................................. -- -- 31
Other, net................................................................. 450 (167) (524)
---------- ---------- ----------
Loss before income taxes..................................................... (3,650) (12,887) (10,486)
Income tax expense........................................................... -- (241) (265)
---------- ---------- ----------
Net loss..................................................................... $ (3,650) $ (13,128) $ (10,751)
---------- ---------- ----------
---------- ---------- ----------
Net loss per common share.................................................... $(0.38) $(1.28) $(0.95)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding................................... 9,696 10,251 11,300
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
RETAINED LOSS ON
TOTAL COMMON STOCK SPECIAL STOCK EARNINGS SECURITIES
STOCKHOLDERS' --------------- ---------------- PAID-IN (ACCUMULATED AVAILABLE
EQUITY SHARES DOLLARS SHARES DOLLARS CAPITAL DEFICIT) FOR SALE
------------ ------ ------- ------ ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1992............ $23,661 9,409 $ 942 -- $ -- $18,321 $ 4,398 $--
Net loss......................... (3,650) -- -- -- -- -- (3,650 ) --
Common stock warrants issued..... 559 -- -- -- -- 559 -- --
Shares issued upon exercise of
options......................... 2,096 591 59 -- -- 2,037 -- --
------------ ------ ------- ------ ------- ------- -------- -----
Balances, June 30, 1993............ 22,666 10,000 1,001 -- -- 20,917 748 --
Net loss......................... (13,128) -- -- -- -- -- (13,128 ) --
Shares issued for acquisitions... 249 112 11 -- -- 238 -- --
Common stock warrants issued..... 116 -- -- -- -- 116 -- --
Cost of private placement........ (201) -- -- -- -- (201) -- --
Net change in unrealized loss on
securities available for sale... (421) -- -- -- -- -- -- (421)
Shares issued for capital
infusion........................ 4,999 -- -- 1,333 133 4,866 -- --
Shares issued upon exercise of
options......................... 819 394 39 -- -- 780 -- --
------------ ------ ------- ------ ------- ------- -------- -----
Balances, June 30, 1994............ 15,099 10,506 1,051 1,333 133 26,716 (12,380 ) (421)
Net loss......................... (10,751) -- -- -- -- -- (10,751 ) --
Shares issued for acquisitions... 3,754 712 71 -- -- 3,683 -- --
Compensatory stock issued........ 1,313 250 25 -- -- 1,288 -- --
Net change in unrealized loss on
securities available for sale... 105 -- -- -- -- -- -- 105
Shares issued upon exercise of
options......................... 465 186 18 -- -- 447 -- --
------------ ------ ------- ------ ------- ------- -------- -----
Balances, June 30, 1995............ $ 9,985 11,654 $1,165 1,333 $133 $32,134 $(23,131) $(316)
------------ ------ ------- ------ ------- ------- -------- -----
------------ ------ ------- ------ ------- ------- -------- -----
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................................................... $ (3,650) $ (13,128) $ (10,751)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................... 8,718 9,530 9,520
Loss on abandoned casinos....................................................... -- 3,713 --
Loss on abandoned taverns....................................................... -- 2,638 --
Write-off of other assets....................................................... 149 1,817 2,796
Provision for losses on receivables............................................. 461 705 400
Amortization of debt discounts.................................................. 265 292 297
Undistributed earnings of affiliate............................................. -- -- (31)
Non-cash stock compensation expense............................................. -- -- 1,313
Net change in operating assets and liabilities:
(Increase) decrease in:
Inventories..................................................................... (233) 78 (40)
Prepaid expenses................................................................ 1,475 (519) 381
Refundable income taxes......................................................... 766 (361) --
Other........................................................................... 305 254 (126)
Increase (decrease) in:
Accounts and slot contracts payable............................................. (2,378) 269 (447)
Accrued and deferred income taxes............................................... -- 137 (137)
Other liabilities, including minority interest.................................. (153) 511 397
Accrued expenses................................................................ 184 3,126 (2,615)
--------- --------- ---------
Net cash provided by operating activities..................................... 5,909 9,062 957
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment............................................... (5,092) (5,385) (8,887)
Proceeds from sale of property and equipment...................................... 257 1,466 351
Additions to receivables.......................................................... (8,715) (18,801) (8,970)
Cash collections on receivables................................................... 7,925 17,541 10,315
Net cash provided by acquisition of business...................................... -- -- 2,481
Acquisition of securities available for sale...................................... -- (12,910) (11,086)
Acquisition of partnership interests.............................................. -- (2,000) (1,585)
Additions to intangible assets.................................................... (77) (5,179) (390)
Additions to other long-term assets............................................... (3,296) (2,031) (3,877)
--------- --------- ---------
Net cash (used in) investing activities....................................... (8,998) (27,299) (21,648)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of expenses..................................... 1,941 81,984 --
Issuance of common stock warrants................................................. 559 116 --
Reduction of long-term debt....................................................... (2,167) (41,776) (3,125)
Issuance of special stock, net of costs........................................... -- 4,799 --
Issuance of common stock.......................................................... 2,097 619 465
--------- --------- ---------
Net cash (used in) provided by financing activities........................... 2,430 45,742 (2,660)
--------- --------- ---------
Cash and cash equivalents:
Increase (decrease) for year...................................................... (659) 27,505 (23,351)
Balance, beginning of year........................................................ 10,239 9,580 37,085
--------- --------- ---------
Balance, end of year.......................................................... $ 9,580 $ 37,085 $ 13,734
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
Alliance Gaming Corporation and its subsidiaries (collectively, the
"Company") are presently engaged in gaming device route operations in Nevada and
in the greater New Orleans, Louisiana area; casino operations in Nevada and
Mississippi; and the design, manufacture and refurbishment of gaming devices.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Alliance Gaming Corporation, its wholly-owned subsidiaries and indirect
subsidiaries and its partially owned, controlled subsidiaries. In the case of
Video Services, Inc. ("VSI"), the Company owns 490 shares of Class B voting
stock, which constitutes 100% of the voting stock, of VSI. The Company is
entitled to receive 71% of dividends declared by VSI, if any, at such time that
such dividends are declared. In July 1994, the Company acquired a 45% limited
partnership interest in the Rainbow Casino-Vicksburg Partnership. Accordingly,
the Company accounted for its investment in this partnership under the equity
method until March 29, 1995 at which time the Company increased its partnership
interest and assumed the general partnership position (see Note 11). Effective
March 29, 1995, the results of operations of the Rainbow Casino have been
included in the accompanying consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
In accordance with industry practice, the Company recognizes gaming revenues
as the net win from route, casino and tavern operations, which is, for gaming
devices, the difference between coins and currency deposited into the devices
and payments to customers and, for other games, the difference between gaming
wins and losses. The Company recognizes total net win from gaming devices as
revenues for gaming routes which operate under revenue-sharing arrangements and
revenue-sharing payments as a cost of gaming routes. The Company recognizes
revenue from parts and equipment sales to outside purchasers when the products
are shipped.
LOCATION RENT EXPENSE
For financial statement purposes, the Company recognizes expenses for fixed
periodic rental payments (including scheduled increases) made in connection with
route operation space lease arrangements or sublease agreements on a straight
line basis over the term of the agreement including any extension periods which
are expected to be exercised. Contingent periodic rental payments are expensed
in the period incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Such
investments of $29,799,000 (1994) and $5,238,000 (1995) are included in cash and
cash equivalents and are carried at cost, which approximates market value.
SECURITIES AVAILABLE FOR SALE
Effective January 1, 1994, the Company adopted Financial Accounting Standard
No. 115. For fiscal years beginning after December 15, 1993, Statement 115
requires that, except for debt securities classified as "held-to-maturity"
securities, investments in debt and equity securities should be reported at fair
market value. The Company has designated certain securities as being available
for sale. Securities are designated as available for sale at the time of their
purchase. The Company determines which securities are available for sale by
evaluating whether such securities would be sold in response to liquidity needs,
asset/liability management and other factors. Securities available for sale are
recorded at market value with the resulting unrealized gains and losses being
recorded, net of tax, as a component of stockholders' equity. Gains or losses on
these securities are determined using the specific identification method.
F-8
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
(CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market and are determined by
the first-in, first out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated and amortized
over their estimated useful lives or lease terms, if less, using the straight
line method as follows:
<TABLE>
<S> <C>
31-39
Building and improvements....................................... years
Gaming equipment................................................ 5-7 years
Furniture, fixtures and equipment............................... 3-10 years
Leasehold improvements.......................................... 5-20 years
</TABLE>
EXCESS OF COSTS OVER NET ASSETS OF AN ACQUIRED BUSINESS
Excess of costs over net assets of an acquired business is the excess of the
cost over the value of net tangible assets of an acquired business and is
generally amortized on the straight-line method over a period of 40 years. In
the case of the Company's majority-owned subsidiary, Native American
Investments, Inc., where the assets acquired are largely intangible, the Company
has elected a 10-year amortization period representing the estimated life of the
rights acquired, consisting principally of contracts to conduct gaming
operations on Indian lands.
At each balance sheet date, management evaluates the realizability of
goodwill based on expectations of non-discounted cash flows and operating income
for each subsidiary having a material goodwill balance. Based upon its most
recent analysis, management believes that no material impairment of goodwill
exists at June 30, 1995.
INTANGIBLE ASSETS
Intangible assets consist primarily of costs associated with the acquisition
of location leases which are capitalized and amortized using the straight-line
method over the terms of the leases, ranging from one to 40 years, with an
average life of approximately 11 years. Intangible assets for fiscal 1995
includes approximately $4,547,000 of commissions, discounts and other
capitalized costs related to the issuance of the Company's 7.5% Convertible
Subordinated Debentures due 2003, net of approximately $957,000 of accumulated
amortization. At June 30, 1994, intangible assets includes $4,993,000 of such
costs, net of $405,000 of accumulated amortization. Such amounts are being
amortized over the term of the debentures.
The carrying value of intangible assets is periodically reviewed by
management and impairment losses are recognized when the expected non-discounted
future operating cash flows derived from such intangible assets are less than
their carrying value.
OTHER ASSETS
Other assets includes assets held for sale, long-term deposits and other
non-current assets. In fiscal 1993, the Company paid to certain property owners
a $2,500,000 refundable deposit to operate gaming devices at their location.
Additionally, other assets are presented net of valuation allowances of
$1,763,000 and $631,000 at June 30, 1994 and 1995, respectively.
LOSS PER SHARE OF COMMON STOCK
Loss per share of common stock has been computed based on the weighted
average number of shares of common stock outstanding. Fully diluted earnings per
share is not presented because the effect would be anti-dilutive.
F-9
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
(CONTINUED)
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 109 ACCOUNTING FOR INCOME TAXES. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years which those
temporary differences are expected to be recovered or settled. Under Statement
109, the effect on deferred assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Effective
July 1, 1993, the Company adopted Statement 109. The Company previously used the
asset and liability method under Statement 96.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform with the current year presentation.
2. RECEIVABLES
The Company's gaming route operations from time to time involve making loans
to location operators in order to participate in revenues over extended periods
of time. The loans, made for build-outs, tenant improvements and initial
operating expenses are generally secured by the personal guarantees of the
operators and the locations' assets. The majority of the loans are interest
bearing and are expected to be repaid over a period of time not to exceed the
life of the revenue sharing arrangement. The loans have varying payment terms,
with weekly payment amounts ranging from $200 to $1,440 and monthly payment
amounts ranging from $200 to $18,780. Interest rates on the loans range from
prime plus 1.50% to stated rates of 12% with various due dates ranging from July
1995 to April 2007. The loans are expected to be repaid from the locations' cash
flows or proceeds from the sale of the leaseholds.
Receivables at June 30 consist of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes receivable-location operators...................................... $ 8,319 $ 7,760
Other receivables........................................................ 2,214 865
--------- ---------
10,533 8,625
Less current amounts..................................................... 5,924 3,316
--------- ---------
Long-term receivables, excluding current amounts......................... $ 4,609 $ 5,309
--------- ---------
--------- ---------
</TABLE>
Receivables are presented net of an allowance for doubtful accounts of
$1,389,000 and $1,659,000 as of June 30, 1994 and 1995, respectively. The
allowance is allocated between current and long-term receivables on a pro rata
basis related to notes receivable from location operators.
During fiscal 1994, the Company cancelled certain sublease agreements as a
result of defaults by payors in making payments and acquired title to the assets
and operating rights to the tavern locations in exchange for releases of the
customers' debt owed to the Company. During fiscal 1994, interest income of
approximately $48,000 was recognized on these receivables. Total interest income
of $130,000 would have been recognized if the receivables had been current in
accordance with their original terms. The total initial investment in these
tavern locations of approximately $2,011,000 includes the net receivables of
approximately $1,362,000 and other assets of $649,000. No such transactions were
completed in fiscal 1995. Management of the Company has determined the fair
value of the locations' assets from knowledge of sales
F-10
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
2. RECEIVABLES (CONTINUED)
of comparable establishments and expertise acquired from operating its gaming
devices at similar locations. Due to the Company's decision to dispose of the
currently operated small independent tavern operations, certain reserves and
write downs were recognized in fiscal 1994 results of operations.
Management believes properly managing the disposal of these operations will
protect the Company's existing contractual arrangements from the tavern
locations as well as assure their continued operation while preserving the
Company's investment. Management cannot estimate when or how many of these
locations will be obtained and subsequently disposed.
3. LOSS ON ABANDONMENT OF SMALL CASINOS AND TAVERNS
In fiscal 1994, due to continuing losses from operations, negative cash
flows and incompatibility with the Company's long-term growth strategy, the
Company's Board of Directors resolved to 1) exit the downtown Las Vegas gaming
market and 2) dispose of the currently operated small independent taverns on
commercially reasonable terms as market conditions warrant.
As a result of the decision to exit the downtown Las Vegas gaming market,
the Company substantially reduced operations at both the Trolley Stop Casino and
Miss Lucy's Gambling Hall & Saloon. Included in the 1994 statements of
operations are total expenses of approximately $3,246,000 related to these
actions. The total charge included approximately $488,000 related to the
write-down of assets and approximately $2,758,000 representing primarily the
present value of the future lease payments net of estimated future sublease
income.
The decision to withdraw from the tavern business resulted in expenses of
approximately $2,638,000 being recognized in fiscal 1994. Approximately
$1,813,000 of the total amount was related to the write down of assets while
approximately $825,000 represented primarily the present value of the future
lease payments net of estimated future sublease income. The Company has entered
into an agreement to sell all of its tavern locations to an unaffiliated third
party. The sale is contingent upon, among other conditions, approval by Nevada
gaming authorities.
In addition to the items noted above, the Company's lease on the Mizpah
Hotel and Casino has a remaining term of approximately 7.5 years with an option
on the Company's behalf to terminate the lease arrangement with 120 days written
notice at any time after December 31, 1995. The Company has notified the
landlord of the Mizpah of its intention to exercise the termination clause of
the lease at that time. As a result of this decision, the Company recognized an
expense of $467,500 in fiscal 1994.
4. DEBT
Long-term debt at June 30 consists of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
7.5% Convertible subordinated debentures due 2003, unsecured.................... $ 85,000 $ 85,000
Due to stockholder, net of discount of $983,709 (1994) and $747,619 (1995),
secured by the assets of VSI................................................... 4,390 3,309
Hospitality Franchise Systems, secured by the assets of Rainbow Vicksburg....... -- 9,065
Other, secured by related equipment............................................. 1,336 4,023
---------- ----------
90,726 101,397
Less current maturities......................................................... 1,504 3,995
---------- ----------
Long-term debt, less current maturities......................................... $ 89,222 $ 97,402
---------- ----------
---------- ----------
</TABLE>
F-11
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
4. DEBT (CONTINUED)
Accrued interest of approximately $1,893,000 (1994) and $1,991,000 (1995) is
included in accrued expenses in the Consolidated Balance Sheets. Included in
these amounts are $30,343 (1994) and $27,813 (1995) due to affiliates of Alfred
H. Wilms, principal stockholder and member of the Board of Directors of the
Company, related to funding of VSI's gaming device route operations.
In September 1993, the Company completed the private placement of
$85,000,000 aggregate principal amount of its 7.5% Convertible Subordinated
Debentures due 2003. The debentures pay interest semi-annually on March 15 and
September 15. These debentures are convertible at any time into shares of the
Company's common stock at a conversion price of $10 per share (equivalent to a
conversion rate of 100 shares per $1,000 principal amount of debentures),
subject to adjustment. Upon certain defined events, including a change of
control, holders of the debentures have the right to require the Company to
redeem the debentures for cash at the rate of 101% of principal amount plus
accrued interest. The debentures are redeemable at predetermined redemption
prices, in whole or in part, at the option of the Company for cash at any time
on and after September 15, 1995 if the market price of the common stock exceeds
250% of the conversion price for 20 out of any 30 consecutive trading days or at
any time on and after September 15, 1996.
In March 1992, Alfred H. Wilms, director and principal stockholder (and then
Chairman of the Board of Directors and Chief Executive Officer) of the Company,
committed to provide or cause others to provide a $6,500,000 five year
subordinated loan to VSI, the Company's controlled subsidiary which loan has
been funded in full and is secured by a subordinated interest in all of VSI's
present and future personal property. Until August 1993, the loan required
quarterly payments of interest. In August 1993, the loan agreement was amended
to extend the maturity of the loan to September 1, 1998 and to require quarterly
payments of principal and interest. Interest on the loan accrues at the rate of
200 basis points above the 90-day London Inter Bank Offered Rate, adjusted
quarterly. At June 30, 1995 the interest rate for the note was 8.2275%.
During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to loan
$7,750,000 to the Company's majority controlled subsidiary RCVP in connection
with the construction of the Rainbow Casino. The loan amount was subsequently
increased to $10,000,000. The note bears interest at 7.5% per annum and requires
monthly payments of principal and interest over an 24 month period. In exchange
for funding this loan, HFS is also entitled to receive a monthly royalty fee
equal to 12% of the casino's gaming revenues. Included in the consolidated
results of operations for fiscal 1995 are approximately $810,000 of such
royalties.
Maturities of long-term debt for each of the five years ending subsequent to
June 30, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $3,995,000
1997........................................................... 3,927,000
1998........................................................... 2,825,000
1999........................................................... 1,670,000
2000........................................................... 1,723,000
Thereafter..................................................... 87,257,000
</TABLE>
5. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of special stock, par value $.10 per share ("Special Stock").
Special Stock consists of non-voting stock where no holder of the Special Stock
shall be entitled to vote at any meeting of stockholders or otherwise, except as
otherwise may be specifically provided by law or as approved by the Board of
Directors in certain limited circumstances at the time of the stock issuance.
The Special Stock may be issued from time to time in one or more series, each
series having such designations, preferences and relative, participating,
optional or other special rights,
F-12
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
5. STOCKHOLDERS' EQUITY (CONTINUED)
qualifications, limitations or restrictions as shall be stated and expressed in
the resolution providing for the issuance of Special Stock or any series thereof
adopted by the Board of Directors. The Board has designated an initial series of
Special Stock as "Non-voting Junior Convertible Special Stock" which consists of
1,333,333 shares (the "Initial Series"). The Company's Articles of Incorporation
provide that the Initial Series is intended to have the same rights as the
Common Stock except that the Initial Series has no voting rights and a $.01 per
share liquidation preference. At June 30, 1995, only the Initial Series of
Special Stock was outstanding. The Initial Series is convertible on a share for
share basis into shares of Common Stock of the Company.
In 1984, the Company created an Employee Stock Option Plan (the "1984 Plan")
that provides for the issuance of up to 2,000,000 shares of common stock to
Company employees and directors. At June 30, 1995, there were incentive stock
options covering 207,000 shares and non-qualified stock options covering 10,000
shares outstanding under the 1984 Plan.
At June 30, 1994 there were incentive stock options covering 376,000 shares
and non-qualified stock options covering 15,000 shares outstanding under the
1984 Plan. Generally, options are granted at the fair market value of the
Company's Common Stock at the date of the grant and become exercisable over five
years.
In 1992, the Company created the 1991 Long Term Incentive Plan (the
"Incentive Plan") that, as amended, provides for the issuance of up to 3,000,000
shares of common stock to Company employees and directors. At June 30, 1995
there were incentive stock options covering 2,400,834 shares outstanding under
the Incentive Plan. At June 30, 1994 there were incentive stock options covering
1,099,500 shares outstanding under the Incentive Plan. Generally, options are
granted at the fair market value of the Company's Common Stock at the date of
the grant and become exercisable over five years.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
SHARES EXERCISE PRICE
<S> <C> <C>
Balance, June 30, 1992..................................................... 1,546,150 1.375- 8.750
Granted.................................................................. 300,000 5.875- 8.750
Exercised................................................................ (590,700) 1.375- 4.875
Cancelled................................................................ (3,600) 3.875
----------
Balance, June 30, 1993..................................................... 1,251,850 1.375- 8.750
Granted.................................................................. 690,500 6.500-10.125
Exercised................................................................ (393,850) 1.625- 4.000
Cancelled................................................................ (58,000) 2.125- 4.000
----------
Balance, June 30, 1994..................................................... 1,490,500 1.375-10.125
Granted.................................................................. 1,598,334 5.750- 8.000
Exercised................................................................ (186,000) 1.375- 4.000
Cancelled................................................................ (285,000) 3.500-10.000
----------
Balance, June 30, 1995..................................................... 2,617,834 1.625- 9.250
----------
----------
Exercisable at June 30, 1995............................................... 825,600 1.625- 9.250
----------
----------
</TABLE>
Also at June 30, 1995, Mr. Wilms held warrants to purchase 2,000,000 shares
of Common Stock at $2.50 per share, subject to adjustment. These warrants were
issued in connection with the funding of the $6,500,000 five year subordinated
loan for VSI.
F-13
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
5. STOCKHOLDERS' EQUITY (CONTINUED)
Upon closing of the private placement of the Company's 7.5% Convertible
Subordinated Debentures and the $5 million equity investment by Kirkland-Ft.
Worth Investment Partners, L.P. ("Kirkland") on September 21, 1993, the Company
issued warrants to purchase up to 2,750,000 shares of Common Stock at $1.50 per
share to Kirkland. These warrants are exercisable one year after the grant date
and only after the market price of the Common Stock reaches certain
predetermined levels. Under the same terms, the Company issued warrants to
purchase 1,250,000 and 30,000 shares of Common Stock to Gaming Systems Advisors,
L.P. ("GSA") and L.H. Friend, Weinress & Frankson, Inc. ("Friend"),
respectively. The Company also issued warrants to purchase 500,000 and 250,000
shares of Common Stock at $8.25 per share to the initial purchasers of the
Debentures, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
Oppenheimer & Co., Inc. ("Oppenheimer"), respectively. Under the same general
terms and conditions, DLJ may earn warrants to purchase an additional 250,000
shares of the Company's Common Stock. In fiscal 1995, in connection with the
commencement of their employment with the Company, Steve Greathouse, the
Company's Chairman of the Board, President and Chief Executive Officer and Dr.
Craig Fields, Vice Chairman of the Board were each granted warrants to purchase
250,000 shares of common stock on the same terms as the Kirkland warrants
described above.
As of June 30, 1995, none of the warrants granted to Kirkland, GSA, Friend,
Greathouse or Fields are exercisable.
F-14
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
6. INCOME TAXES
The Company generally accounts for income taxes and files its income tax
returns on a consolidated basis. However, VSI, in which the Company holds 100%
of the voting interests, has previously filed its income tax returns on a
separate basis and was not consolidated for tax purposes. During the quarter
ended December 31, 1994, the Company determined that VSI can be consolidated for
tax purposes. As a result, the Company filed for and has received a refund of
estimated income taxes paid for fiscal year 1994.
