<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1996
REGISTRATION NO. 333-02145
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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:
<TABLE>
<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 AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER UNIT (1)(2) PRICE (1)(2) FEE (1)(3)
<S> <C> <C> <C> <C>
15% Non-Voting Senior Pay-in-Kind Special Stock,
Series B......................................... $49,000,000 100% $49,000,000 $16,897
<FN>
(1) Includes $2