Effective July 1, 1993, the Company adopted Financial Accounting Standard
No. 109 ACCOUNTING FOR INCOME TAXES, prospectively. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
The federal and state income tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and liabilities at June
30, 1995 and 1994 are presented below.
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net Operating Loss Carryforwards.............................................. $ 8,495 $ 12,470
Inventory Obsolescence Reserve................................................ 578 179
Receivables, Bad Debt Allowance............................................... 472 564
Organization and Start-up Costs............................................... 267 172
Reserves for abandoned projects............................................... 1,577 1,356
Other......................................................................... 307 566
---------- ----------
Total gross deferred tax assets................................................. 11,696 15,307
Less valuation allowance........................................................ 10,615 13,908
---------- ----------
Net deferred tax assets......................................................... $ 1,081 $ 1,399
---------- ----------
Deferred tax liabilities:
Property and equipment, principally due to depreciation differences........... 1,218 1,399
---------- ----------
Total gross deferred tax liabilities (in 1995, $194 is included in accrued
expenses)...................................................................... 1,218 1,399
---------- ----------
Net deferred tax assets (liabilities)........................................... $ (137) $ --
---------- ----------
---------- ----------
</TABLE>
The valuation allowance for deferred tax assets as of June 30, 1994 was
$10,615,000. The net change in the total valuation allowance for the twelve
months ended June 30, 1995 was an increase of $3,293,000.
At June 30, 1995, the Company has estimated net operating loss carryforwards
for federal income tax purposes of approximately $36,678,000 which are available
to offset future federal taxable income, if any, expiring in the years 2007
through 2010.
F-15
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
6. INCOME TAXES (CONTINUED)
A reconciliation of the Company's provision for income tax expense as
compared to the tax benefit calculated by applying the statutory federal tax
rate to the loss before income taxes follows.
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Statutory Rate..................................................................... $ (4,202) $ (3,565)
Meals, entertainment............................................................... 3 27
State Income Taxes................................................................. 33 67
Tax losses for which no current benefit is recognized.............................. 4,385 3,736
Alternative Minimum Tax............................................................ 22 --
--------- ---------
$ 241 $ 265
--------- ---------
--------- ---------
</TABLE>
The components of the Company's income tax expense for the year ended June
30, 1995 are:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Federal--current................................................................... $ 73 $ --
State--current..................................................................... 31 102
Federal--deferred.................................................................. 118 163
State--deferred.................................................................... 19 --
--------- ---------
Total.......................................................................... $ 241 $ 265
--------- ---------
--------- ---------
</TABLE>
7. STATEMENTS OF CASH FLOWS
The following supplemental information is related to the Consolidated
Statements of Cash Flows. In fiscal 1995, the Company reclassified approximately
$212,000 from receivables to intangible assets and reclassified other assets of
approximately $1,099,000 to property and equipment ($1,074,000) and receivables
($25,000). Additionally, numerous non-cash items related to the Company's
acquisition of the general partnership interest in RCVP impacted the statement
of cash flows. The most significant of these non-cash items included non-cash
additions to property, plant and equipment of approximately $23,400,000 and
additions to total debt of approximately $13,839,000. See also Note 11.
In fiscal 1994, the Company reclassified approximately $1,445,000 of
accounts receivable to intangible assets ($1,393,000) and property and equipment
($52,000) on a net basis.
Payments for interest expense in 1993, 1994 and 1995 were approximately
$4,408,000, $4,690,000 and $7,102,000 respectively.
F-16
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
8. INTERIM FINANCIAL INFORMATION (UNAUDITED)
Following is the unaudited quarterly results of the Company for the years
ended June 30, 1994 and 1995. This information is not covered by the Independent
Auditors' Report.
<TABLE>
<CAPTION>
PRIMARY
INCOME
TOTAL NET (LOSS) (LOSS) PER
REVENUES INCOME SHARE
--------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
1994
First Quarter........................................................ $ 28,419 $ (1,376) $ (.14)
Second Quarter....................................................... 30,566 (1,221) (.12)
Third Quarter........................................................ 31,807 847 .08
Fourth Quarter....................................................... 32,262 (11,378) (1.09)
1995
First Quarter........................................................ $ 30,824 $ (1,926) $ (.18)
Second Quarter....................................................... 31,514 (3,090) (.28)
Third Quarter........................................................ 31,439 (1,775) (.16)
Fourth Quarter....................................................... 38,211 (3,960) (.34)
</TABLE>
The sum of the income (loss) per share for the four quarters, which are
based on average shares outstanding during each quarter, does not equal income
(loss) per share for the year, which is based on average shares outstanding
during the year.
9. RELATED PARTY TRANSACTIONS
The Company sold products to Seeben N.V., a company in which Alfred H. Wilms
is the brother of a member of the company's board of directors. Sales to this
company were approximately $2,000 (1993), $6,000 (1994) and $0 (1995). No
accounts receivable were due from this company at June 30, 1994 or June 30,
1995. Sales prices and terms were similar to those of non-affiliated persons.
In March 1992, Alfred H. Wilms, a director and principal stockholder (and
then Chairman and Chief Executive Officer of the Company), committed to provide
or cause others to provide a $6,500,000 five year, unsecured, subordinated loan
to VSI, a majority-controlled subsidiary of the Company engaged in the Company's
Louisiana gaming device route operations. As consideration for this commitment,
the Company issued to Mr. Wilms five year warrants to purchase 200,000 shares of
Common Stock at $2.50 per share subject to certain adjustments, and agreed to
issue an additional warrant to purchase 1,800,000 shares of Common Stock at
$2.50 per share subject to certain adjustments upon complete funding of the
loan. At June 30, 1993 approximately $6,000,000 of the loan had been funded. The
remaining $500,000 was funded in October 1993 at which time the Company issued
to Mr. Wilms the additional warrant for 1,800,000 shares of common stock.
David Robbins, a director appointed to the Board in July 1994, as a designee
of Kirkland Investment Corporation ("KIC"), is employed by the law firm of
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel which has represented the
Company in various matters related to the Company's growth strategy and its
transactions with Kirkland and KIC. The Company paid fees of approximately
$1,046,000 and $493,000 to such firm in fiscal 1994 and fiscal 1995,
respectively.
In connection with the agreements with KIC (100% owned by Joel Kirschbaum)
and its affiliates and related transactions, the Company has paid to or on
behalf of Kirkland and its affiliates a total of approximately $346,000 in
fiscal 1994 and $597,000 in fiscal 1995 primarily for reimbursement of expenses
incurred on behalf of the Company.
F-17
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
9. RELATED PARTY TRANSACTIONS (CONTINUED)
In 1993 and 1994 the Company entered into employment agreements with certain
key employees. These agreements range from one to three years in length and
cover certain other terms of employment including compensation. As a condition
of his employment, in April 1995 the Company issued 250,000 shares of common
stock to Steve Greathouse, the Company's Chairman, President and Chief Executive
Officer and recognized a non-cash charge of $1,313,000 related to this
transaction.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment, warehouse and repair facilities,
gaming route locations, casino and other locations under non-cancelable
operating leases.
Future minimum rentals under non-cancelable operating leases at June 30,
1995 are:
<TABLE>
<CAPTION>
TOTAL
MINIMUM SUBLEASE NET MINIMUM
YEAR ENDED JUNE 30 RENTALS INCOME RENTALS
- ----------------------------------------------------------------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1996................................................................... $ 8,828 $ 921 $ 7,907
1997................................................................... 6,462 842 5,620
1998................................................................... 6,173 809 5,364
1999................................................................... 5,623 758 4,865
2000................................................................... 3,737 598 3,139
Thereafter............................................................. 34,349 2,757 31,592
----------- ----------- -----------
$ 65,172 $ 6,685 $ 58,487
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Certain gaming route location leases provide only for contingent rentals
based upon a percentage of gaming revenue and are cancelable at any time by
either party.
Operating lease rental expense, including contingent lease rentals, for
years ended June 30 was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals........................................................ $ 11,727 $ 13,743 $ 9,704
Contingent rentals..................................................... 49,621 55,910 58,113
--------- --------- ---------
61,348 69,653 67,817
Sublease rental income................................................. (850) (1,004) (1,192)
--------- --------- ---------
$ 60,498 $ 68,649 $ 66,625
--------- --------- ---------
--------- --------- ---------
</TABLE>
These amounts are included in the cost of gaming revenues on the
accompanying Consolidated Statements of Operations.
In April, 1990, the Company entered into a ten year lease to operate a
non-restricted gaming location in Las Vegas, Nevada. The lease commencement date
was scheduled to begin no later than 90 days after the construction had been
finalized. In January, 1991, the Company received notice that the construction
was complete; however, upon review of the property, the Company did not believe
that construction had been completed. In August, 1992, the lessor filed a suit
against the Company seeking compensatory and exemplary damages totalling
$18,700,000. In fiscal 1992, the Company had accrued a $480,000 liability
representing back rent owed to the lessor. In February, 1993 the lawsuit was
settled and the Company paid the lessor $425,000 in return for resolution of all
prior and current disputes regarding the lease terms. The lease calls for
monthly rentals of approximately $31,000 and provides for annual increases based
on certain indices. At
F-18
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
June 30, 1992, the Company sublet the property to a location operator in
exchange for the right to operate gaming devices at the property under a space
lease arrangement for a period of 10 years beginning December, 1992.
The Company and Casino Magic Corporation, through wholly owned subsidiaries,
are members in Kansas Gaming Partners, LLC ("KGP") and Kansas Financial
Partners, LLC ("KFP"), both Kansas limited liability companies. Under an option
agreement granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown"), KGP
has been granted the exclusive right to operate gaming devices and/or
casino-type gaming at Camptown's facility if and when such gaming is permitted
in Kansas. In September 1994, the Kansas Racing Commission approved a revised
financing proposal submitted by Camptown that would facilitate completion of
construction of a greyhound racing facility on the 320 acre site in Frontenac,
Kansas. Camptown has received a $3,205,000 loan commitment which has been
guaranteed by KFP. In December 1994, the Company invested $1,580,000 in KFP for
its portion of the loan guarantee which was made in the form of a certificate of
deposit. The Company owns 50% of the equity of KFP which is accounted for under
the equity method. The Company has not guaranteed the obligations of KFP.
Construction of Camptown's racing facility has been completed and the facility
opened for business in May 1995. Camptown's obligation to begin to repay the
loan guaranteed by KFP commenced in June 1995 with interest only payments.
Principal repayment is scheduled to commence in June 1996. There can be no
assurance as to the successful completion or operation of any part of this
project.
The Company is also involved in various claims and legal actions arising in
the ordinary course of business. Management of the Company believes that the
ultimate outcome of these matters will not have a material adverse effect on the
Company's consolidated financial statements taken as a whole.
11. ACQUISITIONS
On July 12, 1994, the Rainbow Casino located in Vicksburg, Mississippi
permanently opened for business. Through a wholly-owned subsidiary, the Company
originally purchased a 45% limited partnership interest in RCVP, a Mississippi
limited partnership which owns the casino, all assets (including the gaming
equipment) associated with the casino and certain adjacent parcels of land. As
consideration for its 45% limited partnership interest, the Company paid
$2,000,000 in cash and issued 600,000 shares of its common stock to RCC and its
two shareholders. The 55% general partnership interest in RCVP was held by RCC.
In connection with the completion of the casino, the Company funded a $3,250,000
advance to RCC on the same terms as RCC's financing from Hospitality Franchise
Systems, Inc. ("HFS") (other than the fact that such advance is subordinate to
payments due to HFS). On March 29, 1995, the Company consummated certain
transactions whereby the Company acquired from RCC the controlling general
partnership interest in RCVP and increased its partnership interest. In exchange
for the assumption by National Gaming Mississippi, Inc. ("NGM"), a subsidiary of
National Gaming Corporation, of approximately $1,140,000 of liabilities (plus a
financing fee payable to HFS) related to the completion of certain incomplete
elements of the project which survived the opening of the casino (for which RCC
was to have been responsible, but failed to satisfy), a related $652,000 cash
payment by the Company to NGM and commitments by the Company and NGM to fund
additional financing required to complete the project (i) a subsidiary of the
Company became the general partner and RCC became the limited partner and (ii)
the respective partnership interests were adjusted. As a result of these
transactions, RCVP assumed $1,304,000 of new debt of which 50% was payable to
the Company. Under the adjusted partnership interests, RCC is entitled to
receive 10% of the net available cash flows after debt service and other items,
as defined, (which amount shall increase to 20% of cash above $35,000,000 (i.e.,
only on such incremental amount)), for a period of 15 years, such period being
subject to one year extensions for each year in which a minimum payment of
$50,000 is not made. This transaction was accounted for as an acquisition using
the purchase method. Accordingly, the purchase price
F-19
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
11. ACQUISITIONS (CONTINUED)
was allocated to assets acquired based on their estimated fair values. This
treatment resulted in no cost in excess of net assets acquired (goodwill) being
recognized. The Rainbow Casino's results of operations have been included in the
consolidated results of operations since the date of acquisition.
The following summarized, unaudited pro forma results of operations for the
fiscal year ended June 30, 1995, assume the complete acquisition of RCVP
occurred on the date the casino permanently opened for business:
<TABLE>
<CAPTION>
1995
-------------------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNT)
<S> <C>
Revenues........................................................................... $ 142,051
Net loss........................................................................... (10,862)
Net loss per common share.......................................................... (0.96)
</TABLE>
12. RECENT DEVELOPMENTS (UNAUDITED)
On June 19, 1995, the Company publicly proposed a negotiated acquisition of
Bally Gaming International, Inc. ("BGII") for $12.50 per share of BGII common
stock. Prior to making this offer, the Company had acquired 500,000 shares of
BGII stock on the open market and at June 30, 1995 held 1,000,000 shares
(approximately 9.3% of BGII's total outstanding shares, based on BGII's most
recent public filings) which it acquired at an average cost of approximately
$10.41 per share. Under the proposed terms of the offer, approximately 60% of
BGII shares not held by the Company would be acquired for cash with the
remainder exchanged for shares of the Company's common stock. The offer was
contingent upon satisfactory due diligence, regulatory and stockholder approval
and reasonable financing. At the time the offer was made public, the Company
requested expedited due diligence, subject to a confidentiality agreement. BGII
had previously announced a planned merger with WMS Industries, Inc. ("WMS")
which included an exclusive period for WMS to negotiate the terms of that
proposed merger. WMS's exclusive negotiating period had expired several weeks
before the Company's proposal was made without announcement or action on the
part of BGII or WMS. On July 25, 1995, after being refused due diligence access
and the announcement by BGII that a definitive agreement had been reached to
merge with WMS, the Company announced its intent to make a tender offer for
BGII. The tender offer was on largely the same terms as the originally proposed
acquisition. On the same date, the Company announced it had filed litigation in
Delaware Chancery Court requesting that the court require BGII to grant the
Company due diligence access, enjoin BGII from proceeding with the WMS merger
(including a provision therein requiring the sale of BGII's German operations)
and declare the breakup fee provided for in the WMS merger to be invalid. The
Company indicated that it would increase the price per share of BGII stock to
$13.00 per share if the breakup fee was declared invalid. The tender offer was
conditioned upon the Company being validly tendered a number of shares of BGII
stock, which combined with its own holdings of such stock, would give the
Company a majority of BGII's outstanding shares. The tender offer commenced on
July 28, 1995. Subsequently, the Company announced its intention to proceed with
a consent solicitation to elect a majority of independent directors to the BGII
Board of Directors. On August 14, 1995, the Company, BGII and WMS jointly
announced an agreement whereby the parties would hold in abeyance all activities
related to pending litigation until September 1, 1995, refrain from commencing
new litigation until that same date, BGII would schedule its annual shareholder
meeting for consideration of the proposed WMS merger and the election of
directors on October 30, 1995, and the Company would extend the expiration date
of the tender offer until September 12, 1995 and refrain from soliciting proxies
until September 1, 1995. On September 1, 1995, the Company disclosed that it had
obtained firm financing commitments to fund the tender offer and that such
commitments were not conditioned on due diligence of BGII. Accordingly, the
Company extended the expiration date of its tender offer to September 29, 1995.
BGII and WMS filed lawsuits against the Company alleging numerous public
misrepresentations had been made by the Company with regards to the WMS-
F-20
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
12. RECENT DEVELOPMENTS (UNAUDITED) (CONTINUED)
BGII agreement, the Company's tender offer and the level of cooperation of
BGII's board of directors. Subsequent to filing its lawsuit against the Company,
BGII adopted a poison pill provision designed to discourage the Company's
acquisition efforts. In response to the poison pill adoption, the Company
announced it had increased its tender offer to $13.00 per share of BGII common
stock and increased to 5,400,000 the number of BGII common shares being sought
in the tender offer.
F-21
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and securities available for sale............................. $ 37,414 $ 29,468
Receivables, net..................................................................... 3,316 3,110
Inventories.......................................................................... 714 672
Prepaid expenses..................................................................... 4,148 2,984
Other................................................................................ 517 411
---------- ------------
Total current assets............................................................... 46,109 36,645
---------- ------------
Property and equipment, net............................................................ 50,352 50,870
Receivables, net....................................................................... 5,309 4,809
Excess of costs over net assets of an acquired business, net of accumulated
amortization.......................................................................... 3,842 3,733
Intangible assets, net of accumulated amortization..................................... 12,405 11,638
Investment in minority owned subsidiary................................................ 1,585 1,585
Other.................................................................................. 6,746 7,592
---------- ------------
Total assets..................................................................... $ 126,348 $ 116,872
---------- ------------
---------- ------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt.................................. $ 3,995 $ 4,054
Accounts payable...................................................... 1,758 2,295
Accrued expenses, including due to related parties.................... 8,610 10,187
--------- ---------
Total current liabilities........................................... 14,363 16,536
Long-term debt, less current maturities................................. 97,402 96,052
--------- ---------
Other liabilities....................................................... 3,955 4,082
--------- ---------
Total liabilities................................................... 115,720 116,670
--------- ---------
Commitments and contingencies
Minority interest....................................................... 643 919
Stockholders' equity (deficiency):
Common stock, $.10 par value; authorized 175,000,000 shares; issued
and outstanding 11,654,150 and 12,987,483.......................... 1,165 1,298
Special stock, $.10 par value; authorized 10,000,000 shares; issued
and outstanding 1,333,333 and 0.................................... 133 --
Paid-in capital..................................................... 32,134 32,134
Unrealized loss on securities available for sale, net............... (316) (1,587)
Accumulated deficit................................................. (23,131) (32,562)
--------- ---------
Total stockholders' equity (deficiency)............................. 9,985 (717)
--------- ---------
Total liabilities and stockholders' equity (deficiency)........... $ 126,348 $ 116,872
--------- ---------
--------- ---------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Revenues:
Gaming:
Routes.................................................................................. $ 52,511 $ 52,621
Casinos and taverns..................................................................... 7,861 21,679
Food and beverage sales................................................................... 1,950 1,923
Net equipment sales....................................................................... 16 6
--------- ---------
62,338 76,229
--------- ---------
Costs and expenses:
Cost of gaming:
Routes.................................................................................. 39,214 40,361
Casinos and taverns..................................................................... 4,653 9,887
Cost of food and beverage................................................................. 1,414 1,426
Cost of equipment sales................................................................... 9 1
Selling, general and administrative....................................................... 6,486 9,398
Business development expenses............................................................. 3,508 10,737
Corporate expenses........................................................................ 4,302 3,037
Depreciation and amortization............................................................. 4,613 4,906
--------- ---------
64,199 79,753
--------- ---------
Operating loss............................................................................ (1,861) (3,524)
Other income (expense):
Interest income........................................................................... 1,504 818
Interest expense.......................................................................... (3,915) (4,288)
Minority share of income.................................................................. (169) (276)
Other, net................................................................................ (286) (1,373)
--------- ---------
Loss before income taxes.................................................................... (4,727) (8,643)
Income tax expense.......................................................................... (290) (788)
--------- ---------
Net loss.................................................................................... $ (5,017) $ (9,431)
--------- ---------
--------- ---------
Loss per share of common stock.............................................................. $ (.45) $ (.79)
--------- ---------
--------- ---------
Weighted average common shares outstanding.................................................. 11,101 11,879
--------- ---------
--------- ---------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-23
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................ $ (5,017) $ (9,431)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization......................................................... 4,613 4,906
Loss on sale of property and equipment................................................ 560 240
Write off of other assets............................................................. 361 201
Provision for losses on receivables................................................... 261 20
Amortization of debt discounts........................................................ 179 118
Equity in losses of affiliate......................................................... 405 --
Deferred income tax provision......................................................... -- 655
Net change in operating assets and liabilities:
Decrease in:
Inventories........................................................................... 28 12
Prepaid expenses...................................................................... 1,577 1,163
Refundable income taxes............................................................... -- 312
Other assets.......................................................................... 615 143
Increase (decrease) in:
Accounts and slot contracts payable................................................... 101 537
Accrued expenses...................................................................... (1,333) 1,577
Minority interests.................................................................... 168 276
Other liabilities..................................................................... (424) (223)
---------- ----------
Net cash provided by operating activities........................................... $ 2,094 $ 506
---------- ----------
Cash flows from investing activities:
Additions to property and equipment..................................................... (2,905) (5,004)
Proceeds from sale of property and equipment............................................ 265 2,218
Additions to receivables................................................................ (12,303) (6,296)
Cash collections on receivables......................................................... 9,272 6,564
Investment in subsidiary................................................................ (1,580) --
Proceeds from sale (purchase) of securities available for sale.......................... (133) 8,015
Additions to intangible assets.......................................................... (162) (420)
Additions to other long-term assets..................................................... (1,959) (2,179)
---------- ----------
Net cash (used in) provided by investing activities................................... (9,505) 2,898
---------- ----------
Cash flows from financing activities:
Reduction of long-term debt............................................................. (1,594) (2,091)
Proceeds from long-term debt............................................................ -- 682
Issuance of stock....................................................................... 109 --
---------- ----------
Net cash (used in) financing activities............................................... (1,485) (1,409)
---------- ----------
Cash and cash equivalents:
Increase (decrease) for period.......................................................... (8,896) 1,995
Balance, beginning of period............................................................ 37,085 13,734
---------- ----------
Balance, end of period................................................................ $ 28,189 $ 15,729
---------- ----------
---------- ----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-24
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
1. ADJUSTMENTS FOR FAIR PRESENTATION
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial condition, results of operations and
cash flows of the Company for the respective periods presented. The results of
operations for an interim period are not necessarily indicative of the results
to be expected for a full year.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying condensed
consolidated financial statements be read in conjunction with the financial
statements and notes in the Company's annual report on Form 10-K. All
intercompany accounts and transactions have been eliminated in consolidation.
2. RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial
statements to conform with current period presentations.
3. RECEIVABLES
The Company's gaming route operations from time to time involve making loans
to location operators in order to participate in revenues over extended periods
of time. These loans, generally made for buildouts, tenant improvements and
initial operating expenses, are generally guaranteed on a full recourse basis by
the location owner and are secured by the assets of the location. The majority
of the loans are interest bearing and are expected to be repaid over a period of
time not to exceed the life of the related revenue sharing agreement. The loans
have varying payment terms requiring either weekly or monthly payments. Annual
interest rates on the loans range from prime plus 1.5% to stated rates of 12%
with various maturity dates ranging through 2007. The loans are expected to be
repaid from the locations' cash flows or proceeds from the sale of the
leaseholds.
Receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DEC. 31
1995 1995
--------- ---------
(In thousands)
<S> <C> <C>
Notes receivable-location operators...................................... $ 7,760 $ 7,764
Other receivables........................................................ 865 155
--------- ---------
8,625 7,919
Less current amounts..................................................... 3,316 3,110
--------- ---------
Long-term receivables, excluding current amounts......................... $ 5,309 $ 4,809
--------- ---------
--------- ---------
</TABLE>
Receivables are presented net of an allowance for doubtful accounts of
approximately $1,659,000 and $1,435,000 as of June 30, 1995 and December 31,
1995, respectively. The allowance is allocated between current and long-term
receivables on a pro rata basis related to notes receivable from location
operators.
F-25
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
4. DEBT
Long-term debt at June 30, 1995 and December 31, 1995 consists of the
following:
<TABLE>
<CAPTION>
JUNE 30 DEC 31
1995 1995
---------- ----------
(In thousands)
<S> <C> <C>
Convertible subordinated debentures due 2003, 7.5%.............................. $ 85,000 $ 85,000
Due to stockholder due 1998, 200 basis points over the London Inter Bank Offer
Rate (current rate 7.97%), net of discount of $747,619 and $629,573............ 3,309 2,797
Hospitality Franchise Systems due 2001, 7.5%.................................... 9,065 8,476
National Gaming Mississippi due 2002, 10.0%..................................... 631 1,224
Other debt...................................................................... 3,392 2,609
---------- ----------
101,397 100,106
Less current maturities......................................................... 3,995 4,054
---------- ----------
Long-term debt, less current maturities......................................... $ 97,402 $ 96,052
---------- ----------
---------- ----------
</TABLE>
Accrued interest of approximately $1,991,000 (June 30) and $1,973,000
(December 31) is included in accrued expenses in the unaudited condensed
consolidated balance sheets. Amounts due to stockholder include amounts owed to
affiliates of Alfred H. Wilms, the Company's largest stockholder and a member of
the Board of Directors of the Company, relating to funding of the Company's
majority-controlled subsidiary, Video Services, Inc.'s ("VSI") gaming device
route operations.
5. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Financial Accounting Standard No. 109 Accounting for Income Taxes. Under the
asset and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Due to losses and the lack of available carrybacks, the Company recognized
no federal income tax expense or benefit for the six month period ended December
31, 1994 and 1995 other than the tax effects of changes in the unrealized gains
(losses) on securities available for sale. At December 31, 1995, the Company had
estimated net operating loss carryforwards for federal income tax purposes of
approximately $35,000,000 which are available to offset future federal taxable
income, if any, expiring 2007 through 2009. The deferred tax asset related to
the net operating losses has been fully reserved.
6. INTANGIBLE ASSETS
Intangible Assets includes $4,272,000, net of $1,232,000 of accumulated
amortization, for costs related to the commissions, discounts and other issuance
costs of the Company's private placement of $85,000,000 aggregate principal
amount of 7.5% Convertible Subordinated Debentures due 2003. Such costs are
being amortized on a straight line basis over the term of the debentures.
7. INVESTMENT IN MINORITY OWNED SUBSIDIARY
The Company and Casino Magic Corporation, through wholly owned subsidiaries,
are members in Kansas Gaming Partners, L.L.C. ("KGP") and Kansas Financial
Partners, L.L.C. ("KFP"), both Kansas limited liability companies. Under an
option agreement (the "option agreement") granted to KGP by
F-26
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
7. INVESTMENT IN MINORITY OWNED SUBSIDIARY (CONTINUED)
Camptown Greyhound Racing, Inc. ("Camptown") and The Racing Association of
Kansas-Southeast ("TRAK Southeast"), KGP has been granted the exclusive right,
which right expires on September 13, 2013, to operate gaming devices and/or
casino-type gaming at Camptown's racing facility in Frontenac, Kansas if and
when such gaming is permitted in Kansas. In December 1994, Camptown received a
$3,205,000 loan from Boatmen's Bank which was guaranteed by KFP. The Company and
Casino Magic Corporation each invested $1,580,000 in KFP which was used to
purchase a certificate of deposit to collateralize its guaranty. Construction of
Camptown's racing facility has been completed and the facility opened for
business in May 1995. The racing facility was temporarily closed on November 5,
1995 due to poor financial results. Camptown filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated an
intention to reopen for business following bankruptcy reorganization. Boatmen's
Bank demanded payment of the Camptown loan from KFP under the terms of the
guaranty. KFP paid the loan and Boatmen's Bank returned KFP's certificate of
deposit and KFP assumed Boatmen's Bank's position in the loan to Camptown which
is secured by a second mortgage on Camptown's greyhound racing facility in
Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by the
Option Agreement. KFP intends to vigorously pursue all of its rights and
remedies which may include, among other things, seeking authority from the
bankruptcy court to commence a foreclosure action. In the case of a foreclosure
action, KFP would be required to assume or pay the existing first mortgage of
approximately $2,000,000 if KFP becomes the purchaser at any such sale. The
Company intends to continue to monitor its investment in KFP. While the Company
is encouraged by the positive movement in Kansas towards considering legislation
that would legalize the operation of gaming devices at pari-mutuel track
locations, there can be no assurance as to Camptown's ability to maintain its
license at the location, or any successful completion or operation of any part
of this project.
8. CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE FOR SALE
For balance sheet presentation the following account balances have been
combined:
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash
equivalents............... $ 13,734 $ 15,729
Securities available for
sale...................... 23,680 13,739
------------- -------
Total...................... $ 37,414 $ 29,468
------------- -------
------------- -------
</TABLE>
As of June 30, 1995, unrealized loss for securities available for sale was
$316,000, net of the tax effect of $161,000. As of December 31, 1995, unrealized
loss for securities available for sale was $1,587,000 net of the tax effect of
$817,000. These amounts are included as components of stockholders' equity.
9. INTANGIBLE ASSETS
Intangible Assets includes $4,272,000 net of $1,232,000 of accumulated
amortization, for costs related to the commissions, discounts and other issuance
costs of the Company's private placement of $85,000,000 aggregate principal
amount of 7.5% Convertible Subordinated Debentures due 2003. Such costs are
being amortized on a straight line basis over the term of the debentures.
10. PROPOSED BGII MERGER TRANSACTION
On October 18, 1995, the Company and Bally Gaming International, Inc.
("BGII") entered into a definitive merger agreement ("Merger") under which the
outstanding shares of BGII common stock would each be exchanged for $13 in cash
and shares of the Company's common stock.
F-27
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
10. PROPOSED BGII MERGER TRANSACTION (CONTINUED)
On January 22, 1996, the parties reached an agreement to amend the terms of
the Merger. Under the amended agreement, each share of BGII common stock
outstanding (10,799,501 as of September 30, 1995 less the 1,000,000 shares
already owned by the Company) will receive $7.83 per share in cash, $3.57 per
share in the Company's Series B Special Stock which is a Pay-in-Kind (PIK)
preferred stock, and $0.30 per share of the Company's common stock totaling
$11.70 per share of BGII common stock. The PIK preferred stock has an eight-year
maturity and has a dividend rate of 15% as follows: PIK at 15% for the first
five years; 8% PIK and 7% cash for years six and seven; and 15% cash in the
eighth year of the term. All shares of Series B Special Stock are mandatorily
redeemable by the eighth anniversary of the date of initial issuance. If the
Company fails to redeem such shares by that date, then the number of directors
constituting the Company's Board will be increased by two and the holders of the
shares of Series B Special Stock will have the right to elect no more than two
directors total to the Company's Board. The holders of Series B Special Stock
will have no other remedies upon such failure to redeem the outstanding shares
of Series B Special Stock by such date. Other than as described herein, the
holders of shares of Series B Special Stock have no other voting rights except
as stated by law. The Company intends to seek to have the Series B Special Stock
quoted on NASDAQ. The aggregate amount of cash is unchanged from the previous
agreement.
The transaction is subject to approval by shareholders, obtaining customary
regulatory approvals, the securing of $150,000,000 in permanent financing by the
Company including $15,000,000 through a registered public offering of the Series
B Special Stock, and certain other conditions. The Merger is expected to occur
in late April 1996.
11. LEGAL PROCEEDINGS
In June 1995, Bally Entertainment Corporation ("BEC") asserted that a
certain agreement between BEC and BGII (the "Noncompete Agreement") prohibits
the use of the trade name "Bally" if it is merged with a company that is in the
casino business within or without the United States and operates such business
prior to January 8, 1996. BGII believes such claim is entirely without merit
since the restriction referred to expires on January 8, 1996 and in any event
does not relate to the use of the "Bally" trade name, which is covered by the
License Agreement. The restriction in the Noncompete Agreement will not have any
impact on the combined company after the Merger since the effective time of the
Merger contemplates a closing of the Merger after the restriction in the
Noncompete Agreement lapses. BEC has not reasserted this position since it was
informed by BGII in July 1995 that the restriction lapses on January 8, 1996.
Consequently, BGII believes BEC has determined not to contest with BGII's
position.
BEC has also asserted that its permission is required for use of the "Bally"
trade name by any entity other than BGII and that a merger between BGII and
another company would violate the terms of the License Agreement. BGII has
denied these claims and believes that the surviving company in a merger will be
permitted to use the "Bally" trade name in accordance with the terms of such
License Agreement. BGII believes that no breach of such License Agreement is
caused by the Merger and the use of the "Bally" trade name by the surviving
corporation. In a letter dated November 9, 1995, BEC reasserted its position. On
November 20, 1995 the Company, the Company's Merger Subsidiary, and BGII
commenced an action against BEC in Federal District Court in Delaware seeking a
declaratory judgment, among other things, that the surviving company in the
Merger will be permitted to use the "Bally" trade name in accordance with the
terms of the License Agreement, and seeking injunctive relief (the "Alliance
Action"). On November 28, 1995, BEC commenced an action against BGII, Bally
Gaming (a BGII subsidiary), the Company, and the Company's Merger Subsidiary in
Federal District Court in New Jersey to enjoin the defendants from using the
"Bally" trade name (the "BEC Action"). The BEC Action alleges that BGII's
continued use of the trade name after the Merger will (1) constitute a
prohibited assignment of BGII's rights to use the trade name and (2) exceed the
scope of the license granted to BGII because BGII will be under control of the
Company. Also on November 28, 1995, BEC filed a motion to dismiss, transfer to
New Jersey, or stay the Alliance
F-28
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995
11. LEGAL PROCEEDINGS (CONTINUED)
Action pending resolution of the BEC Action. BGII, Bally Gaming, the Company,
and the Company's Merger Subsidiary intend to vigorously defend their position
in these actions. However, there can be no assurance that BEC will not be
successful in its action to prohibit the surviving corporation in the Merger
from using the "Bally" trade name. The loss of the "Bally" trade name may have a
material adverse effect on the gaming machine operations of the surviving
corporation in the Merger.
12. INITIAL SERIES SPECIAL STOCK
In September 1993, Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland")
invested $5,000,000 in the Company in exchange for 1,333,333 shares of the
Company's Non-Voting Junior Convertible Special Stock, which are convertible on
a share for share basis into shares of the Company's Common Stock, and warrants
to purchase up to 2,750,000 shares of common stock subject to certain
conditions. In December 1995, Kirkland elected to convert the entire 1,333,333
shares of Special Stock into shares of the Company's Common Stock.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bally Gaming International, Inc.
We have audited the accompanying consolidated balance sheets of Bally Gaming
International, Inc. as of December 31, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bally Gaming
International, Inc. as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Las Vegas, Nevada
February 13, 1996
F-30
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 9,204 $ 5,526
Accounts and notes receivable, net of allowance for doubtful accounts of $12,282 and
$16,281................................................................................ 84,632 87,176
Inventories, net:
Raw materials and work-in-process..................................................... 21,082 16,066
Finished goods........................................................................ 28,377 35,525
---------- ----------
49,459 51,591
Other current assets.................................................................... 5,074 3,983
---------- ----------
Total current assets................................................................ 148,369 148,276
Long-term notes receivable, net of allowance for doubtful accounts
of $8,198 and $7,869.................................................................... 5,558 9,981
Property, plant and equipment, at cost:
Land.................................................................................... 1,357 1,357
Buildings and leasehold improvements.................................................... 19,262 19,871
Machinery and equipment................................................................. 26,636 30,328
Furniture, fixtures and equipment....................................................... 6,075 6,162
Less accumulated depreciation........................................................... (28,972) (34,474)
---------- ----------
Property, plant and equipment, net.................................................... 24,358 23,244
Intangible assets, less accumulated amortization of $12,609 and $13,720................... 11,410 10,814
Other assets.............................................................................. 2,547 2,001
---------- ----------
$ 192,242 $ 194,316
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 19,272 $ 18,556
Accrued liabilities and other payables:
Compensation and benefit related liabilities............................................ 5,962 5,608
Other................................................................................... 11,363 11,798
---------- ----------
17,325 17,406
Current maturities of long-term debt.................................................... 16,000 14,957
---------- ----------
Total current liabilities........................................................... 52,597 50,919
10 3/8% Senior Secured Notes due 1998, net of unamortized discount
of $458 and $344........................................................................ 39,542 39,656
Other long-term debt, less current maturities............................................. 14,220 15,331
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; 5,000,000 shares authorized, none issued............... -- --
Common stock; $.01 par value; 30,000,000 shares authorized, 10,749,501
and 10,799,501 issued and outstanding.................................................. 107 108
Additional paid-in-capital.............................................................. 67,758 68,345
Retained earnings....................................................................... 5,235 1,842
Cumulative translation adjustments...................................................... 13,560 18,662
Unearned compensation................................................................... (777) (547)
---------- ----------
Total stockholders' equity.......................................................... 85,883 88,410
---------- ----------
$ 192,242 $ 194,316
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-31
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS,)EXCEPT PER SHARE
DATA
Revenues:
Sales...................................................................... $ 164,571 $ 231,318 $ 244,471
Other...................................................................... 4,136 4,874 4,841
---------- ---------- ----------
168,707 236,192 249,312
---------- ---------- ----------
Costs and expenses:
Cost of sales.............................................................. 121,710 157,059 163,131
Selling, general and administrative........................................ 57,357 59,989 65,289
Provision for doubtful receivables......................................... 8,176 5,763 6,712
Unusual charges............................................................ -- -- 5,816
---------- ---------- ----------
187,243 222,811 240,948
---------- ---------- ----------
Operating income (loss)...................................................... (18,536) 13,381 8,364
Interest expense............................................................. 4,424 6,768 6,853
---------- ---------- ----------
Income (loss) before income taxes and extraordinary gain..................... (22,960) 6,613 1,511
Provision for income taxes................................................... 4,242 2,820 4,904
---------- ---------- ----------
Income (loss) before extraordinary gain...................................... (27,202) 3,793 (3,393)
Extraordinary gain on early extinguishment of debt........................... 3,759 -- --
---------- ---------- ----------
Net income (loss)............................................................ $ (23,443) $ 3,793 $ (3,393)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common share:
Income (loss) before extraordinary gain.................................... $ (2.54) $ 0.35 $ (0.31)
Extraordinary gain on early extinguishment of debt......................... 0.35 -- --
---------- ---------- ----------
Net income (loss).......................................................... $ (2.19) $ 0.35 $ (0.31)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares and common stock equivalents
outstanding................................................................. 10,685 10,727 10,776
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-32
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN- RETAINED TRANSLATION UNEARNED STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENTS COMPENSATION EQUITY
----------- ----------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.................. $ 106 $ 65,757 $ 24,885 $ 11,662 $ (1,133) $ 101,277
Net loss.................................... -- -- (23,443) -- -- (23,443)
Issuance of restricted Company common stock
award..................................... 1 1,149 -- -- (1,150) --
Exercise of warrants........................ -- 30 -- -- -- 30
Amortization of unearned compensation....... -- -- -- -- 951 951
Foreign currency translation adjustment..... -- -- -- (4,536) -- (4,536)
Issuance of stock warrants.................. -- 600 -- -- -- 600
----- ----------- ----------- ------------- ------- -------------
Balance at December 31, 1993.................. 107 67,536 1,442 7,126 (1,332) 74,879
Net income.................................. -- -- 3,793 -- -- 3,793
Amortization of unearned compensation....... -- -- -- -- 555 555
Foreign currency translation adjustment..... -- -- -- 6,434 -- 6,434
Issuance of Company common stock under
compensation agreement.................... -- 222 -- -- -- 222
----- ----------- ----------- ------------- ------- -------------
Balance at December 31, 1994.................. 107 67,758 5,235 13,560 (777) 85,883
----- ----------- ----------- ------------- ------- -------------
Net loss.................................... -- -- (3,393) -- -- (3,393)
Exercise of stock options................... 1 587 -- -- -- 588
Amortization of unearned compensation....... -- -- -- -- 230 230
Foreign currency translation adjustment..... -- -- -- 5,102 -- 5,102
----- ----------- ----------- ------------- ------- -------------
Balance at December 31, 1995.................. $ 108 $ 68,345 $ 1,842 $ 18,662 $ (547) $ 88,410
----- ----------- ----------- ------------- ------- -------------
----- ----------- ----------- ------------- ------- -------------
<CAPTION>
COMMON
STOCK
SHARE AMOUNTS (IN THOUSANDS) ISSUED
- ---------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.................. 10,623
Issuance of restricted Company common stock
award..................................... 100
Exercise of warrants........................ 2
-------------
Balance at December 31, 1993.................. 10,725
Issuance of Company common stock under
compensation agreement.................... 25
-------------
Balance at December 31, 1994.................. 10,750
Exercise of stock options................... 50
-------------
Balance at December 31, 1995.................. 10,800
-------------
-------------
</TABLE>
See accompanying notes.
F-33
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ (23,443) $ 3,793 $ (3,393)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Extraordinary gain on early extinguishment of debt.......................... (3,759) -- --
Depreciation and amortization............................................... 8,103 8,271 8,953
Deferred income taxes....................................................... 163 (296) (778)
Provision for doubtful receivables.......................................... 8,176 5,763 6,712
Provision for writedown of building to be sold.............................. -- -- 812
Provision for inventory valuation........................................... 6,156 2,230 1,955
(Gain) loss on disposals of property, plant and equipment................... 64 (83) 48
Changes in operating assets and liabilities:
Accounts and notes receivable............................................. (17,648) (15,823) (10,304)
Inventories............................................................... (15,077) (3,889) (2,167)
Other current assets...................................................... (1,534) (713) 1,279
Accounts payable and accrued liabilities.................................. 9,717 2,730 578
Other, net.................................................................. (466) (759) 100
---------- ---------- ----------
Cash provided by (used in) operating activities........................... (29,548) 1,224 3,795
---------- ---------- ----------
Cash flows from investing activities:
Net assets of distribution business acquired.................................. (8,382) -- --
Purchases of property, plant and equipment.................................... (6,467) (9,537) (8,240)
Proceeds from disposals of property, plant and equipment...................... 1,091 1,749 1,757
Other......................................................................... 351 1,397 250
---------- ---------- ----------
Cash used in investing activities......................................... (13,407) (6,391) (6,233)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured Notes and Common Stock Warrants...... 40,000 -- --
Net change in lines of credit................................................. 28,711 21,423 359
Repayments of long-term debt.................................................. (29,761) (13,192) (2,908)
Exercise of stock warrants and stock options.................................. 30 -- 588
---------- ---------- ----------
Cash provided by financing activities....................................... 38,980 8,231 (1,961)
Effect of exchange rate changes on cash....................................... (389) 704 721
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.............................. (4,364) 3,768 (3,678)
Cash and cash equivalents, beginning of year.................................. 9,800 5,436 9,204
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 5,436 $ 9,204 $ 5,526
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flows information:
Operating activities include cash payments for interest and income taxes as
follows:
Interest paid............................................................... $ 2,910 $ 5,972 $ 6,888
Income taxes paid, net of refunds........................................... 6,454 4,020 1,801
Investing activities exclude the following non-cash activities:
Exchange of income tax receivable for intangible assets and equipment....... 1,969 -- --
Long-term note received from sale of assets................................. -- 517 --
Financing activities exclude the following non-cash activities:
Issuance of restricted stock awards......................................... 1,150 -- --
Issuance of Company common stock under compensation agreement............... -- 222 --
Issuance of note payable for license agreement.............................. -- 1,465 --
</TABLE>
See accompanying notes.
F-34
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Bally Gaming International, Inc. (the "Company") was formed in August 1991
by Bally Entertainment Corporation ("BEC") to consolidate the gaming machine
manufacturing and distribution operations of BEC. These operations are conducted
in Germany under the name Bally Wulff ("Wulff") and in the United States under
the name Bally Gaming ("Gaming") and Bally Systems ("Systems"). Wulff designs,
manufactures (through the Company's wholly-owned subsidiary "Automaten") and
distributes (through the Company's wholly-owned subsidiary "Vertriebs")
wall-mounted, coin-operated, armless gaming devices similar to slot machines
known as wall machines and also distributes recreational and amusement machines
manufactured by third parties. Gaming designs, manufactures and distributes
electronic slot machines and video gaming machines. Systems designs, assembles
and sells computerized monitoring systems for slot and video gaming machines. In
three transactions dated November 1991, July 1992 and September 1993, BEC
divested substantially all its interests in the Company.
Certain reclassifications have been made to prior years' financial
statements to conform with the 1995 presentation.
Hereafter, references to the Company are to the consolidated operations of
Wulff, Gaming and Systems including the predecessor operations.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less which are readily convertible into cash.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Cost elements included for work-in-process and
finished goods include raw materials, freight, direct labor and manufacturing
overhead.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided by using the straight-line method over the
estimated economic lives of the related assets and the terms of the applicable
leases for leasehold improvements, which range from 3 to 30 years.
Significant replacements and improvements are capitalized; other maintenance
and repairs are expensed. The cost and accumulated depreciation of assets
retired or otherwise disposed of are eliminated from the accounts and any
resulting gain or loss is credited or charged to income as appropriate.
INTANGIBLE AND OTHER ASSETS
Intangible assets include the cost in excess of net assets of acquired
businesses, which are being amortized using the straight-line method over
periods ranging up to 40 years from dates of acquisition.
In July 1992, the Company reached an agreement for an exclusive license
until December 31, 2005, subject to extension, of a patent relating to the use
of credit cards in gaming machines, and acquired 1% of the stock of Scotch
Twist, Inc., a private company which granted this license, in exchange for the
issuance of 100,001 shares of the Company's Common Stock. The licensing
agreement requires the Company to commit
F-35
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
$1.2 million in research and development costs related to the patent, plus any
costs related to obtaining required regulatory approvals and licenses. As of
December 31, 1995 approximately $1 million has been spent relative to this
commitment.
In July 1992 and again in March 1995, the Company and BEC amended a
trademark license agreement ("License Agreement") pursuant to which the Company
licensed the use of the name "Bally" for its use in the gaming machine business
worldwide. Prior to 1995, the trademark licensing rights were being amortized
using the straight-line method over a 20 year period. Pursuant to the terms of
the March 1995 amendment, the Company reduced the remaining amortization period
to five years effective March 31, 1995, resulting in an increase in amortization
expense of approximately $315,000 for the year ended December 31, 1995.
In January 1993, as part of an amendment to an intercorporate agreement
between the Company and BEC, a long-term income tax receivable from BEC of
$1,971,000 was exchanged for certain assets owned by BEC but managed by the
Company, a reduction in the period from six years to three years of certain non-
competition restrictions previously imposed on the Company by BEC and the
settlement of certain other intercompany service arrangements with BEC. This
transaction resulted in an increase to intangible assets of approximately
$1,515,000 which is being amortized over a 6 year period.
In June 1994, the Company acquired a paid up license for use of a patent on
slot machines manufactured or sold during the life of the patent. The owner of
the patent had recently filed an infringement action against various casinos in
Atlantic City alleging infringement of a certain patent by these casino
companies. As a result of the agreement, the casino operator defendants will be
released from any claims relating to the past and future use of certain gaming
machines manufactured by the Company. The Company agreed to pay $2 million over
a 5 year period, without interest, for the paid up license. The asset is fully
amortized as of December 31, 1995.
The carrying value of intangible assets is periodically reviewed by
management and impairment losses, if any, are recognized when the expected
non-discounted future operating cash flows derived from such intangible assets
is less than their carrying value. In 1995, Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121") was issued which will be
effective for the Company's year ended December 31, 1996. This statement
requires that long-lived assets and certain identifiable intangible assets to be
held and used be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. Management believes that if SFAS No. 121 had been early adopted at
December 31, 1995, it would not have had a material effect on the financial
position, results of operations or cash flows of the Company.
INCOME TAXES
Taxes on income of Wulff are provided at the tax rates applicable to the tax
jurisdictions in Germany, as Wulff files separate foreign income tax returns.
German withholding taxes and related United States federal income taxes are
provided on Wulff earnings.
REVENUE RECOGNITION
The Company sells products on normal credit terms (90 days or less), over
longer term installments of up to 36 months or more or through payments from the
net winnings of the machines until the purchase price is paid.
Revenue from sales of gaming machines and recreational and amusement
equipment is normally recognized at the time products are shipped and title has
passed to the customer. Revenue from sales of software included in computerized
management systems is recognized at the time the systems are accepted by the
customer, which normally coincides with installation of the equipment. Revenue
from sales of hardware included in computerized management systems is recognized
at the time the product is shipped.
F-36
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency of Wulff is the Deutsche Mark. Assets and
liabilities of Wulff are translated at the rate of exchange at the end of the
period, and the statements of operations are translated at the average rate of
exchange for the period. Translation adjustments are reflected as a separate
component of stockholder's equity. Gains and losses on foreign currency
transactions are included in net income.
RESEARCH AND DEVELOPMENT
The Company expenses product research and development costs as incurred.
Research and development costs for the years ended December 31, 1993, 1994 and
1995 were $7.8 million, $8.7 million and $9.2 million, respectively.
STOCK-BASED EMPLOYEE COMPENSATION AWARDS
The Company accounts for its stock-based employee compensation awards in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price
of the Company's employee stock options and stock performance rights equals the
market price on date of grant, no compensation expense is recognized.
In 1995, Statement of Financial Accounting Standards No. 123, "Accounting
for Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") was issued
which will be effective for the Company's year ended December 31, 1996. SFAS No.
123 provides alternative accounting treatment to APB No. 25 with respect to
stock-based compensation and requires certain additional disclosures, including
disclosures if the Company elects not to adopt the accounting requirements of
SFAS No. 123. At this point, the Company does not anticipate adopting the
accounting requirements of SFAS No. 123 and therefore in future years would
expect to provide the required additional disclosures in the footnotes to the
consolidated financial statements.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding totaling 10,685,054, 10,726,556 and 10,775,699 for the
years ended December 31, 1993, 1994 and 1995.
Common stock equivalents were not included in the computation of earnings
(loss) per common share as their effect would have been antidilutive or
immaterial.
MERGER AGREEMENT, TENDER OFFER AND RELATED LITIGATION
On October 17, 1995, the Board of Directors of the Company approved an
Agreement and Plan of Merger with Alliance Gaming Corporation ("Alliance") which
was subsequently amended as of January 23, 1996 ("Merger Agreement"). Pursuant
to the Merger Agreement, the Company will merge with a subsidiary of Alliance
("Alliance Merger Subsidiary") with the Company being the surviving corporation
and becoming a wholly-owned subsidiary of Alliance ("Alliance Merger"). The
Merger Agreement provides that the Company's stockholders will have the right to
receive, in exchange for each of their issued and outstanding shares of the
Company's common stock (i) an amount of cash determined by dividing $76,700,000
by the number of shares of the Company's common stock outstanding immediately
prior to the effective time of the Merger (other than shares which are held by
the Company, Alliance or their respective subsidiaries) ("Converted Shares"),
(ii) a fraction of a share of common stock, $.10 par value, of Alliance
("Alliance
F-37
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Common Stock") having a value determined in accordance with the Merger Agreement
of $.30 (the "Common Stock Consideration") and (iii) that number of shares (or
fractions thereof) of 15% Non-Voting Junior Special Stock, Series B, $.10 par
value, of Alliance (the "Series B Special Stock") having a value determined in
accordance with the Merger Agreement equal to $11.40 less the cash consideration
described in clause (i) above. The obligations of Alliance and the Company to
consummate the Alliance Merger are subject to various conditions, including
obtaining requisite stockholder and regulatory approvals and Alliance's
obtaining $150 million in financing on commercially reasonable terms, at least
two-thirds of which must be in the form of bank debt, other debt having a term
of at least four years or equity. In conjunction with the Merger Agreement,
Alliance terminated its unsolicited tender offer and consent solicitation and
withdrew its litigation against the Company and the Company withdrew its
litigation against Alliance.
BUSINESS SEGMENT
The business of the Company is conducted in one industry segment: the
design, manufacture and distribution of gaming machines, computerized monitoring
systems and recreational and amusement equipment. All of Wulff's sales are to
customers outside the United States while Gaming and Systems sell to domestic
and foreign customers. See "Commitments and Contingencies."
The Company has operations based in Germany and the United States. The table
below presents information as to the Company's operations by geographic region.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Germany................................................ $ 112,601 $ 111,068 $ 130,655
United States.......................................... 60,533 131,228 129,140
Eliminations........................................... (4,427) (6,104) (10,483)
---------- ---------- ----------
Consolidated........................................... $ 168,707 $ 236,192 $ 249,312
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS):
Germany................................................ $ 9,702 $ 9,232 $ 5,581
United States.......................................... (27,658) 4,184 2,982
Eliminations........................................... (580) (35) (199)
---------- ---------- ----------
Consolidated........................................... $ (18,536) $ 13,381 $ 8,364
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS:
Germany................................................ $ 81,899 $ 97,537 $ 100,207
United States.......................................... 90,613 99,478 100,643
Eliminations........................................... (1,682) (4,773) (6,534)
---------- ---------- ----------
Consolidated........................................... $ 170,830 $ 192,242 $ 194,316
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Wulff's customers are a diverse group of operators of arcades, hotels,
restaurants and taverns, primarily in Germany. Gaming's and Systems' customers
are primarily casinos and gaming machine distributors in the United States and
abroad. Receivables of Wulff, Gaming and Systems are generally collateralized by
the related equipment. See "Concentration of Credit Risk."
F-38
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Export sales (including sales to Wulff) from Gaming's and Systems'
operations for the years ended December 31, 1993, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Europe....................................................... $ 8,651 $ 10,889 $ 12,890
Far East..................................................... 223 860 998
Latin America................................................ 2,030 4,015 5,392
Canada....................................................... 1,589 3,254 6,185
Other........................................................ -- 556 1,824
--------- --------- ---------
$ 12,493 $ 19,574 $ 27,289
--------- --------- ---------
--------- --------- ---------
</TABLE>
ACCOUNTS AND NOTES RECEIVABLE
The Company grants certain customers extended payment terms under contracts
of sale. These contracts are generally for terms of one to three years, with
interest at prevailing rates, and are generally collateralized by the related
equipment sold although the value of such equipment, if repossessed, may be less
than the receivable balance outstanding. See "Concentration of Credit Risk."
The following table represents, at December 31, 1995, scheduled collections
of accounts and notes receivable (net of allowances for doubtful accounts) by
year:
<TABLE>
<S> <C>
1996............................................................... $ 87,176
1997............................................................... 8,250
1998............................................................... 1,731
---------
$ 97,157
---------
---------
</TABLE>
LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt and lines of credit consist of the following at December 31,
1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
10 3/8% Senior Secured Notes due 1998, net of unamortized discount of
$458 and $344........................................................ $ 39,542 $ 39,656
OTHER LONG-TERM DEBT:
Wulff revolving lines of credit....................................... 15,853 15,905
Bally Gaming, Inc. revolving line of credit........................... 7,768 9,400
Notes payable, 5% to 12%.............................................. 6,599 4,983
Less current maturities............................................... (16,000) (14,957)
---------- ----------
$ 14,220 $ 15,331
---------- ----------
---------- ----------
</TABLE>
In July 1993, the Company completed a private placement of $40 million
principal amount of 10 3/8% Senior Secured Notes due July 1998 and Common Stock
Purchase Warrants to purchase 1.2 million shares of Common Stock exercisable at
$12.50 per share after the Common Stock has traded at an average of $20 per
share for a twenty consecutive trading day period and under certain other
circumstances. The warrants became exercisable during November 1993. The Company
allocated $600,000 of the $40 million gross proceeds to the warrants and
accordingly recorded the Senior Secured Notes at $39.4 million with unamortized
discount of $600,000 (the effective yield of the Senior Secured Notes is
10.77%). The Company used $21.6 million of the gross proceeds of $40 million
from the sale of the notes and warrants to redeem all of its outstanding 6%
Senior Convertible Debentures due 2002. The Company realized an extraordinary
gain of approximately $3.8 million from the redemption of the Convertible
Debentures in 1993. The gain represents the difference between the carrying
amount of the debt retired and related deferred financing costs ($25.4
F-39
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
million) and the redemption price of $21.6 million. The Senior Secured Notes are
collateralized by a pledge of the outstanding capital stock of Automaten and
Vertriebs and a guarantee by Bally Gaming, Inc. The Notes are subject to
redemption, at the option of the Company, at a redemption price equal to 103%
and 101.5% of the principal amount of the Notes if redeemed during the twelve
month period beginning on the anniversary of the issue date in the years 1996
and 1997, respectively.
During March 1993, Vertriebs obtained two bank lines of credit for the
purpose of financing the acquisition of assets acquired from an independent
distributor. The agreements provide for borrowings of DM2,250,000 and
DM16,000,000 (approximately $1,600,000 and $11,200,000) at December 31, 1995,
respectively. Availability of the DM2,250,000 line of credit is reduced by
DM250,000 per quarter and expires on March 31, 1998. Borrowings under this line
of credit bear interest at 6.95%. The working capital revolving credit line of
DM16,000,000 bears interest at a rate tied to an international borrowing rate
plus 1% (5.3% at December 31, 1995) and is due on demand. These lines are
collateralized by a pledge of the assets acquired. Approximately $12,751,000 was
outstanding under these lines at December 31, 1995. In May 1993, Vertriebs
obtained a DM16,300,000 (approximately $11,400,000 at December 31, 1995)
revolving line of credit for general working capital purposes. This agreement
bears interest at a rate tied to an international borrowing rate plus 1% (4.8%
at December 31, 1995) and is due on demand. This line is collateralized by the
receivables of Vertriebs. Approximately $3,144,000 was outstanding under this
line at December 31, 1995. Vertriebs and Automaten are jointly and severally
liable under these lines of credit.
In March 1993, Bally Gaming, Inc. obtained a bank revolving line of credit
which, as amended, provides for borrowings tied to a percentage of Bally Gaming,
Inc.'s eligible (as defined in the credit agreement) inventory and accounts
receivable with a maximum borrowing capacity of $15,000,000. Borrowings under
this agreement, which expires March 31, 1997, bear interest at one and one-half
percent above the bank's prime rate (10% at December 31, 1995). The Company must
pay an annual facility fee of one-half of one percent of the maximum borrowing
capacity and a monthly unused line fee of one-quarter of one percent of the
difference between the maximum borrowing capacity and the average daily
outstanding balance during any month. This line of credit is collateralized by
property, plant and equipment and the eligible inventory and accounts
receivable. The agreement and subsequent amendments also contain certain
financial and other restrictive covenants, including the maintenance by Bally
Gaming, Inc. of specified levels of minimum net working capital, working capital
ratio, tangible net worth, net worth ratio, and minimum net income after taxes,
all as defined in the credit agreement. Eligible borrowing capacity under this
agreement at December 31, 1995 was approximately $15,000,000. Approximately
$9,400,000 was outstanding at December 31, 1995.
Aggregate annual maturities of long-term debt for the five years after
December 31, 1995 are $14.9 million, $11.5 million, $43.6 million, $.3 million
and none.
STOCK PLANS, AWARDS AND RIGHTS
1991 INCENTIVE PLAN
On November 6, 1991, the Company adopted the 1991 Incentive Plan of Bally
Gaming International, Inc. (the "Plan") for directors (employee directors that
are not members of the Compensation and Stock Option Committee of the Board of
Directors), officers, key employees and consultants (collectively
"Participants"). The Plan provides for the grant of stock options, stock
appreciation rights ("SARs") and restricted stock (collectively "Awards"). The
aggregate number of shares of common stock which may be delivered under the Plan
and the 1991 Non-Employee Directors' Option Plan described below may not exceed
1,250,000 shares. No awards may be granted after November 6, 2001.
The Plan provides for granting incentive as well as nonqualified stock
options. Unless the Compensation and Stock Option Committee of the Board of
Directors, in its discretion, determines otherwise,
F-40
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
nonqualified stock options will be granted with an option price equal to the
fair market value of the shares of common stock at the date of grant. Incentive
stock options must be granted at not less than the fair market value of the
shares of common stock at the date of grant.
SARs are rights granted to Participants to receive shares of common stock
and/or cash in an amount equal to the excess of (i) the fair market value of the
shares of common stock on the date the SARs are exercised over (ii) the fair
market value of the shares of common stock on the date the SARs were granted or,
at the discretion of the Compensation and Stock Option Committee of the Board of
Directors, the date the option was granted, if granted in tandem with an option
granted on a different date.
Restricted stock awards are rights granted to an employee to receive shares
of common stock without payment but subject to forfeiture and other restrictions
as set forth in the Plan. Generally, the restricted stock awarded, and the right
to vote such stock or to receive dividends thereon, may not be sold, exchanged
or otherwise disposed of during the restricted period. The Compensation and
Stock Option Committee of the Board of Directors, in its discretion, will
determine the restrictions and the forfeiture provisions applicable to
restricted stock awards. The Plan provides that, at the discretion of the
Compensation and Stock Option Committee of the Board of Directors, the Company
may pay cash to Participants to insure that the Participant will receive the
common stock net of all taxes imposed on such Participant related to the receipt
of common stock and cash payments under the Plan. During 1991, restricted stock
awards for 72,500 shares of common stock were granted under the Plan to key
employees effective January 1, 1992. These awards are fully vested at December
31, 1995. In 1993, 100,000 shares of restricted common stock were granted to an
officer of the Company. This award vests ratably over a five-year period. As of
December 31, 1995, 40,000 shares of this award were vested.
The Plan is administered by the Compensation and Stock Option Committee
which will determine the participants to whom awards will be granted, the
provisions applicable to each award and the time periods during which the awards
may be exercised. Each option and SAR granted under the Plan may be exercisable
for a term of not more than ten years after the date of grant. Incentive stock
options and SARs granted in tandem with incentive stock options may only be
exercised when the fair market value of common stock is greater than the option
price. Certain other restrictions apply in connection with the timing of
exercise. In the event of a change of control (as defined in the Plan), the date
on which all SARs and options outstanding under the Plan may first be exercised
is accelerated, and restrictions on restricted stock awards lapse. Generally,
all SARs and options terminate 90 days after a change of control.
1991 NON-EMPLOYEE DIRECTORS' OPTION PLAN
The 1991 Non-Employee Directors' Option Plan of the Company (the "Directors'
Plan") was also adopted in November 1991. The Directors' Plan provides for the
granting of stock options at the Company's initial public offering price to
persons who, on the consummation of the Company's initial public offering, were
members of the Board of Directors and who are not employees of the Company or
its subsidiaries ("Non-Employee Directors"), and thereafter, options are granted
at fair market value to persons who become members of the Board of Directors
after the Company's initial public offering and who are not employees of the
Company or its subsidiaries at the time they become members of the Board of
Directors. Each of the Non-Employee Directors received, or will receive, an
option, for ten years, to purchase 25,000 shares of common stock that vests over
three years. Administration, the term of the Directors' Plan and change of
control features for the Directors' Plan are consistent with the above described
Plan.
F-41
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
At December 31, 1995, 35,000 shares were reserved for future grant under the
Plan and the Directors' Plan. A summary of shares granted, canceled and
exercisable (excluding restricted stock grants of 172,500) are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------- -----------------
<S> <C> <C>
Outstanding at December 31, 1992.............................. 845,000 $11.75 - $14.50
Granted..................................................... 188,000 $12.38 - $12.75
Canceled.................................................... (9,000) $14.50
----------
Outstanding at December 31, 1993.............................. 1,024,000 $11.75 - $14.50
Granted..................................................... 58,000 $ 8.06 - $12.88
Canceled.................................................... (53,000) $12.00 - $14.50
----------
Outstanding at December 31, 1994.............................. 1,029,000 $ 8.06 - $14.50
Granted..................................................... 30,000 $7.88
Canceled.................................................... (16,500) $12.00 - $14.50
Exercised................................................... (50,000) $11.75
----------
Outstanding at December 31, 1995.............................. 992,500 $ 7.88 - $14.50
---------- -----------------
---------- -----------------
Exercisable at December 31, 1995.............................. 871,320 $ 8.06 - $14.50
---------- -----------------
---------- -----------------
</TABLE>
1992 RESTRICTED STOCK PERFORMANCE PLAN
On November 3, 1992, the Company's Board of Directors adopted the Bally
Gaming International, Inc. 1992 Restricted Stock Performance Plan (the
"Performance Plan"). The purpose of the Performance Plan is to benefit the
Company through increased incentive on the part of key employees, officers,
directors and consultants of the Company and its subsidiaries by permitting the
Company to make awards of Restricted Stock and/or Performance Units comprised of
stock and cash to such persons based upon specific performance objectives. Up to
600,000 shares of the Company's common stock have been reserved under this plan.
In February 1993, 200,000 Performance Units were granted in connection with an
employment agreement entered into by the Company with its Chairman of the Board
and Chief Executive Officer. In May 1993, 200,000 Performance Units were granted
in connection with an employment agreement entered into by the Company and Bally
Gaming, Inc. with its new President. In December 1993, an additional 120,000
Performance Units were granted to other members of senior management of the
Company, of which 40,000 units were canceled during the year ended December 31,
1994.
Under the terms of the award agreements as amended June 8, 1994, the
Performance Units will vest if either (i) the cumulative annual growth rate for
any three consecutive years during the Performance Period (as defined in the
Performance Plan) is at least 35% (the "EPS Growth Target") or (ii) the fair
market value of the Common Stock (as determined based on the market price of the
Common Stock) equals or exceeds $40 per share for at least twenty of thirty
consecutive trading days (the "Market Price Target") or (iii) under certain
circumstances following a change in control or (iv) the Company enters into a
business combination or (v) the Company obtains a capital infusion of at least
$30,000,000 provided however if (i) the Company's earnings per share growth in
any consecutive three years during the Performance Period (as defined in the
Performance Plan) is at least 85% of the EPS Growth Target, at least 70% of the
Performance Units will vest, or (ii) the Company's stock price at any time in
the Performance Period (as defined in the Performance Plan) is at least 85% of
the Market Price Target, at least 70% of the Performance Units will vest. Each
Performance Unit is equal in value to one share of the Company's Common Stock,
plus an additional amount in cash equal to fifty percent (50%) of the value of
one share of Common Stock, based on the fair market value of the Common Stock at
the date the award vests. Payments are to be made in common stock and/or cash as
determined by the Compensation Committee. No accruals have been recorded in the
Company's financial statements as of December 31, 1995 as such performance
objectives have not yet begun to be met.
F-42
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1994 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The 1994 Stock Option Plan for Non-Employee Directors (the "1994 Directors'
Plan") was adopted in April 1994 and provides for the granting of stock options
of the Company's Common Stock exercisable at fair market value to Non-Employee
Directors. Each of the Non-Employee Directors received an option, for ten years,
to purchase 25,000 shares of Common Stock that vests over three years. The
option price was $12.875. The 1994 Directors' Plan has change in control
features similar to those contained in the 1991 Directors' Plan. 250,000 shares
of the Company's Common Stock were reserved for future issuance under the 1994
Directors' Plan. At December 31, 1995, 125,000 shares had been granted of which
33,333 shares were exercisable, 25,000 had been canceled and none had previously
been exercised.
STOCK PERFORMANCE RIGHTS ("SPRS")
Stock Performance Rights ("SPRs") are rights granted to individuals to
receive cash in an amount equal to the excess of (i) the fair market value of
the shares of common stock on the date the SPRs are exercised over (ii) the fair
market value of the shares of common stock on the date the SPRs were granted.
In 1993, 100,000 SPRs were granted to an officer of the Company at a fair
market value on date of grant of $11.625 in connection with the signing of a
five-year employment agreement. These SPRs vest ratably over the term of the
employment agreement and become exercisable at the end of each vesting period.
As of December 31, 1995, 40,000 of the SPRs were exercisable, and none had been
previously exercised.
WARRANTS
The Company issued warrants to the underwriters of the initial public
offering of the Company's common stock to purchase an aggregate of 300,000
shares of its common stock. The warrants are exercisable during a four-year
period ending November 11, 1996 at an exercise price of $15 per share. For the
year ended December 31, 1993, 2,000 warrants were exercised and no other
warrants have since been exercised.
In 1993, the Company issued warrants to purchase 1.2 million shares of its
common stock at $12.50 per share in connection with the private placement of the
Senior Secured Notes. These warrants are currently exercisable and expire on
July 29, 1998. At December 31, 1995 none of these warrants were exercised. See
"Long-term Debt and Lines of Credit."
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1995 shares of the Company's Common Stock were reserved for
future issuance as follows:
<TABLE>
<S> <C>
Warrants related to the 10 3/8% Senior Secured Notes............. 1,200,000
1991 Incentive Plan and Directors' Plan.......................... 1,200,000
1992 Restricted Stock Performance Plan........................... 600,000
1994 Stock Option Plan for Non-Employee Directors................ 250,000
Warrants to underwriters......................................... 298,000
---------
3,548,000
---------
---------
</TABLE>
OTHER REVENUES
Other revenues for the years ended December 31, 1993, 1994 and 1995 were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest......................................................... $ 3,795 $ 3,538 $ 3,615
Currency transaction gain (loss)................................. (245) (30) (53)
Other............................................................ 586 1,366 1,279
--------- --------- ---------
$ 4,136 $ 4,874 $ 4,841
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-43
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
UNUSUAL CHARGES
During the year ended December 31, 1995, the Company incurred approximately
$4.0 million in legal, accounting, investment banking, public and investor
relations and printing costs in connection with a merger agreement with WMS
Industries, Inc., which has been terminated, Alliance's tender offer and consent
solicitation and the pending Alliance Merger. All of these costs have been
expensed as incurred. Such costs will continue to be incurred in 1996.
During the fourth quarter of 1995, Vertriebs recorded a non-recurring charge
of $.8 million to writedown to net realizable value a building to be sold. The
provision was based on a strategic decision to sell the building as Wulff's
other distribution offices adequately covered the geographic region that would
have been served by this facility.
During 1995, Wulff increased the amount of value added tax reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million. The Company has accrued the liability as, based on current
developments, the Company's estimate of the ultimate outcome and its experience
in contesting these matters, it is probable that a liability has been incurred
and a range of costs can be reasonably estimated. As the scope of the liability
is better determined, there could be changes in the estimate of the ultimate
liability. Management believes that the preliminary proposed adjustments are
without merit and the ultimate results of the audit will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes" which requires recognition of deferred tax
assets and liabilities for temporary differences and net operating loss ("NOL")
and tax credit carryforwards. Under SFAS No. 109, deferred income taxes are
established based on enacted tax rates expected to be in effect when temporary
differences are scheduled to reverse and NOL and tax credit carryforwards are
expected to be utilized. The cumulative effect of the adoption of SFAS No. 109
had an immaterial effect on net income for the year ended December 31, 1993.
The provision (credit) for foreign and domestic income taxes for the years
ended December 31, 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
FEDERAL:
Current........................................................ $ 476 $ 220 $ 260
Deferred....................................................... -- -- --
--------- --------- ---------
476 220 260
--------- --------- ---------
--------- --------- ---------
FOREIGN:
Current........................................................ 3,603 2,896 4,586
Deferred....................................................... 163 (296) 58
--------- --------- ---------
3,766 2,600 4,644
--------- --------- ---------
Total provisions for income taxes................................ $ 4,242 $ 2,820 $ 4,904
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-44
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The major components of the net deferred tax asset as of December 31, 1994,
and 1995 were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Property, plant and equipment......................................... $ 1,075 $ 1,193
Other................................................................. 131 --
---------- ----------
Total deferred tax liabilities.................................... 1,206 1,193
---------- ----------
Bad debt reserves..................................................... 4,933 5,876
Inventory reserves.................................................... 5,527 4,736
Wulff corporate reorganization........................................ 235 366
Net operating loss carryforwards...................................... -- 391
Foreign tax credit carryforwards...................................... 8,382 12,955
AMT tax credit carryforwards.......................................... 384 570
Intangibles........................................................... 2,432 909
Accrued liabilities................................................... 1,201 562
Deferred compensation................................................. 696 476
Other................................................................. 31 500
---------- ----------
Total deferred tax assets......................................... 23,821 27,341
---------- ----------
Valuation allowance................................................... (21,460) (24,667)
---------- ----------
Net deferred tax assets........................................... $ 1,155 $ 1,481
---------- ----------
---------- ----------
</TABLE>
At December 31, 1994 and 1995, net deferred tax assets resulted from German
net operating loss carryforwards and, inventory and intangible assets book/tax
basis differences. At December 31, 1995 the Company has foreign tax credit
carryforwards of approximately $13.0 million and alternative minimum tax ("AMT")
credit carryforwards of approximately $.6 million. Foreign tax credits are
available to offset future taxes due in the U.S. on future foreign taxable
income and expire between 1997 and 2001 unless utilized prior to such time. AMT
credits are available to be carried forward indefinitely and may be utilized
against regular U.S. corporate income tax to the extent it does not exceed tax
computed under AMT calculations.
The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Taxes at federal statutory rate................................. $ (7,806) $ 2,248 $ 529
Losses with no current tax benefit.............................. 11,528 -- --
Federal alternative minimum tax................................. 143 200 200
Foreign earnings at other than U.S. statutory rate.............. 238 (2) 3,529
Foreign withholding on dividends................................ 333 353 450
Other........................................................... 34 21 196
Impact of SFAS 109 adoption..................................... (228) -- --
--------- --------- ---------
$ 4,242 $ 2,820 $ 4,904
--------- --------- ---------
--------- --------- ---------
</TABLE>
RELATED PARTY TRANSACTIONS
In connection with the Company's initial public offering, BEC granted
restricted stock awards for shares of the Company's common stock owned by BEC to
certain senior executives of the Company. These restricted stock awards
represent compensation from the Company equal to the fair market value of the
F-45
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
shares on the date of the awards and are recorded as unearned compensation and a
capital contribution in the accompanying financial statements. Unearned
compensation is charged to operations over the vesting periods of the awards.
In connection with the Company's initial public offering, the Company and
BEC entered into an intercorporate agreement which was amended in July 1992, and
again in January 1993, which provided, among other things, that BEC would
perform certain accounting, tax, treasury, legal, data processing, employee
benefits and other services which the Company reasonably requests, and that the
Company would reimburse BEC for the reasonable cost of all services rendered,
including salaries and expenses of BEC's employees while they are rendering such
services. Charges by BEC to the Company under the intercorporate agreement for
the years ended December 31, 1993, 1994 and 1995 were $295,000, $90,000 and
none, respectively.
The Company participated in BEC's insurance program for general liability
and directors' and officers' liability coverage through June 1993. Under these
programs, insurance expenses were charged to the Company based on claims
experience and for reimbursements of premium payments made by BEC. Insurance
expense charged to the Company was $281,000, none, and none for the years ended
December 31, 1993, 1994 and 1995, respectively.
The Company had a long-term income tax receivable from BEC totaling
$1,971,000 at December 31, 1992. As part of an amendment to the intercorporate
agreement between the Company and BEC, which was entered into in January 1993,
the income tax receivable of $1,971,000 was exchanged for certain assets
previously owned by BEC but managed by the Company, a reduction in the period
from six years to three years of certain non-competition restrictions previously
imposed on the Company by BEC and settlement of certain other intercompany
service arrangements with BEC. This transaction resulted in an increase to
intangible assets of approximately $1,515,000 which is being amortized over a
six-year period.
Waters, McPherson, McNeill, P.C., a law firm of which Mr. McPherson, a
director of the Company, is Senior Lawyer and Chairman, provides legal services
to the Company, primarily relating to litigation involving the Company's former
distributor in Louisiana. As of December 31, 1994 and 1995, the Company was
indebted to the firm for approximately $200,000 and $480,000, respectively, for
legal services rendered. During the years ended December 31, 1993, 1994 and
1995, Waters, McPherson, McNeill, P.C. billed the Company approximately $1.0
million, $1.3 million and $1.5 million, respectively, for legal services
provided to the Company.
EMPLOYEE BENEFIT PLANS
Until February 28, 1994 the Company participated in BEC's defined
contribution plans which covered certain full-time employees and which were
considered part of the Company's overall retirement program. Effective March 1,
1994, the Company ceased its participation in BEC's defined contribution plans
and formed its own plan. This program consists of a savings plan to which
employees may contribute a percentage of their compensation. Employee
contributions to the savings plan, up to certain limits, may be matched by the
Company. The Company's contribution accrued for the savings plan for the years
ended December 31, 1993, 1994 and 1995 was approximately $91,000, $120,000 and
$140,000, respectively.
COMMITMENTS AND CONTINGENCIES
The Company is obligated under several patent agreements to pay royalties
ranging from approximately $50 to $200 per game depending on the components in
the gaming machines. Additionally, based on an amendment to the trademark
licensing agreement between the Company and BEC dated March 31, 1995, the
Company is obligated to pay a royalty on new machines sold of $25 to $30 per
machine beginning on March 31, 1995 with a minimum annual royalty payment of
$500,000 for the initial five-year term of the amended agreement, which is
subject to annual renewals thereafter. Royalty expense for the years ended
December 31, 1993, 1994 and 1995 was $1.1 million, $2.9 million and $3.0
million, respectively.
F-46
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum lease
payments at December 31, 1995 under operating leases that have initial or
remaining lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1996............................................................... $ 3,136
1997............................................................... 2,753
1998............................................................... 1,754
1999............................................................... 1,361
2000............................................................... 1,121
Thereafter......................................................... 1,844
---------
$ 11,969
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 was $2.6
million, $2.7 million and $3.6 million, respectively.
The Company has entered into employment contracts with several of its
executives. These contracts are for periods ranging from one to five years and
require certain minimum annual payments. Future minimum annual payments under
these contracts are as follows:
<TABLE>
<S> <C>
1996................................................................ $ 3,573
1997................................................................ 2,299
1998................................................................ 1,700
---------
$ 7,572
---------
---------
</TABLE>
In conjunction with sales by Gaming, with recourse to Gaming and/or the
Company, of certain trade receivables to third parties, Gaming and/or the
Company have guaranteed amounts due from various customers of approximately
$18.2 million at December 31, 1995. A charge was recognized as a result of these
sales of receivables which aggregated approximately $.5 million, $1.0 million
and $.1 million during 1993, 1994 and 1995, respectively. It is possible that
one or more of Gaming's customers whose obligation has been guaranteed by Gaming
may be unable to make payments as such become due. In this case Gaming may
become responsible for repayment of at least a portion of such amounts over the
term of the receivables. At December 31, 1995, amounts due from one customer
under three contracts totaling $3.5 million were past due and these amounts and
subsequent installments have not been paid. In general, under the terms of these
contracts, the Company may be responsible for monthly payments of the
outstanding obligations. The third party holder of these contracts has not yet
asserted demands under these contracts although such demands may be imminent.
The Company intends to pursue a restructuring of the contracts although no
assurance can be given that such a restructuring would be successfully
negotiated. The outcome of this issue is not anticipated to have a material
effect on the financial position, results of operations or cash flows of the
Company. A provision for doubtful accounts of approximately $3.5 million and
$6.3 million on all receivables with recourse is included in the Company's
allowance for doubtful accounts at December 31, 1994 and 1995, respectively.
On or about June 19, 1995, three purported class actions were filed in the
Chancery Court of Delaware by Company's stockholders against the Company and its
directors (the "Fiorella, Cignetti and Neuman Actions"). The Fiorella and Neuman
Actions, in identical complaints alleged that the Company's directors had
breached their fiduciary duties of good faith, fair dealing, loyalty and candor
by approving the Merger Agreement with WMS ("WMS Merger") instead of the
unsolicited tender offer transaction proposed by Alliance ("Alliance Proposal"),
by not properly exposing the Company for sale, and by failing to take all
reasonable steps to maximize stockholder value. These actions sought injunctions
to prevent the Company from proceeding with, consummating or closing the WMS
Merger, and to rescind it should it be consummated, as well as compensatory
damages. The Cignetti Action made similar allegations, and also alleged that
F-47
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
the Company had in place a shareholders' right plan, commonly know as a "poison
pill." The Cignetti Action sought an injunction requiring the Company to
negotiate with all bona fide parties or other potential acquirees or to conduct
an unencumbered market check in a manner designed to maximize shareholder value,
and preventing the Company from implementing any unlawful barriers to the
acquisition of the Company by any third party or taking other actions that would
lessen its attractiveness as an acquisition candidate. The Cignetti Action also
specifically requested an injunction barring triggering of the Company's alleged
"poison pill" until full consideration was given to the Alliance Proposal
(subsequently superseded by the execution of the Merger Agreement with
Alliance), and sought compensatory damages.
Also on or about June 19, 1995, a purported class action was filed in the
Delaware Court of Chancery by a Company stockholder against the Company and its
directors and Alliance (the "Strougo Action"). The Strougo Action alleged that
the Alliance Proposal (subsequently superseded by the execution of the Alliance
Merger Agreement) to acquire the Company stock was at a grossly unfair and
inadequate price; that the Company's directors had breached their fiduciary
duties by failing seriously to consider potential purchasers for the Company
other than Alliance; and that the transaction proposed by Alliance was wrongful,
unfair and harmful to the Company's public stockholders. The Strougo Action
sought a declaration that defendants had breached their fiduciary duties; an
injunction preventing the consummation of the Alliance transaction or requiring
its rescission; an order requiring defendants to permit a stockholders'
committee to participate in any process undertaken in connection with the sale
of the Company; and compensatory damages.
On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman
Actions and the Strougo Action (collectively, the "Stockholder Plaintiffs")
filed with the Court a motion to consolidate the four actions.
On or about July 27, 1995, certain of the Stockholder Plaintiffs filed an
amended complaint (the "Amended Fiorella Action") that adopted certain
allegations concerning self-dealing by the Company's directors in connection
with the WMS Merger; added a claim relating to the Company's alleged failure to
hold an annual meeting as required and added WMS as defendant. The Amended
Fiorella Action also alleged that the Company intended, in violation of Delaware
law, to sell Wulff without first seeking stockholder approval of the sale. The
action sought an order enjoining defendants from proceeding with, consummating
or closing the WMS Merger, or rescinding it if it closed; preventing the sale of
Wulff without prior stockholder approval; declaring invalid the Company's
agreement to pay WMS a fee if the WMS Merger is terminated by the Company in
certain circumstances; compelling an auction of the Company and the provision of
due diligence to Alliance; scheduling an immediate meeting of the Company
stockholders; and awarding compensatory damages. The Company believes these
lawsuits to be without merit and intends to vigorously defend these actions.
On October 23, 1995, WMS instituted a suit in New York State Court against
the Company for the Company's failure to pay $4.8 million upon termination of
the WMS Merger. The Company believes this lawsuit to be without merit and
intends to vigorously defend this action. On November 22, 1995, the Company
answered the complaint and brought counterclaims against WMS alleging that WMS
repudiated and breached the WMS Merger by, among other things, failing to act in
good faith toward the consummation of the WMS Merger, advising the Company that
it would not perform as agreed but would impose new conditions on the WMS
Merger, acting in excess of its authority and undermining the ability of the
Company to perform the WMS Merger. On February 8, 1996 WMS moved for summary
judgement. The Company's response to that action is presently due on March 15,
1996. Pursuant to the Merger Agreement, Alliance has agreed to indemnify the
directors and officers of the Company in certain circumstances.
In June 1995, BEC asserted that a certain agreement between BEC and the
Company (the "Non-compete Agreement") prohibits the use by the Company of the
tradename "Bally" if it is merged with a company that is in the casino business
within or without the United States and operates such business prior to January
8, 1999. The Company believes such a claim is entirely without merit since the
restriction referred
F-48
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
to expired on January 8, 1996 and in any event does not relate to the use of the
"Bally" tradename, which is covered by the License Agreement. The restriction in
the Non-compete Agreement will not have any impact on the combined company after
the Merger since the effective time of the Alliance Merger contemplates a
closing of the Alliance Merger after the restriction in the Non-compete
Agreement lapses. BEC has not reasserted this position since it was informed by
the Company in July 1995 that the restriction lapses on January 8, 1996.
Consequently, the Company believes BEC has determined not to contest the
Company's position.
On February 16, 1996, the Company received notice from BEC alleging that the
Company has violated the License Agreement by, among other things, granting to
Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which
provides Bally Gaming, Inc.'s revolving line of credit, a security interest in
general intangibles. In such notice, BEC also stated that as a result of the
foregoing, it was immediately terminating the License Agreement. The Company
does not believe that it has violated the terms of the License Agreement and the
Company will defend its position against BEC's claims.
BEC has also asserted that its permission is required for use of the "Bally"
tradename by any entity other than the Company and that a merger between the
Company and another company would violate the terms of the License Agreement.
The Company has denied these claims and believes that the surviving company in
the Alliance Merger will be permitted to use the "Bally" tradename in accordance
with the terms of such License Agreement. The Company believes that no breach of
such License Agreement is caused by the Alliance Merger and use of the "Bally"
tradename by the surviving corporation. In a letter dated November 9, 1995, BEC
reasserted its position. On November 20, 1995, Alliance, the Alliance Merger
Subsidiary and the Company commenced an action against BEC in Federal District
Court in Delaware seeking a declaratory judgment, among other things, that the
surviving company in the Alliance Merger will be permitted to use the "Bally"
tradename in accordance with the terms of the License Agreement, and seeking
injunctive relief (the "Alliance Action"). On November 28, 1995, BEC commenced
an action against the Company, Bally Gaming, Inc., Alliance and the Alliance
Merger Subsidiary in Federal District Court in New Jersey to enjoin the
defendants from using the "Bally" tradename (the "BEC Action"). The BEC Action
alleges that the Company's continued use of the tradename after the Alliance
Merger will (1) constitute a prohibited assignment of the Company's rights to
use the tradename and (2) exceed the scope of the license granted to the Company
because the Company will be under the control of Alliance. Also on November 28,
1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the
Alliance Action pending resolution of the BEC Action. On December 15, 1995 BEC
filed a motion to dismiss, transfer to New Jersey or stay the Alliance Action
pending resolution of the BEC Action. On December 15, 1995, BEC filed a motion
for a preliminary injunction in the BEC Action. At a hearing on January 17,
1996, the court declined to issue a preliminary injunction, but held BEC's
motion in abeyance pending the defendant's motion to dismiss and for summary
judgment, which defendants had filed on December 26, 1995. After a second
hearing on February 20, 1996 the court stated it would attempt to rule on both
motions in fourteen days. The Company, Bally Gaming Inc., Alliance and the
Alliance Merger Subsidiary intend to vigorously defend their position in these
actions.
In 1994, after an intensive federal investigation of Gaming's former
distributor, eighteen individuals were indicted on charges of racketeering and
fraud against Gaming and the Louisiana regulatory system. Among those indicted
were the former distributor's stockholders, directors, employees and others
alleged to be associated with organized crime. Fifteen entered pleas of guilty
before trial and the remaining three were convicted in October 1995. Gaming was
never a subject or target of the federal investigation.
Prior to the conclusion of the federal case, the Company's activities with
regard to its former VLT distributor in Louisiana were the subject of inquiries
by gaming regulators and a report by the New Jersey Division of Gaming
Enforcement ("DGE") dated August 24, 1995. The New Jersey Casino Control
Commission ("CCC") has indicated that it may hold a hearing on the matter, but
no date has been set at this time.
F-49
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The New Jersey report makes no specific recommendations for action by the CCC.
The gaming authorities in Ontario, Canada, who have investigated the matters,
have issued a gaming registration to the Company's subsidiary Bally Gaming, Inc.
on February 8, 1996.
The DGE's report is similar in many respects to one prepared by the
President of the Louisiana Economic Development and Gaming Corporation ("LEDGC")
in January 1995. Hearings on that report were held in January 1995 and on
February 7, 1995 the Board of Directors of the LEDGC found all of the
allegations in its President's report to be without merit and granted a license
to the Company and has announced that it will continue to monitor the Company's
conduct in light of any further information disclosed as a result of the trial
of the eighteen defendants (all of whom have now plead, or been found, guilty)
and other regulatory proceedings. In November 1995, the operator of the land
based casino in New Orleans filed for bankruptcy reorganization and ceased
operations. That action resulted in the termination of funding for the LEDGC
regulatory operations and, shortly thereafter, the Attorney General of Louisiana
took control of the agency and effectively closed its operations. LEDGC's
President and employees were dismissed. The foregoing occurred prior to the
completion of review of the Company's pending application.
The Company believes that the information contained in the DGE's report does
not differ in any material respect from the prior report to the LEDGC the
conclusions of which were found to be without merit in February 1995. An adverse
determination by a gaming regulator in any jurisdiction could result in the loss
of the Company's ability to do business in that jurisdiction. Further regulatory
scrutiny in other jurisdictions would be likely to follow. The Company would
appeal any adverse finding, as was the case when the Company successfully
appealed the LEDGC President's decision in January 1995.
On September 25, 1995, the Company was named as defendant in a class action
lawsuit filed in the United States District Court, District of Nevada, by Larry
Schreier on behalf of himself and all others similarly situated (the
"plaintiffs"). The plaintiffs filed suit against the Company and approximately
45 other defendants (each a "defendant," and collectively the "defendants").
Each defendant is involved in the gaming business as either a gaming machine
manufacturer, distributor, or casino operator. The class action lawsuit arises
out of alleged fraudulent marketing and operation of casino video poker machines
and electronic slot machines. The plaintiffs allege that the defendants have
engaged in a course of fraudulent and misleading conduct intended to induce
people in playing their gaming machines based on a false belief concerning how
those machines actually operate as well as the extent to which there is actually
an opportunity to win on any given play. The plaintiffs allege that the
defendants' actions constitute violations of the Racketeer Influenced and
Corrupt Organizations Act ("RICO") and give rise to claims of common law fraud
and unjust enrichment. The plaintiffs are seeking monetary damages in excess of
one billion dollars, and are asking that any damage awards be trebled under
applicable federal law. The Company believes the plaintiffs' lawsuit to be
without merit and intends to vigorously defend these actions.
While the ultimate results of the matters described above are not presently
known, management does not expect that the results will have a material adverse
effect on the Company's results of operations, financial position or cash flows.
The Company and its subsidiaries are from time to time also subject to
litigation incidental to the conduct of their business. The Company believes
that the results of such litigation and other pending legal proceedings will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
CONCENTRATION OF CREDIT RISK
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts and notes
receivable and customer obligations guaranteed by the Company.
F-50
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Product sales and the resulting receivables are concentrated in specific
legalized gaming regions. The Company also distributes its products through
third party distributors resulting in distributor receivables. At December 31,
1995 net accounts and notes receivable, including obligations of various
customers which are guaranteed by the Company, by region as a percentage to
total net receivables are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-----------------------------------------------------
WULFF GAMING SYSTEMS TOTAL
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Germany............................................... 47.0% --% --% 47.0%
Mississippi Riverboats................................ -- 9.5 -- 9.5
Other Riverboat Casinos............................... -- 1.3 -- 1.3
Nevada................................................ -- 15.0 1.8 16.8
Atlantic City......................................... -- 2.0 2.0 4.0
International......................................... -- 8.0 1.6 9.6
Louisiana............................................. -- 1.6 .1 1.7
New Mexico Indian Casinos............................. -- 5.6 .2 5.8
Other Indian Casinos.................................. -- 1.8 .3 2.1
Others individually less than 5%...................... -- 2.2 -- 2.2
--
--- --- -----
47.0% 47.0% 6.0% 100.0%
--
--
--- --- -----
--- --- -----
</TABLE>
Gaming's receivables and customer obligations guaranteed by Gaming and/or
the Company, from riverboat casinos and casinos on Indian land generally
represent sales to recently opened casinos and, in many cases, new customers to
Gaming. Approximately 43% of the accounts and notes receivable and customer
obligations guaranteed by the Company at December 31, 1995 relate to these
emerging markets including approximately 25% to three customers operating in
Mississippi. Receivables and customer obligations guaranteed by the Company from
emerging market customers contain increased risk factors compared to receivables
at Wulff or other traditional markets for Gaming.
In early 1995, the Governor of the State of New Mexico signed compacts with
certain Indian tribes to permit casino gaming on tribal lands in New Mexico.
These compacts went through appropriate federal approval processes and a number
of casinos began operating. In July 1995 the Supreme Court of New Mexico found
that the Governor did not have proper authority to sign the compacts. The Indian
tribes have filed a lawsuit in federal court to seek resolution to this issue.
Gaming and Systems had sold product to the Indian tribes prior to this ruling.
At December 31, 1995, the Company has $5.5 million in accounts and notes
receivable from an operator of two casinos for two different Indian tribes
including $2.1 million of trade receivables sold to a third party with recourse
to Gaming. This operator is currently four months ahead on payments. No
provision for doubtful accounts for this customer has been included in the
accompanying financial statements at December 31, 1995. Management believes the
receivable is properly valued at December 31, 1995. As events change during 1996
management will reevaluate its estimate of the realizability of the receivable.
CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements are presented to provide
information regarding Bally Gaming, Inc., as guarantor of the Senior Secured
Notes, and Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH, because
substantially all of the common stock of these entities is pledged as collateral
for the Senior Secured Notes. The results herein are presented by each legal
entity rather than by business segment as presented elsewhere in these financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations. Such business segment information of Bally Gaming, Inc.,
Automaten and Vertriebs includes an allocation of parent company revenues and
expenses whereas the following consolidating financial statements do not reflect
these allocations to the subsidiaries. The notes to consolidating financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto.
F-51
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY BALLY CONSOLIDATING BALLY GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
--------- --------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 1,362 $ 7,487 $ 355 $ -- $ -- $ 9,204
Accounts and notes receivable, net of
allowance for doubtful accounts of
$19, $5,659 and $6,604 for Automaten,
Vertriebs and Gaming................. 2,813 46,342 38,773 2,903 (6,199) 84,632
Inventories, net:
Raw materials and work-in-process... 5,063 -- 16,019 -- -- 21,082
Finished goods...................... 2,442 9,413 17,599 -- (1,077) 28,377
--------- --------- -------- -------- ------------- --------------
7,505 9,413 33,618 -- (1,077) 49,459
Other current assets.................. 1,446 2,957 650 196 (175) 5,074
--------- --------- -------- -------- ------------- --------------
Total current assets.............. 13,126 66,199 73,396 3,099 (7,451) 148,369
Long-term notes receivables, net of
allowance for doubtful accounts of $35
and $8,163 for Vertriebs and Gaming.... -- 1,186 4,372 -- -- 5,558
Long-term receivables from affiliate.... 23,314 -- -- 29,014 (52,328) --
Property, plant and equipment, at cost:
Land.................................. -- 332 1,025 -- -- 1,357
Buildings and leasehold
improvements......................... 1,648 7,705 9,909 -- -- 19,262
Machinery and equipment............... 11,174 7,072 8,390 -- -- 26,636
Furniture, fixtures and equipment..... 828 2,181 5,335 -- (2,269) 6,075
Less accumulated depreciation......... (11,615) (5,978) (11,844 ) -- 465 (28,972)
--------- --------- -------- -------- ------------- --------------
Property, plant and equipment,
net.............................. 2,035 11,312 12,815 -- (1,804) 24,358
Intangible assets, less accumulated
amortization of $197, $11,131, $69 and
$1,212 for Automaten, Vertriebs, Gaming
and Parent............................. -- 5,773 181 5,456 -- 11,410
Investment in subsidiaries.............. -- -- -- 90,766 (90,766) --
Other assets............................ 337 586 113 1,511 -- 2,547
--------- --------- -------- -------- ------------- --------------
$38,812 $85,056 $90,877 $129,846 $(152,349) $192,242
--------- --------- -------- -------- ------------- --------------
--------- --------- -------- -------- ------------- --------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable...................... $ 411 $ 4,064 $18,880 $ 891 $ (4,974) $ 19,272
Accrued liabilities and other
payables:
Compensation and benefit related
liabilities........................ 2,287 612 2,433 630 -- 5,962
Interest............................ -- -- -- 1,890 -- 1,890
Other............................... 1,461 4,065 4,495 186 (734) 9,473
--------- --------- -------- -------- ------------- --------------
3,748 4,677 6,928 2,706 (734) 17,325
Current maturities of long-term
debt................................. -- 13,756 1,350 894 -- 16,000
--------- --------- -------- -------- ------------- --------------
Total current liabilities......... 4,159 22,497 27,158 4,491 (5,708) 52,597
Long-term payables to affiliate......... -- 26,741 29,014 -- (55,755) --
10 3/8% Senior Secured Notes due 1998,
net of unamortized discount of $458.... -- -- -- 39,542 -- 39,542
Other long-term debt, less current
maturities............................. -- 5,006 7,927 1,287 -- 14,220
Commitments and contingencies
Stockholders' equity:
Preferred stock....................... -- -- -- -- -- --
Common stock.......................... 2,638 15,142 -- 107 (17,780) 107
Additional paid-in-capital............ 19,191 6,455 34,596 73,852 (66,336) 67,758
Retained earnings (accumulated
deficit)............................. 6,199 1,433 (7,818 ) 11,550 (6,129) 5,235
Cumulative translation adjustments.... 6,625 7,782 -- (206) (641) 13,560
Unearned compensation................. -- -- -- (777) -- (777)
--------- --------- -------- -------- ------------- --------------
Total stockholders' equity.......... 34,653 30,812 26,778 84,526 (90,886) 85,883
--------- --------- -------- -------- ------------- --------------
$38,812 $85,056 $90,877 $129,846 $(152,349) $192,242
--------- --------- -------- -------- ------------- --------------
--------- --------- -------- -------- ------------- --------------
</TABLE>
See accompanying notes.
F-52
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY
BALLY BALLY BALLY CONSOLIDATING GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,353 $ 3,240 $ 933 $ -- $ -- $ 5,526
Accounts and notes receivable, net of
allowance for doubtful accounts of $19,
$7,201, and $9,061 for Automaten, Vertriebs
and Gaming................................. 1,804 51,110 38,948 4,772 (9,458) 87,176
Inventories, net:
Raw materials and work-in-process........... 4,974 -- 11,092 -- -- 16,066
Finished goods.............................. 3,548 12,340 21,020 -- (1,383) 35,525
----------- ----------- --------- --------- ------------- -------------
8,522 12,340 32,112 -- (1,383) 51,591
Other current assets........................ 1,236 1,443 651 560 93 3,983
----------- ----------- --------- --------- ------------- -------------
Total current assets...................... 12,915 68,133 72,644 5,332 (10,748) 148,276
Long-term notes receivables, net of allowance
for doubtful accounts of $48 and $7,821 for
Vertriebs and Gaming......................... -- 1,654 8,327 -- -- 9,981
Long-term receivables from affiliate.......... 23,208 -- -- 28,380 (51,588) --
Property, plant and equipment, at cost:
Land........................................ -- 332 1,025 -- -- 1,357
Buildings and leasehold improvements........ 1,571 8,375 9,925 -- -- 19,871
Machinery and equipment..................... 11,913 9,617 8,798 -- -- 30,328
Furniture, fixtures and equipment........... 812 2,520 5,909 -- (3,079) 6,162
Less accumulated depreciation............... (12,964) (8,787) (13,587) -- 864 (34,474)
----------- ----------- --------- --------- ------------- -------------
Property, plant and equipment, net.......... 1,332 12,057 12,070 -- (2,215) 23,244
Intangible assets, less accumulated
amortization of $11,527, $94 and $2,099 for
Vertriebs, Gaming and Parent................. -- 6,089 156 4,569 -- 10,814
Investment in subsidiaries.................... -- -- -- 90,766 (90,766) --
Other assets.................................. 332 561 113 497 498 2,001
----------- ----------- --------- --------- ------------- -------------
$ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316
----------- ----------- --------- --------- ------------- -------------
----------- ----------- --------- --------- ------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 557 $ 6,386 $ 19,342 $ 31 $ (7,760) $ 18,556
Accrued liabilities and other payables:
Compensation and benefit related
liabilities.............................. 2,335 955 2,318 -- -- 5,608
Interest.................................. -- -- -- 1,890 -- 1,890
Other..................................... 1,472 3,546 4,293 617 (20) 9,908
----------- ----------- --------- --------- ------------- -------------
3,807 4,501 6,611 2,507 (20) 17,406
Current maturities of long-term debt........ -- 14,333 212 412 -- 14,957
----------- ----------- --------- --------- ------------- -------------
Total current liabilities................. 4,364 25,220 26,165 2,950 (7,780) 50,919
Long-term payables to affiliate............... -- 26,421 28,380 -- (54,801) --
10 3/8% Senior Secured Notes due 1998, net of
unamortized discount of $344................. -- -- -- 39,656 -- 39,656
Other long-term debt, less current
maturities................................... -- 4,721 9,435 1,175 -- 15,331
Commitments and contingencies
Stockholders' equity:
Preferred stock............................. -- -- -- -- -- --
Common stock................................ 2,638 15,142 -- 108 (17,780) 108
Additional paid-in-capital.................. 19,191 6,455 34,596 74,439 (66,336) 68,345
Retained earnings(accumulated deficit)...... 2,155 286 (5,273) 11,969 (7,295) 1,842
Cumulative translation adjustments.......... 9,439 10,249 7 (206) (827) 18,662
Unearned compensation....................... -- -- -- (547) -- (547)
----------- ----------- --------- --------- ------------- -------------
Total stockholders' equity................ 33,423 32,132 29,330 85,763 (92,238) 88,410
----------- ----------- --------- --------- ------------- -------------
$ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316
----------- ----------- --------- --------- ------------- -------------
----------- ----------- --------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-53
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales.............................. $ 42,437 $ 100,287 $ 59,709 $ -- $ (37,862) $ 164,571
Other.............................. 1,497 3,083 807 1,479 (2,730) 4,136
----------- ---------- ---------- --------- ------------- -------------
43,934 103,370 60,516 1,479 (40,592) 168,707
----------- ---------- ---------- --------- ------------- -------------
Costs and expenses:
Cost of sales...................... 26,937 81,611 51,888 -- (38,726) 121,710
Selling, general and
administrative.................... 6,737 19,608 24,498 6,531 (17) 57,357
Provision (credit) for doubtful
receivables....................... (13) 326 7,363 500 -- 8,176
----------- ---------- ---------- --------- ------------- -------------
33,661 101,545 83,749 7,031 (38,743) 187,243
----------- ---------- ---------- --------- ------------- -------------
Operating income (loss).............. 10,273 1,825 (23,233) (5,552) (1,849) (18,536)
Interest expense..................... 21 1,873 2,849 2,180 (2,499) 4,424
----------- ---------- ---------- --------- ------------- -------------
Income (loss) before income taxes and
extraordinary gain.................. 10,252 (48) (26,082) (7,732) 650 (22,960)
Provision (benefit) for income
taxes............................... 3,705 (557) 10 -- 1,084 4,242
----------- ---------- ---------- --------- ------------- -------------
Income (loss) before extraordinary
gain................................ 6,547 509 (26,092) (7,732) (434) (27,202)
Extraordinary gain on early
extinguishment of debt.............. -- -- 3,759 -- -- 3,759
----------- ---------- ---------- --------- ------------- -------------
Net income (loss).................... $ 6,547 $ 509 $ (22,333) $ (7,732) $ (434) $ (23,443)
----------- ---------- ---------- --------- ------------- -------------
----------- ---------- ---------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-54
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales............................. $ 47,419 $ 99,218 $ 130,452 $ -- $ (45,771) $ 231,318
Other............................. 1,189 3,578 776 2,856 (3,525) 4,874
----------- ---------- ---------- --------- ------------- -------------
48,608 102,796 131,228 2,856 (49,296) 236,192
----------- ---------- ---------- --------- ------------- -------------
Costs and expenses:
Cost of sales..................... 30,988 79,589 91,107 -- (44,625) 157,059
Selling, general and
administrative................... 6,656 19,408 28,135 5,862 (72) 59,989
Provision for doubtful
receivables...................... 11 1,894 3,858 -- -- 5,763
----------- ---------- ---------- --------- ------------- -------------
37,655 100,891 123,100 5,862 (44,697) 222,811
----------- ---------- ---------- --------- ------------- -------------
Operating income (loss)............. 10,953 1,905 8,128 (3,006) (4,599) 13,381
Interest expense.................. 2 1,648 3,871 4,486 (3,239) 6,768
----------- ---------- ---------- --------- ------------- -------------
Income (loss) before income taxes... 10,951 257 4,257 (7,492) (1,360) 6,613
Provision (benefit) for income
taxes.............................. 3,885 (1,019) 1,685 (1,465) (266) 2,820
----------- ---------- ---------- --------- ------------- -------------
Net income (loss)................... $ 7,066 $ 1,276 $ 2,572 $ (6,027) $ (1,094) $ 3,793
----------- ---------- ---------- --------- ------------- -------------
----------- ---------- ---------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-55
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY
BALLY BALLY CONSOLIDATING GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales............................ $ 52,263 $ 117,618 $ 127,985 $ -- $ (53,395) $ 244,471
Other............................ 889 3,477 1,155 2,911 (3,591) 4,841
----------- ---------- ---------- ---------- ------------- -------------
53,152 121,095 129,140 2,911 (56,986) 249,312
----------- ---------- ---------- ---------- ------------- -------------
Costs and expenses:
Cost of sales.................... 35,337 95,483 85,270 -- (52,959) 163,131
Selling, general and
administrative.................. 7,433 22,492 30,365 5,044 (45) 65,289
Provision for doubtful
receivables..................... -- 1,697 5,015 -- -- 6,712
Unusual charges.................. 799 1,038 125 3,854 -- 5,816
----------- ---------- ---------- ---------- ------------- -------------
43,569 120,710 120,775 8,898 (53,004) 240,948
----------- ---------- ---------- ---------- ------------- -------------
Operating income................... 9,583 385 8,365 (5,987) (3,982) 8,364
Interest expense................... 1 1,398 4,155 4,613 (3,314) 6,853
----------- ---------- ---------- ---------- ------------- -------------
Income (loss) before income
taxes............................. 9,582 (1,013) 4,210 (10,600) (668) 1,511
Provision (benefit) for income
taxes............................. 3,987 134 1,665 (1,380) 498 4,904
----------- ---------- ---------- ---------- ------------- -------------
Net income (loss).................. $ 5,595 $ (1,147) $ 2,545 $ (9,220) $ (1,166) $ (3,393)
----------- ---------- ---------- ---------- ------------- -------------
----------- ---------- ---------- ---------- ------------- -------------
</TABLE>
See accompanying notes.
F-56
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 6,547 $ 509 $ (22,333) $ (7,732) $ (434) $ (23,443)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Extraordinary gain on early extinguishment
of debt...................................... -- -- (3,759) -- -- (3,759)
Depreciation and amortization................. 1,609 2,466 2,221 1,557 250 8,103
Deferred income taxes......................... -- 163 -- -- -- 163
Provision for doubtful receivables............ (13) 326 7,363 500 -- 8,176
Provision for inventory valuation reserves.... -- -- 6,156 -- -- 6,156
(Gain) loss on disposals of property, plant
and equipment................................ (40) 15 89 -- -- 64
Changes in operating assets and liabilities:
Accounts and notes receivable............... 6,842 (3,384) (15,213) (957) (4,936) (17,648)
Inventories................................. (2,987) 3,411 (15,290) -- (211) (15,077)
Other current assets........................ (824) 481 126 (423) (894) (1,534)
Accounts payable and accrued liabilities.... (2,759) (5,814) 12,060 423 5,807 9,717
Other........................................... -- -- -- -- (466) (466)
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) operating
activities................................. 8,375 (1,827) (28,580) (6,632) (884) (29,548)
----------- ----------- ----------- --------- ------------- -------------
Cash flows from investing activities:
Net assets of distribution business acquired.... -- (8,382) -- -- -- (8,382)
Purchases of property, plant and equipment...... (1,541) (3,298) (1,628) -- -- (6,467)
Proceeds from disposals of property, plant and
equipment...................................... 57 585 449 -- -- 1,091
Other........................................... -- -- 110 -- 241 351
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) investing
activities................................. (1,484) (11,095) (1,069) -- 241 (13,407)
----------- ----------- ----------- --------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured Notes.... -- -- -- 40,000 -- 40,000
Net change in lines of credit..................... -- 20,825 5,667 2,219 -- 28,711
Repayments of long-term debt...................... -- (7,376) (415) (21,970) -- (29,761)
Change in payables to/receivables from
affiliates....................................... -- -- 21,170 (21,813) 643 --
Exercise of stock warrants........................ -- -- -- 30 -- 30
Intercompany dividends............................ (8,167) -- -- 8,167 -- --
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) financing
activities................................. (8,167) 13,449 26,422 6,633 643 38,980
Effect of exchange rate changes on cash........... (69) (320) -- -- -- (389)
----------- ----------- ----------- --------- ------------- -------------
Increase (decrease) in cash and cash
equivalents...................................... (1,345) 207 (3,227) 1 -- (4,364)
Cash and cash equivalents, beginning of period.... 1,844 4,400 3,556 -- -- 9,800
----------- ----------- ----------- --------- ------------- -------------
Cash and cash equivalents, end of period.......... $ 499 $ 4,607 $ 329 $ 1 $ -- $ 5,436
----------- ----------- ----------- --------- ------------- -------------
----------- ----------- ----------- --------- ------------- -------------
Supplemental cash flows information:
Operating activities include cash payments
(receipts) for interest and income taxes as
follows:
Interest paid................................. $ 22 $ 942 $ 327 $ 1,619 $ -- $ 2,910
Income taxes paid (received).................. 5,732 1,077 -- (355) -- 6,454
Investing activities exclude the following
non-cash activities:
Exchange of income tax receivable for
intangible assets and equipment.............. -- -- 454 1,515 -- 1,969
Financing activities exclude the following
non-cash activities:
Issuance of restricted stock awards........... -- -- -- 1,150 -- 1,150
</TABLE>
SEE ACCOMPANYING NOTES.
F-57
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 7,066 $ 1,276 $ 2,572 $ (6,027) $ (1,094) $ 3,793
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation and amortization............... 2,556 2,491 1,974 1,342 (92) 8,271
Deferred income taxes....................... (415) (56) -- -- 175 (296)
Provision for doubtful receivables.......... 11 1,894 3,858 -- -- 5,763
Provision for inventory valuation........... -- -- 2,230 -- -- 2,230
(Gain) loss on disposals of property, plant
and equipment.............................. -- 6 (89) -- -- (83)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts and notes receivable............. (2,237) (3,099) (9,783) (644) (60) (15,823)
Inventories............................... 1,096 476 (5,573) -- 112 (3,889)
Other current assets...................... 286 (1,711) 139 572 1 (713)
Accounts payable and accrued
liabilities.............................. 1,708 (342) 2,396 (912) (120) 2,730
Other....................................... 450 (759) -- 183 (633) (759)
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) operating
activities............................. 10,521 176 (2,276) (5,486) (1,711) 1,224
----------- ----------- ----------- --------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.... (3,086) (4,363) (2,088) -- -- (9,537)
Proceeds from disposals of property, plant and
equipment.................................... -- 1,414 335 -- -- 1,749
Other......................................... -- -- 268 -- 1,129 1,397
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) investing
activities............................. (3,086) (2,949) (1,485) -- 1,129 (6,391)
----------- ----------- ----------- --------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in lines of credit................. -- 16,192 4,419 812 -- 21,423
Repayments of long-term debt.................. -- (11,675) (704) (813) -- (13,192)
Change in payables to/receivables from
affiliates................................... -- -- 72 (654) 582 --
Dividends to/from affiliate................... (6,654) 514 -- 6,140 -- --
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) financing
activities............................. (6,654) 5,031 3,787 5,485 582 8,231
Effect of exchange rate changes on cash....... 82 622 -- -- -- 704
----------- ----------- ----------- --------- ------------- -------------
Increase (decrease) in cash and cash
equivalents.................................. 863 2,880 26 (1) -- 3,768
Cash and cash equivalents, beginning of
year......................................... 499 4,607 329 1 -- 5,436
----------- ----------- ----------- --------- ------------- -------------
Cash and cash equivalents, end of year........ $ 1,362 $ 7,487 $ 355 $ -- $ -- $ 9,204
----------- ----------- ----------- --------- ------------- -------------
----------- ----------- ----------- --------- ------------- -------------
SUPPLEMENTAL CASH FLOWS INFORMATION:
Operating activities include cash payments
(receipts) for interest and income taxes as
follows:
Interest paid............................... $ 3 $ 981 $ 789 $ 4,199 $ -- $ 5,972
Income taxes paid (received)................ 4,038 (105) 12 75 -- 4,020
INVESTING ACTIVITIES EXCLUDE THE FOLLOWING
NON-CASH ACTIVITIES:
Capital contribution to affiliate........... -- -- -- (5,492) -- (5,492)
Long-term note received from sale of
assets..................................... -- -- 517 -- -- 517
FINANCING ACTIVITIES EXCLUDE THE FOLLOWING
NON-CASH ACTIVITIES:
Capital contribution from affiliate......... 899 4,593 -- -- -- 5,492
Issuance of Company common stock under
compensation agreement..................... -- -- -- 222 -- 222
Issuance of note payable for license
agreement.................................. -- -- -- 1,465 -- 1,465
</TABLE>
See accompanying notes.
F-58
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 5,595 $ (1,147) $ 2,545 $ (9,220) $ (1,166) $ (3,393)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation and amortization............... 2,602 3,120 2,029 1,312 (110) 8,953
Deferred income taxes....................... -- 63 -- -- (841) (778)
Provision for doubtful receivables.......... -- 1,697 5,015 -- -- 6,712
Provision for inventory valuation........... -- -- 1,955 -- -- 1,955
Provision for writedown of building to be
sold....................................... -- 812 -- -- -- 812
(Gain) loss on disposals of property, plant
and equipment.............................. (17) 67 (2) -- -- 48
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts and notes receivable............... 1,223 (2,855) (8,672) -- -- (10,304)
Inventories................................. (393) (2,140) 142 -- 224 (2,167)
Other current assets........................ (119) 1,763 (1) (364) -- 1,279
Accounts payable and accrued liabilities.... 239 1,240 (1,235) (1,139) 1,473 578
Other, net.................................... (1) (402) 7 819 (323) 100
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) operating
activities............................... 9,129 2,218 1,783 (8,592) (743) 3,795
----------- ----------- ----------- --------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment.................................... (1,694) (5,468) (1,078) -- -- (8,240)
Proceeds from disposals of property, plant and
equipment.................................... 24 1,728 5 -- -- 1,757
Other......................................... -- -- (10) -- 260 250
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) investing
activities............................... (1,670) (3,740) (1,083) -- 260 (6,233)
----------- ----------- ----------- --------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in lines of credit................. -- (1,273) 1,632 -- -- 359
Repayments of long-term debt.................. -- (2) (2,287) (620) 1 (2,908)
Change in payables to/receivables from
affiliates................................... 2,058 (2,058) 533 (1,015) 482 --
Exercise of stock options..................... -- -- -- 588 -- 588
Dividends to/from affiliates.................. (9,639) -- -- 9,639 -- --
----------- ----------- ----------- --------- ------------- -------------
Cash provided by (used in) financing
activities............................... (7,581) (3,333) (122) 8,592 483 (1,961)
Effect of exchange rate changes on cash....... 113 608 -- -- -- 721
----------- ----------- ----------- --------- ------------- -------------
Increase (decrease) in cash and cash
equivalents.................................. (9) (4,247) 578 -- -- (3,678)
Cash and cash equivalents, beginning of
period....................................... 1,362 7,487 355 -- -- 9,204
----------- ----------- ----------- --------- ------------- -------------
Cash and cash equivalents, end of period...... $ 1,353 $ 3,240 $ 933 $ -- $ -- $ 5,526
----------- ----------- ----------- --------- ------------- -------------
----------- ----------- ----------- --------- ------------- -------------
SUPPLEMENTAL CASH FLOWS INFORMATION:
OPERATING ACTIVITIES INCLUDE CASH PAYMENTS
(RECEIPTS) FOR INTEREST AND INCOME TAXES AS
FOLLOWS:
Interest paid............................... $ 1 $ 1,335 $ 1,178 $ 4,374 $ -- $ 6,888
Income taxes paid (refunded), net........... 3,104 (1,694) 85 306 -- 1,801
</TABLE>
See accompanying notes.
F-59
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
These notes to consolidating financial statements should be read in
conjunction with the consolidated financial statements and notes thereto.
Certain reclassifications have been made to prior years' financial
statements to conform with the 1995 presentation.
Hereafter, references to the Company are to the subsidiaries of Bally Gaming
International, Inc.
RESEARCH AND DEVELOPMENT
The Company expenses product research and development costs as incurred.
Research and development costs for the years ended December 31, 1993, 1994 and
1995 were:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. INC.
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1993................................... $ 3,350 $ -- $ 4,440 $ 7,790
----------- ----- ------ ------
----------- ----- ------ ------
1994................................... $ 3,546 $ -- $ 5,199 $ 8,745
----------- ----- ------ ------
----------- ----- ------ ------
1995................................... $ 3,561 $ -- $ 5,639 $ 9,200
----------- ----- ------ ------
----------- ----- ------ ------
</TABLE>
ACCOUNTS AND NOTES RECEIVABLE
The following table represents, at December 31, 1995, scheduled collections
of accounts and notes receivable (net of allowances for doubtful accounts) by
year:
<TABLE>
<CAPTION>
CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF BALLY AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS GAMING, INC. PARENT ADJUSTMENTS INC.
----------- ----------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1996.................... $ 1,804 $ 51,110 $ 38,948 $ 4,772 $ (9,458) $ 87,176
1997.................... -- 1,464 6,786 -- -- 8,250
1998.................... -- 190 1,541 -- -- 1,731
----------- ----------- ------------ --------- ------------- -------------
$ 1,804 $ 52,764 $ 47,275 $ 4,772 $ (9,458) $ 97,157
----------- ----------- ------------ --------- ------------- -------------
----------- ----------- ------------ --------- ------------- -------------
</TABLE>
LONG-TERM DEBT
Aggregate annual maturities of long-term debt for the five years after
December 31, 1995 are:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY GAMING, INTERNATIONAL,
VERTRIEBS INC. PARENT INC.
----------- ------------- --------- -------------
<S> <C> <C> <C> <C>
1996..................................... $ 14,333 $ 212 $ 412 $ 14,957
1997..................................... 1,572 9,435 456 11,463
1998..................................... 3,149 -- 40,468 43,617
1999..................................... -- -- 251 251
2000..................................... -- -- -- --
----------- ------ --------- -------------
Total.................................... $ 19,054 $ 9,647 $ 41,587 $ 70,288
----------- ------ --------- -------------
----------- ------ --------- -------------
</TABLE>
F-60
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
OTHER REVENUES
Other revenues for the year ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- --------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest............................. $ 294 $ 2,932 $ 608 $ 2,943 $ (3,239) $ 3,538
Currency transaction gain (loss)..... 3 52 2 (87) -- (30)
Other................................ 892 594 166 -- (286) 1,366
----------- ----------- ----- --------- ------------- ------
$ 1,189 $ 3,578 $ 776 $ 2,856 $ (3,525) $ 4,874
----------- ----------- ----- --------- ------------- ------
----------- ----------- ----- --------- ------------- ------
</TABLE>
Other revenues for the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
CONSOLIDATING BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
------------- ----------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest............................. $ 362 $ 2,626 $ 962 $ 2,979 $ (3,314) $ 3,615
Currency transaction gain (loss)..... -- 62 (29) (68) (18) (53)
Other................................ 527 789 222 -- (259) 1,279
----- ----------- ------ --------- ------------- ------
$ 889 $ 3,477 $ 1,155 $ 2,911 $ (3,591) $ 4,841
----- ----------- ------ --------- ------------- ------
----- ----------- ------ --------- ------------- ------
</TABLE>
UNUSUAL CHARGES
During the year ended December 31, 1995, Parent and Bally Gaming, Inc.
incurred approximately $3.9 million and $.1 million, respectively, in legal,
accounting, investment banking, public and investor relations and printing costs
in connection with the merger agreement with WMS Industries, Inc., which has
since been terminated, Alliance's tender offer and consent solicitation and the
pending Alliance Merger. All of these costs have been expensed as incurred. Such
costs will continue to be incurred in 1996.
During the fourth quarter of 1995, Vertriebs recorded a non-recurring charge
of $.8 million to writedown to net realizable value a building to be sold. The
provision was based on a strategic decision to sell the building as Wulff's
other distribution offices adequately covered the geographic region that would
have been served by this facility.
During 1995, Wulff increased the amount of value added tax reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million. The Company has accrued the liability as, based on current
developments, the Company's estimate of the ultimate outcome and its experience
in contesting these matters, it is probable that a liability has been incurred
and a range of costs can be reasonably estimated. As the scope of the liability
is better determined, there could be changes in the estimate of the ultimate
liability. Management believes that the preliminary proposed adjustments are
without merit and the ultimate results of the audit will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
F-61
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum lease
payments at December 31, 1995 under operating leases that have initial or
remaining lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. INC.
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1996............................................. $ 608 $ 1,610 $ 918 $ 3,136
1997............................................. 608 1,505 640 2,753
1998............................................. -- 1,157 597 1,754
1999............................................. -- 878 483 1,361
2000............................................. -- 680 441 1,121
Thereafter....................................... -- 767 1,077 1,844
----------- ----------- ------ -------------
$ 1,216 $ 6,597 $ 4,156 $ 11,969
----------- ----------- ------ -------------
----------- ----------- ------ -------------
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 was:
<TABLE>
<CAPTION>
BALLY GAMING
BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT INC.
------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1993..................................... $ 680 $ 1,519 $ 405 $ -- $ 2,604
----- ----------- ------ ----- ------
----- ----------- ------ ----- ------
1994..................................... $ 621 $ 1,604 $ 487 $ -- $ 2,712
----- ----------- ------ ----- ------
----- ----------- ------ ----- ------
1995..................................... $ 615 $ 1,731 $ 1,221 $ 2 $ 3,569
----- ----------- ------ ----- ------
----- ----------- ------ ----- ------
</TABLE>
F-62
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------- -------------------- --------------------
1994 1995 1994 1995 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
Revenues................................. $ 61.7 $ 68.3 $ 58.9 $ 69.2 $ 49.3 $ 51.5 $ 66.3 $ 60.3
Gross profit............................. 19.4 24.8 17.6 23.9 16.3 17.7 25.8 19.8
Operating income (loss).................. 4.0 6.7 2.7 4.6 1.2 (1.3) 5.5 (1.6)
Net income (loss)........................ 1.3 2.8 1.6 1.1 (1.4) (3.8) 2.2 (3.5)
Net income (loss) per share of common
stock................................... $ 0.12 $ 0.27 $ 0.15 $ 0.10 $ (0.13) $ (0.35) $ 0.21 $ (0.33)
WULFF
Revenues................................. $ 29.1 $ 36.0 $ 21.4 $ 35.5 $ 26.4 $ 27.0 $ 34.2 $ 32.2
Gross profit............................. 10.0 12.4 5.6 11.9 8.9 9.3 14.5 8.9
Operating income (loss).................. 2.5 3.8 (0.4) 3.0 2.5 0.8 4.6 (2.0)
Net income (loss)........................ 1.1 1.4 (0.1) 1.0 1.3 (0.3) 3.0 (2.4)
GAMING
Revenues................................. $ 30.2 $ 28.0 $ 35.0 $ 33.0 $ 21.4 $ 24.0 $ 31.3 $ 23.4
Gross profit............................. 7.4 8.6 9.2 9.0 5.2 7.0 9.2 5.9
Operating income (loss).................. 1.0 1.0 1.8 0.6 (1.8) (1.6) 0.6 (2.2)
Net income (loss)........................ (0.3) (0.6) 0.4 (0.9) (3.2) (3.0) (1.1) (3.7)
SYSTEMS
Revenues................................. $ 3.0 $ 6.1 $ 4.3 $ 4.2 $ 2.8 $ 2.4 $ 3.3 $ 8.0
Gross profit............................. 2.0 3.9 2.8 3.0 2.2 1.5 2.1 5.0
Operating income......................... 0.5 2.1 1.3 1.0 0.5 (0.5) 0.3 2.6
Net income............................... 0.5 2.1 1.3 1.0 0.5 (0.5) 0.3 2.6
</TABLE>
F-63
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 16
The Merger and Related Financings.............. 25
Use of Proceeds................................ 27
Capitalization................................. 28
Unaudited Pro Forma Condensed Combined
Financial Information......................... 29
Supplemental Analysis of Adjusted Operating
Cash Flow..................................... 41
Forecast of Operating Income and Adjusted
Operating Cash Flow........................... 45
Selected Historical Financial Information of
Alliance...................................... 57
Selected Historical Financial Information of
BGII.......................................... 59
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 60
Business....................................... 75
Gaming Regulation and Licensing................ 96
Management..................................... 106
Security Ownership of Certain Beneficial
Holders and Management........................ 109
Certain Relationships and Related
Transactions.................................. 113
Description of Certain Other Indebtedness...... 114
Description of the Notes....................... 116
Underwriting................................... 138
Legal Matters.................................. 139
Experts........................................ 140
Available Information.......................... 140
Index to Financial Statements.................. F-1
</TABLE>
$140,000,000
ALLIANCE GAMING
CORPORATION
% SENIOR SECURED NOTES DUE 2003
PROSPECTUS
JEFFERIES & COMPANY, INC.
LADENBURG, THALMANN & CO. INC.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
An itemized statement of the estimated amount of all expenses in connection
with the distribution of the securities registered hereby is as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 48,276
Blue Sky fees and expenses......................................... *
NASD fee........................................................... 14,500
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Printing and engraving expenses.................................... *
Trustee and Registrar fees......................................... *
Miscellaneous...................................................... *
---------
Total.......................................................... $ *
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 15. 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 Revised Statutes. 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 Revised Statutes provides:
1. The directors of a corporation shall not make dividends or other
distributions to stockholders except as provided by such section.
2. In case of any willful or grossly negligent violation of the
provisions of such section, the directors under whose administration the
violation occurred, except those who caused their dissent to be entered upon
the minutes of the meeting of the directors at the time, or who not then
being present caused their dissent to be entered on learning of such action,
are jointly and severally liable, at any time within 3 years after each
violation, to the corporation, and, in the event of its dissolution or
insolvency, to its creditors at the time of the violation, or any of them,
to the lesser of the full amount of the dividend made or of any loss
sustained by the corporation by reason of the dividend or other distribution
to stockholders.
However, Section 78.751 of the Nevada Revised Statutes 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,
II-1
<PAGE>
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 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 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------------------
<C> <C> <S>
<CAPTION>
.1*1 -- Form of Preferred Stock Underwriting Agreement.
<C> <C> <S>
*1.2 -- Form of Note Underwriting Agreement.
*2.1 -- Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of October
18, 1995, as amended and restated.
2.2 -- Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel, and exhibits thereto (incorporated herein by
reference to Alliance's Form 8-K dated October 29, 1993).
2.3 -- Letter Agreement, dated as of November 5, 1993, among United Gaming, Inc., Capital Gaming
International, Inc., I.G. Davis, Jr. and John E. Dell, with exhibits thereto (incorporated herein
by reference to Alliance's Form 8-K dated November 5, 1993).
2.4 -- Consolidation Agreement, dated March 29, 1995 among Alliance, United Gaming Rainbow, Inc., RCC,
RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development Corporation and Leigh Seippel
and John A. Barrett, Jr. (incorporated herein by reference to Alliance's Form 8-K dated March 29,
1995).
2.5 -- Offer to Purchase Common Shares of Bally Gaming International, Inc., dated July 28, 1995
(incorporated herein by reference to Alliance's Schedule 14D-1 and Schedule 13D dated July 28,
1995).
3.1 -- Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by
reference to Alliance's Form S-2, Registration Number 33-72990, and subsequent amendments
thereto).
3.2 -- Revised By-Laws of the Registrant (incorporated herein by reference to Alliance's Form 10-K for
the year ended June 30, 1994).
*4.1 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of 15%
Non-Voting Junior Special Stock, Series B.
*4.2 -- Form of Certificate evidencing 15% Non-Voting Junior Special Stock, Series B.
4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan commitment
with Video Services, Inc. (incorporated herein by reference to Alliance's Form 8-K dated March
31, 1992).
4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and NationsBank of Texas,
N.A., as Trustee in respect of Alliance's 7 1/2% Convertible Subordinated Debentures due 2003
(incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990, and
subsequent amendments thereto).
4.5 -- Form of 7-1/2% Convertible Subordinated Debenture due 2003 (included in Exhibit 4.5, above).
4.6 -- Registration Rights Agreement, dated as of September 21, 1993, by and among United Gaming, Inc.,
Donaldson Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc. and L.H. Friend,
Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration
Number 33-72990, and subsequent amendments thereto).
*4.7 -- Form of Note Indenture (including form of Note).
*4.8 -- Form of Collateral Documents.
*5 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey as to legality of the securities being
registered.
10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video Services, Inc.
and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated March 31,
1992).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------------------
<C> <C> <S>
10.2 -- Lease, dated August 3, 1988, as amended April 6, 1989, from Walter Schwartz to Alliance for
Alliance's corporate headquarters building at 4380 Boulder Highway, Las Vegas, Nevada
(incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1989).
10.3 -- Employment Agreement between United Gaming, Inc. and John W. Alderfer (incorporated herein by
reference to Alliance's Form 10-Q for the quarter ended March 31, 1993).
10.4 -- Amendment to Employment Agreement between United Gaming, Inc. and John W. Alderfer (incorporated
herein by reference to Alliance's Form 10-K for the year ended June 30, 1994).
10.5 -- Letter Agreement dated June 25, 1993 among United Gaming, Inc. and Kirkland-Ft. Worth Investment
Partners, L.P., Kirkland Investment Corporation and, as to certain provisions, Alfred H. Wilms,
including Exhibit A (Form of Securities Purchase Agreement), Exhibit B (Form of Stockholders
Agreement), Exhibit C (Form of Certificate of Designations of Non-Voting Junior Convertible
Preferred Stock), Exhibit D (Form of Warrant Agreement), and Exhibit E (Form of press release)
thereto (incorporated herein by reference to Alliance's Form 8-K dated June 25, 1993).
10.6 -- Advisory Agreement, dated June 25, 1993 among United Gaming, Inc., Gaming Systems Advisors, L.P.
and, as to certain provisions, Mr. Alfred H. Wilms, including Exhibit A (Form of Warrant
Agreement) and Exhibit B (Form of press release) thereto (incorporated herein by reference to
Alliance's Form 8-K dated June 25, 1993).
10.7 -- United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (incorporated herein by reference
to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308).
10.8 -- Gaming and Technology, Inc. 1984 Employee Stock Option Plan (incorporated herein by reference to
Alliance's Form S-8 Registration Number 2-98777).
10.9 -- Agreement, dated as of September 14, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth
Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and
Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated September 21,
1993).
10.10 -- Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and
Kirkland-Ft. Worth Investment Partners, L.P. relating to warrants to purchase 2.75 million shares
of Common Stock (incorporated herein by reference to Alliance's Form 8-K dated September 21,
1993).
10.11 -- Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and Gaming
Systems Advisors, L.P. relating to warrants to purchase 1.25 million shares of Common Stock
(incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993).
10.12 -- Stockholders Agreement, dated as of September 21, 1993, by and among United Gaming, Inc.,
Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems
Advisors, L.P. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated
September 21, 1993).
10.13 -- Amendment to Stockholders Agreement dated as of October 20, 1994 (incorporated herein by
reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308).
10.14 -- Selling Stockholder Letter Agreement dated as of March 20, 1995 (incorporated herein by reference
to Alliance's Form S-3 Registration Number 33-58233).
10.15 -- Securities Purchase Agreement, dated as of September 21, 1993, by and among United Gaming, Inc.,
Kirkland-Ft. Worth Investment Partners, L.P. and Kirkland Investment Corporation (incorporated
herein by reference to Alliance's Form 8-K dated September 21, 1993).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------------------
<C> <C> <S>
10.16 -- Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993 (incorporated herein by
reference to Alliance's Form 10-Q dated September 30, 1993).
10.17 -- Amendment to Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993
(incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994).
10.18 -- Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett, Jr. and Leigh
Seippel to United Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K dated
October 29, 1993).
10.19 -- Escrow Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens & Cannada
(incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993).
10.20 -- Pledge Agreement, dated as of October 29, 1993, among United Gaming, Inc. (as secured party) and
The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (as pledgors)
(incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993).
10.21 -- Management Agreement, dated as of October 29, 1993, among Rainbow Casino-Vicksburg Partnership,
L.P., The Rainbow Casino Corporation and Mississippi Ventures, Inc., as manager (incorporated
herein by reference to Alliance's Form 8-K dated October 29, 1993).
10.22 -- Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc., Capital Gaming
International, Inc. and I.G.Davis, Jr. (incorporated herein by reference to Alliance's Form 8-K
dated December 10, 1993).
10.23 -- Loan and Security Agreement, dated as of August 2, 1993, between United Gaming, Inc., Alfred H.
Wilms and Video Services, Inc. (incorporated herein by reference to Alliance's Form S-2,
Registration Number 33-72990 and subsequent amendments thereto).
10.24 -- Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc. and Alfred H. Wilms
(incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and
subsequent amendments thereto).
10.25 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference to
Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.26 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and
Oppenheimer & Co. Inc. (incorporated herein by reference to Alliance's Form S-2, Registration
Number 33-72990 and subsequent amendments thereto).
10.27 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and
L.H. Friend, Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's Form S-2,
Registration Number 33-72990 and subsequent amendments thereto).
10.28 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference to
Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.29 -- Consulting Agreement, dated as of November 8, 1993, between David A. Scheinman and United Gaming,
Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and
subsequent amendments thereto).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------------------
<C> <C> <S>
10.30 -- Letter Agreement, dated as of March 3, 1994, by and among United Native American Gaming, Inc.,
USA Gaming of Native America, Inc., USA Gaming, Inc. and others (incorporated herein by reference
to Alliance's Form 8-K dated March 7, 1994).
10.31 -- Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel (incorporated herein by reference to
Alliance's Form 8-K dated March 15, 1994).
10.32 -- Letter Agreement, dated as of June 29, 1994, among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation
(incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.33 -- Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation
(incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.34 -- Second Amendment to Casino Financing Agreement, dated as of August 11, 1994, among United Gaming,
Inc., United Gaming Rainbow, Inc., Rainbow Casino-Vicksburg Partnership, L.P., The Rainbow Casino
Corporation, John A. Barrett, Jr., Leigh Seippel and HFS Gaming Corporation (incorporated herein
by reference to Alliance's Form 8-K dated August 11, 1994).
10.35 -- Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8, 1994
(incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.36 -- Second Amended and Restated Agreement of Limited Partnership, dated March 29, 1995, between
United Gaming Rainbow and RCC (incorporated herein by reference to Alliance's Form 8-K dated
March 29, 1995).
10.37 -- Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow
Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11,
1994).
10.38 -- Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow
Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11,
1994).
10.39 -- Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and Leigh Seippel to United
Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.40 -- Escrow Agreement, dated as of August 11, 1994, among United Gaming Rainbow, Inc., The Rainbow
Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens &
Cannada, together with Agreement dated February 7, 1994, as amended July 11, 1994 between Rainbow
Casino-Vicksburg Partnership, L.P. and the City of Vicksburg, Mississippi (incorporated herein by
reference to Alliance's Form 8-K dated August 11, 1994).
10.41 -- Employment Agreement between United Gaming, Inc. and Johnann McIlwain (incorporated herein by
reference to Alliance's Form 10-K for the year ended June 30, 1994).
10.42 -- Settlement Agreement, dated December 4, 1994, by and among Alliance, United Gaming of Iowa, Inc.,
GDREC and Joseph and Paula Zwack (incorporated herein by reference to Alliance's Form S-2,
Registration Number 33-72990 and subsequent amendments thereto).
10.43 -- Employment Agreement, dated August 15, 1994, between Alliance and Steve Greathouse (incorporated
herein by reference to Alliance's Form S-3, Registration Number 33-58233).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------------------
<C> <C> <S>
10.44 -- Warrant Agreement, dated August 15, 1994, between Alliance and Steven Greathouse (incorporated
herein by reference to Alliance's Form S-3, Registration Number 33-58233).
10.45 -- Agreement, dated September 1, 1994, between Alliance and Craig Fields (incorporated herein by
reference to Alliance's Form S-3, Registration Number 33-58233).
10.46 -- Warrant Agreement, dated September 1, 1994, between Alliance and Craig Fields (incorporated
herein by reference to Alliance's Form S-3, Registration Number 33-58233).
10.47 -- Agreement, dated March 20, 1995, between Alliance and Joel Kirschbaum (incorporated herein by
reference to Alliance's Form S-3, Registration Number 33-58233).
10.48 -- Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel, John A.
Barrett, Jr. and Butler, Snow, O'Mara, Stevens & Cannada (incorporated herein by reference to
Alliance's Form 8-K dated March 29, 1995).
10.49 -- Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated
herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.50 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated
herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.51 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi, Inc.
(incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.52 -- Release, dated March 29, 1995, by United Gaming Rainbow and Alliance and their affiliates of RCC,
Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their affiliates
(other than RCVP) (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.53 -- Release, dated March 29, 1995, by RCC, Rainbow Development Corporation, John A. Barrett, Jr. and
Leigh Seippel and their affiliates (other than RCVP) of United Gaming Rainbow and Alliance and
their affiliates (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995).
*10.54 -- Agreement, dated March 31, 1995 between Anthony DiCesare and Alliance Gaming Corporation.
10.55 -- Trademark License Agreement, dated November 11, 1991 between Bally Manufacturing Corporation and
Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(i)(d) included
in BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
10.56 -- Amended and Restated Trademark License Agreement, dated July 8, 1992, by and between Bally Gaming
International, Inc. and Bally Manufacturing Corporation (incorporated herein by reference to
exhibit 10(i)(d) included in BGII's Registration Statement on Form S-1 No. 33-48347 filed on July
9, 1992).
10.57 -- Agreement, dated January 8, 1993 by and between Bally Gaming International, Inc. and Bally
Manufacturing Corporation (incorporated herein by reference to exhibit 10(i)(p) included in
BGII's Annual Report on Form 10-K for the period ended December 31, 1992).
10.58 -- Second Amendment to Trademark License Agreement and Settlement Agreement, dated March 31, 1995,
by and between Bally Entertainment Corporation and Bally Gaming International, Inc. (incorporated
herein by reference to Exhibit I, included in BGII's Current Report on Form 8-K dated April 3,
1995).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------------------
<C> <C> <S>
10.59 -- 1991 Incentive Plan of Bally Gaming International, Inc. (incorporated herein by reference to
exhibit 10(iii)(a) included in BGII's Registration Statement No. 33-42227 on Form S-1, effective
November 8, 1991).
10.60 -- Amendment No. 1 to the 1991 Incentive Plan of Bally Gaming International, Inc. effective February
6, 1992 (incorporated herein by reference to exhibit 10(iii)(b) included in BGII's Registration
Statement No. 33-42227 on Form S-1 effective November 1, 1991).
10.61 -- Amendment No. 2 to 1991 Incentive Plan of Bally Gaming International Inc. (incorporated herein by
reference to exhibit 99(e) included in BGII's Registration Statement No. 33-71154 on Form S-3
filed on November 1, 1993).
10.62 -- 1991 Non-Employee Directors' Option Plan of Bally Gaming International, Inc. (incorporated herein
by reference to exhibit 10(iii)(f) included in BGII's Annual Report on Form 10-K for the fiscal y
ear ended December 31, 1991).
10.63 -- Amendment No. 1 to the 1991 Non-Employee Directors' Option Plan of Bally Gaming International,
Inc. (incorporated herein by reference to exhibit 10(iii)(g) included in BGII's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991).
10.64 -- Bally Gaming International, Inc. 1992 Restricted Stock Performance Plan (incorporated herein by
reference to exhibit 99(d) included in BGII's Registration Statement on Form S-3 filed on
November 1, 1993).
10.65 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Richard Gillman and Bally
Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(g) included in
BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.66 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Hans Kloss and Bally
Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(h) included in
BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.67 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Neil Jenkins and Bally
Gaming International, Inc.(incorporated herein by reference to exhibit 10(iii)(i) included in
BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.68 -- Bally Gaming International, Inc. 1994 Stock Option Plan for Non-Employee Directors, as amended
(incorporated herein by reference to exhibit 10(iii)(k) included in BGII's Annual Report on Form
10-K for the period ended December 31, 1994).
10.69 -- Employment Agreement, effective January 1, 1993, between Bally Gaming International, Inc. and
Richard Gillman (incorporated herein by reference to exhibit 10(iii)(j) included in BGII's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992).
10.70 -- Amendment, dated June 8, 1994, to the Employment Agreement, effective as of January 1, 1993,
between Richard Gillman and Bally Gaming International, Inc. (incorporated herein by reference to
exhibit 10(iii)(m) included in BGII's Annual Report on Form 10-K for the period ended December
31, 1994).
10.71 -- Employment Agreements, as amended, between Hans Kloss and each of Bally Wulff Automaten GmbH and
Bally Wulff Vertriebs GmbH (incorporated herein by reference to exhibit 10(iii)(b) included in
BGII's Registration Statement No. 33-42227 on Form S-1, effective November 8, 1991).
10.72 -- Third Amendments, dated June 2, 1993, to Employment Agreements between Hans Kloss and each of
Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH (incorporated herein by reference to
exhibit 99(c) included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on
November 1, 1993).
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------------------
<C> <C> <S>
10.73 -- Employment Agreement, effective as of May 15, 1993, between Bally Gaming International, Inc.,
Bally Gaming, Inc. and Hans Kloss (incorporated herein by reference to exhibit 99(b) included in
BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1, 1993).
10.74 -- Amendment, dated June 8, 1994, to the Employment Agreement effective as of May 15, 1993, between
Hans Kloss and Bally Gaming International, Inc. (incorporated herein by reference to exhibit
10(iii)(q) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.75 -- Employment Agreement, dated June 30, 1994, between Neil Jenkins and Bally Gaming International,
Inc. (incorporated herein by reference to exhibit 10(iii)(r) included in BGII's Annual Report on
Form 10-K for the period ended December 31, 1994).
10.76 -- Employment Agreement, dated as of March 24, 1995, between Scott D. Schweinfurth and Bally Gaming
International, Inc. (incorporated herein by reference to exhibit 10(iii)(z) included in BGII's
Annual Report on Form 10-K/A for the period ended December 31, 1994).
12 -- Statement re computation of ratios.
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
*23.3 -- Consent of Schreck, Jones, Bernhard, Woloson and Godfrey (included in its opinion filed as
Exhibit 5).
24 -- Power of Attorney (included on signature page).
*25 -- Statement of Eligibility of Trustee.
</TABLE>
- ------------------------
* To be filed by amendment.
II-9
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act will be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(b) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions set forth in response to Item 15, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Alliance Gaming
Corporation certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-2 and has duly caused this
registration statement or amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on April 24, 1996.
ALLIANCE GAMING CORPORATION
By: /s/ JOHN W. ALDERFER
--------------------------------------
Name: John W. Alderfer
Title: Senior Vice President--Finance
and
Administration, Chief Financial
Officer
and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
/s/ STEVE GREATHOUSE* Chairman of the Board of Directors,
------------------------------------------- President and Chief Executive Officer April 24, 1996
Steve Greathouse (Principal Executive Officer)
Senior Vice President-Finance and
/s/ JOHN W. ALDERFER Administration, Chief Financial
------------------------------------------- Officer and Treasurer (Principal April 24, 1996
John W. Alderfer Financial and Accounting Officer)
/s/ ANTHONY DICESARE*
------------------------------------------- Director and Executive Vice April 24, 1996
Anthony DiCesare President-Development
------------------------------------------- Director (Vice Chairman of the Board) April 24, 1996
Dr. Craig Fields
/s/ JOEL KIRSCHBAUM*
------------------------------------------- Director April 24, 1996
Joel Kirschbaum
</TABLE>
II-11
<PAGE>
<TABLE>
<C> <S> <C>
/s/ ALFRED H. WILMS*
------------------------------------------- Director April 24, 1996
Alfred H. Wilms
/s/ DAVID ROBBINS*
------------------------------------------- Director April 24, 1996
David Robbins
/s/ CHRISTOPHER BAJ*
------------------------------------------- Director April 24, 1996
Christopher Baj
</TABLE>
*By: /s/ JOHN W. ALDERFER
- -----------------------------------------
John W. Alderfer,
as Attorney-in-fact
II-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- ------------------------------------------------------------------------------------------ -----
<C> <C> <S> <C>
<CAPTION>
.1*1 -- Form of Preferred Stock Underwriting Agreement.
<C> <C> <S> <C>
*1.2 -- Form of Note Underwriting Agreement.
*2.1 -- Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of
October 18, 1995, as amended and restated.
2.2 -- Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow
Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, and exhibits thereto
(incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993).
2.3 -- Letter Agreement, dated as of November 5, 1993, among United Gaming, Inc., Capital Gaming
International, Inc., I.G. Davis, Jr. and John E. Dell, with exhibits thereto (incorporated
herein by reference to Alliance's Form 8-K dated November 5, 1993).
2.4 -- Consolidation Agreement, dated March 29, 1995 among Alliance, United Gaming Rainbow, Inc.,
RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development Corporation and
Leigh Seippel and John A. Barrett, Jr. (incorporated herein by reference to Alliance's
Form 8-K dated March 29, 1995).
2.5 -- Offer to Purchase Common Shares of Bally Gaming International, Inc., dated July 28, 1995
(incorporated herein by reference to Alliance's Schedule 14D-1 and Schedule 13D dated July
28, 1995).
3.1 -- Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by
reference to Alliance's Form S-2, Registration Number 33-72990, and subsequent amendments
thereto).
3.2 -- Revised By-Laws of the Registrant (incorporated herein by reference to Alliance's Form
10-K for the year ended June 30, 1994).
*4.1 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof
of 15% Non-Voting Junior Special Stock, Series B.
*4.2 -- Form of Certificate evidencing 15% Non-Voting Junior Special Stock, Series B.
4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan
commitment with Video Services, Inc. (incorporated herein by reference to Alliance's Form
8-K dated March 31, 1992).
4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and NationsBank of
Texas, N.A., as Trustee in respect of Alliance's 7 1/2% Convertible Subordinated
Debentures due 2003 (incorporated herein by reference to Alliance's Form S-2, Registration
Number 33-72990, and subsequent amendments thereto).
4.5 -- Form of 7-1/2% Convertible Subordinated Debenture due 2003 (included in Exhibit 4.5,
above).
4.6 -- Registration Rights Agreement, dated as of September 21, 1993, by and among United Gaming,
Inc., Donaldson Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc. and L.H.
Friend, Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's Form
S-2, Registration Number 33-72990, and subsequent amendments thereto).
*4.7 -- Form of Note Indenture (including form of Note).
*4.8 -- Form of Collateral Documents.
*5 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey as to legality of the securities
being registered.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- ------------------------------------------------------------------------------------------ -----
<C> <C> <S> <C>
10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video
Services, Inc. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form
8-K dated March 31, 1992).
10.2 -- Lease, dated August 3, 1988, as amended April 6, 1989, from Walter Schwartz to Alliance
for Alliance's corporate headquarters building at 4380 Boulder Highway, Las Vegas, Nevada
(incorporated herein by reference to Alliance's Form 10-K for the year ended June 30,
1989).
10.3 -- Employment Agreement between United Gaming, Inc. and John W. Alderfer (incorporated herein
by reference to Alliance's Form 10-Q for the quarter ended March 31, 1993).
10.4 -- Amendment to Employment Agreement between United Gaming, Inc. and John W. Alderfer
(incorporated herein by reference to Alliance's Form 10-K for the year ended June 30,
1994).
10.5 -- Letter Agreement dated June 25, 1993 among United Gaming, Inc. and Kirkland-Ft. Worth
Investment Partners, L.P., Kirkland Investment Corporation and, as to certain provisions,
Alfred H. Wilms, including Exhibit A (Form of Securities Purchase Agreement), Exhibit B
(Form of Stockholders Agreement), Exhibit C (Form of Certificate of Designations of
Non-Voting Junior Convertible Preferred Stock), Exhibit D (Form of Warrant Agreement), and
Exhibit E (Form of press release) thereto (incorporated herein by reference to Alliance's
Form 8-K dated June 25, 1993).
10.6 -- Advisory Agreement, dated June 25, 1993 among United Gaming, Inc., Gaming Systems
Advisors, L.P. and, as to certain provisions, Mr. Alfred H. Wilms, including Exhibit A
(Form of Warrant Agreement) and Exhibit B (Form of press release) thereto (incorporated
herein by reference to Alliance's Form 8-K dated June 25, 1993).
10.7 -- United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (incorporated herein by
reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number
33-75308).
10.8 -- Gaming and Technology, Inc. 1984 Employee Stock Option Plan (incorporated herein by
reference to Alliance's Form S-8 Registration Number 2-98777).
10.9 -- Agreement, dated as of September 14, 1993, by and among United Gaming, Inc., Kirkland-Ft.
Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors,
L.P. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated
September 21, 1993).
10.10 -- Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and
Kirkland-Ft. Worth Investment Partners, L.P. relating to warrants to purchase 2.75 million
shares of Common Stock (incorporated herein by reference to Alliance's Form 8-K dated
September 21, 1993).
10.11 -- Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and
Gaming Systems Advisors, L.P. relating to warrants to purchase 1.25 million shares of
Common Stock (incorporated herein by reference to Alliance's Form 8-K dated September 21,
1993).
10.12 -- Stockholders Agreement, dated as of September 21, 1993, by and among United Gaming, Inc.,
Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming
Systems Advisors, L.P. and Alfred H. Wilms (incorporated herein by reference to Alliance's
Form 8-K dated September 21, 1993).
10.13 -- Amendment to Stockholders Agreement dated as of October 20, 1994 (incorporated herein by
reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number
33-75308).
10.14 -- Selling Stockholder Letter Agreement dated as of March 20, 1995 (incorporated herein by
reference to Alliance's Form S-3 Registration Number 33-58233).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- ------------------------------------------------------------------------------------------ -----
<C> <C> <S> <C>
10.15 -- Securities Purchase Agreement, dated as of September 21, 1993, by and among United Gaming,
Inc., Kirkland-Ft. Worth Investment Partners, L.P. and Kirkland Investment Corporation
(incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993).
10.16 -- Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993 (incorporated
herein by reference to Alliance's Form 10-Q dated September 30, 1993).
10.17 -- Amendment to Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993
(incorporated herein by reference to Alliance's Form 10-K for the year ended June 30,
1994).
10.18 -- Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett, Jr. and Leigh
Seippel to United Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K
dated October 29, 1993).
10.19 -- Escrow Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow
Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens
& Cannada (incorporated herein by reference to Alliance's Form 8-K dated October 29,
1993).
10.20 -- Pledge Agreement, dated as of October 29, 1993, among United Gaming, Inc. (as secured
party) and The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (as
pledgors) (incorporated herein by reference to Alliance's Form 8-K dated October 29,
1993).
10.21 -- Management Agreement, dated as of October 29, 1993, among Rainbow Casino-Vicksburg
Partnership, L.P., The Rainbow Casino Corporation and Mississippi Ventures, Inc., as
manager (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993).
10.22 -- Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc., Capital Gaming
International, Inc. and I.G.Davis, Jr. (incorporated herein by reference to Alliance's
Form 8-K dated December 10, 1993).
10.23 -- Loan and Security Agreement, dated as of August 2, 1993, between United Gaming, Inc.,
Alfred H. Wilms and Video Services, Inc. (incorporated herein by reference to Alliance's
Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.24 -- Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc. and Alfred H.
Wilms (incorporated herein by reference to Alliance's Form S-2, Registration Number
33-72990 and subsequent amendments thereto).
10.25 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference
to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.26 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and Oppenheimer & Co. Inc. (incorporated herein by reference to Alliance's Form S-2,
Registration Number 33-72990 and subsequent amendments thereto).
10.27 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and L.H. Friend, Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's
Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.28 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference
to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- ------------------------------------------------------------------------------------------ -----
<C> <C> <S> <C>
10.29 -- Consulting Agreement, dated as of November 8, 1993, between David A. Scheinman and United
Gaming, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number
33-72990 and subsequent amendments thereto).
10.30 -- Letter Agreement, dated as of March 3, 1994, by and among United Native American Gaming,
Inc., USA Gaming of Native America, Inc., USA Gaming, Inc. and others (incorporated herein
by reference to Alliance's Form 8-K dated March 7, 1994).
10.31 -- Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc., The Rainbow
Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (incorporated herein by
reference to Alliance's Form 8-K dated March 15, 1994).
10.32 -- Letter Agreement, dated as of June 29, 1994, among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming
Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11,
1994).
10.33 -- Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming
Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11,
1994).
10.34 -- Second Amendment to Casino Financing Agreement, dated as of August 11, 1994, among United
Gaming, Inc., United Gaming Rainbow, Inc., Rainbow Casino-Vicksburg Partnership, L.P., The
Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and HFS Gaming Corporation
(incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.35 -- Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8,
1994 (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994).
10.36 -- Second Amended and Restated Agreement of Limited Partnership, dated March 29, 1995,
between United Gaming Rainbow and RCC (incorporated herein by reference to Alliance's Form
8-K dated March 29, 1995).
10.37 -- Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The
Rainbow Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated
August 11, 1994).
10.38 -- Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The
Rainbow Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated
August 11, 1994).
10.39 -- Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and Leigh Seippel to
United Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K dated August
11, 1994).
10.40 -- Escrow Agreement, dated as of August 11, 1994, among United Gaming Rainbow, Inc., The
Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara,
Stevens & Cannada, together with Agreement dated February 7, 1994, as amended July 11,
1994 between Rainbow Casino-Vicksburg Partnership, L.P. and the City of Vicksburg,
Mississippi (incorporated herein by reference to Alliance's Form 8-K dated August 11,
1994).
10.41 -- Employment Agreement between United Gaming, Inc. and Johnann McIlwain (incorporated herein
by reference to Alliance's Form 10-K for the year ended June 30, 1994).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- ------------------------------------------------------------------------------------------ -----
<C> <C> <S> <C>
10.42 -- Settlement Agreement, dated December 4, 1994, by and among Alliance, United Gaming of
Iowa, Inc., GDREC and Joseph and Paula Zwack (incorporated herein by reference to
Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
10.43 -- Employment Agreement, dated August 15, 1994, between Alliance and Steve Greathouse
(incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233).
10.44 -- Warrant Agreement, dated August 15, 1994, between Alliance and Steven Greathouse
(incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233).
10.45 -- Agreement, dated September 1, 1994, between Alliance and Craig Fields (incorporated herein
by reference to Alliance's Form S-3, Registration Number 33-58233).
10.46 -- Warrant Agreement, dated September 1, 1994, between Alliance and Craig Fields
(incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233).
10.47 -- Agreement, dated March 20, 1995, between Alliance and Joel Kirschbaum (incorporated herein
by reference to Alliance's Form S-3, Registration Number 33-58233).
10.48 -- Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel,
John A. Barrett, Jr. and Butler, Snow, O'Mara, Stevens & Cannada (incorporated herein by
reference to Alliance's Form 8-K dated March 29, 1995).
10.49 -- Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow
(incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.50 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow
(incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.51 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi,
Inc. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.52 -- Release, dated March 29, 1995, by United Gaming Rainbow and Alliance and their affiliates
of RCC, Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their
affiliates (other than RCVP) (incorporated herein by reference to Alliance's Form 8-K
dated March 29, 1995).
10.53 -- Release, dated March 29, 1995, by RCC, Rainbow Development Corporation, John A. Barrett,
Jr. and Leigh Seippel and their affiliates (other than RCVP) of United Gaming Rainbow and
Alliance and their affiliates (incorporated herein by reference to Alliance's Form 8-K
dated March 29, 1995).
*10.54 -- Agreement, dated March 31, 1995 between Anthony DiCesare and Alliance Gaming Corporation.
10.55 -- Trademark License Agreement, dated November 11, 1991 between Bally Manufacturing
Corporation and Bally Gaming International, Inc. (incorporated herein by reference to
exhibit 10(i)(d) included in BGII's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991).
10.56 -- Amended and Restated Trademark License Agreement, dated July 8, 1992, by and between Bally
Gaming International, Inc. and Bally Manufacturing Corporation (incorporated herein by
reference to exhibit 10(i)(d) included in BGII's Registration Statement on Form S-1 No.
33-48347 filed on July 9, 1992).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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<C> <C> <S> <C>
10.57 -- Agreement, dated January 8, 1993 by and between Bally Gaming International, Inc. and Bally
Manufacturing Corporation (incorporated herein by reference to exhibit 10(i)(p) included
in BGII's Annual Report on Form 10-K for the period ended December 31, 1992).
10.58 -- Second Amendment to Trademark License Agreement and Settlement Agreement, dated March 31,
1995, by and between Bally Entertainment Corporation and Bally Gaming International, Inc.
(incorporated herein by reference to Exhibit I, included in BGII's Current Report on Form
8-K dated April 3, 1995).
10.59 -- 1991 Incentive Plan of Bally Gaming International, Inc. (incorporated herein by reference
to exhibit 10(iii)(a) included in BGII's Registration Statement No. 33-42227 on Form S-1,
effective November 8, 1991).
10.60 -- Amendment No. 1 to the 1991 Incentive Plan of Bally Gaming International, Inc. effective
February 6, 1992 (incorporated herein by reference to exhibit 10(iii)(b) included in
BGII's Registration Statement No. 33-42227 on Form S-1 effective November 1, 1991).
10.61 -- Amendment No. 2 to 1991 Incentive Plan of Bally Gaming International Inc. (incorporated
herein by reference to exhibit 99(e) included in BGII's Registration Statement No.
33-71154 on Form S-3 filed on November 1, 1993).
10.62 -- 1991 Non-Employee Directors' Option Plan of Bally Gaming International, Inc. (incorporated
herein by reference to exhibit 10(iii)(f) included in BGII's Annual Report on Form 10-K
for the fiscal y ear ended December 31, 1991).
10.63 -- Amendment No. 1 to the 1991 Non-Employee Directors' Option Plan of Bally Gaming
International, Inc. (incorporated herein by reference to exhibit 10(iii)(g) included in
BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
10.64 -- Bally Gaming International, Inc. 1992 Restricted Stock Performance Plan (incorporated
herein by reference to exhibit 99(d) included in BGII's Registration Statement on Form S-3
filed on November 1, 1993).
10.65 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Richard Gillman
and Bally Gaming International, Inc. (incorporated herein by reference to exhibit
10(iii)(g) included in BGII's Annual Report on Form 10-K for the period ended December 31,
1994).
10.66 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Hans Kloss and
Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(h)
included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.67 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Neil Jenkins and
Bally Gaming International, Inc.(incorporated herein by reference to exhibit 10(iii)(i)
included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.68 -- Bally Gaming International, Inc. 1994 Stock Option Plan for Non-Employee Directors, as
amended (incorporated herein by reference to exhibit 10(iii)(k) included in BGII's Annual
Report on Form 10-K for the period ended December 31, 1994).
10.69 -- Employment Agreement, effective January 1, 1993, between Bally Gaming International, Inc.
and Richard Gillman (incorporated herein by reference to exhibit 10(iii)(j) included in
BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
</TABLE>
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<TABLE>
<CAPTION>
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10.70 -- Amendment, dated June 8, 1994, to the Employment Agreement, effective as of January 1,
1993, between Richard Gillman and Bally Gaming International, Inc. (incorporated herein by
reference to exhibit 10(iii)(m) included in BGII's Annual Report on Form 10-K for the
period ended December 31, 1994).
10.71 -- Employment Agreements, as amended, between Hans Kloss and each of Bally Wulff Automaten
GmbH and Bally Wulff Vertriebs GmbH (incorporated herein by reference to exhibit
10(iii)(b) included in BGII's Registration Statement No. 33-42227 on Form S-1, effective
November 8, 1991).
10.72 -- Third Amendments, dated June 2, 1993, to Employment Agreements between Hans Kloss and each
of Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH (incorporated herein by
reference to exhibit 99(c) included in BGII's Registration Statement No. 33-71154 on Form
S-3 filed on November 1, 1993).
10.73 -- Employment Agreement, effective as of May 15, 1993, between Bally Gaming International,
Inc., Bally Gaming, Inc. and Hans Kloss (incorporated herein by reference to exhibit 99(b)
included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1,
1993).
10.74 -- Amendment, dated June 8, 1994, to the Employment Agreement effective as of May 15, 1993,
between Hans Kloss and Bally Gaming International, Inc. (incorporated herein by reference
to exhibit 10(iii)(q) included in BGII's Annual Report on Form 10-K for the period ended
December 31, 1994).
10.75 -- Employment Agreement, dated June 30, 1994, between Neil Jenkins and Bally Gaming
International, Inc. (incorporated herein by reference to exhibit 10(iii)(r) included in
BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
10.76 -- Employment Agreement, dated as of March 24, 1995, between Scott D. Schweinfurth and Bally
Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(z)
included in BGII's Annual Report on Form 10-K/A for the period ended December 31, 1994).
12 -- Statement re computation of ratios.
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
*23.3 -- Consent of Schreck, Jones, Bernhard, Woloson and Godfrey (included in its opinion filed as
Exhibit 5).
24 -- Power of Attorney (included on signature page).
*25 -- Statement of Eligibility of Trustee.
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 12
ALLIANCE GAMING CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FINANCIAL
INFORMATION
-----------
SIX MONTH
PERIODS ENDED YEAR ENDED
FISCAL YEARS ENDED JUNE 30, DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------- -----------
1991 1992 1993 1941 1995 1994 1995 1995
--------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net income (loss).......... $ (15,816) $ (4,680) $ (3,650) $ (13,128) $ (10,752) $ (5,016) $ (9,431) $ (3,085)
Income taxes............... (5,958) 241 265 290 787 2,555
Imputed interest on
rents..................... 16,485 16,647 19,966 21,700 21,848 10,945 10,721 21,843
Interest and debt discount
amortization.............. 4,663 4,505 5,046 6,830 8,133 3,915 4,288 22,376
--------- --------- --------- --------- --------- --------- --------- -----------
Earnings (loss) as
defined for ratio....... $ (626) $ 16,472 $ 21,362 $ 15,643 $ 19,489 $ 10,134 $ 6,365 $ 43,689
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
Fixed Charges:
Imputed interest on
rents..................... $ 16,485 $ 16,647 $ 19,966 $ 21,700 $ 21,843 $ 10,945 $ 10,721 $ 21,843
Interest and debt discount
amortization.............. 4,663 4,505 5,046 6,830 8,133 3,915 4,288 22,376
--------- --------- --------- --------- --------- --------- --------- -----------
Fixed charges as defined
for ratio............... $ 21,148 $ 21,152 $ 25,012 $ 28,530 $ 29,976 $ 14,860 $ 15,009 $ 44,219
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
Ratio of earnings to fixed
charges..................... (0.03) 0.78 0.85 0.55 0.65 0.68 0.42 .99
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
Amounts by which earnings
were adequate (inadequate)
to cover fixed charges...... $ (21,774) $ (4,680) $ (3,650) $ (12,887) $ (10,487) $ (4,726) $ (8,644) $ (530)
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
<CAPTION>
TWELVE- SIX MONTHS
MONTH PERIODS ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, --------------------
1995 1994 1995
------------- --------- ---------
<S> <C> <C> <C>
Earnings:
Net income (loss).......... $ (6,434) $ (4,616) $ (7,965)
Income taxes............... 2,642 1,202 1,289
Imputed interest on
rents..................... 21,619 10,945 10,721
Interest and debt discount
amortization.............. 22,001 11,290 10,915
------------- --------- ---------
Earnings (loss) as
defined for ratio....... $ 39,828 $ 18,821 $ 14,960
------------- --------- ---------
------------- --------- ---------
Fixed Charges:
Imputed interest on
rents..................... $ 21,619 $ 10,945 $ 10,721
Interest and debt discount
amortization.............. 22,001 11,290 10,915
------------- --------- ---------
Fixed charges as defined
for ratio............... $ 43,620 $ 22,235 $ 21,636
------------- --------- ---------
------------- --------- ---------
Ratio of earnings to fixed
charges..................... .91 .85 .69
------------- --------- ---------
------------- --------- ---------
Amounts by which earnings
were adequate (inadequate)
to cover fixed charges...... $ (3,792) $ (3,414) $ (6,676)
------------- --------- ---------
------------- --------- ---------
</TABLE>
<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 Operating Income and Adjusted Operating Cash
Flow" and "Experts", KPMG Peat Marwick LLP has not examined the Forecast
presented under "Forecast of Operating Income and Adjusted Operating Cash Flow"
and, accordingly we do not express an opinion or any other form of assurance
with respect thereto.
KPMG PEAT MARWICK LLP
Las Vegas, Nevada
April 24, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-2 of
our report, dated February 13, 1996, on our audits of the consolidated financial
statements of Bally Gaming International, Inc. We also consent to the reference
to our firm under the caption "Experts." As noted under the captions "Forecast
of Operating Income and Adjusted Operating Cash Flow" and "Experts," Coopers &
Lybrand L.L.P. neither examined nor compiled nor had any other involvement with
the preparation of the accompanying prospective financial information included
in this registration statement and, accordingly, we do not express an opinion or
any other form of assurance with respect thereto, nor do we assume any
responsibility for such prospective financial information.
COOPERS & LYBRAND L.L.P.
Las Vegas, Nevada
April 23, 1996
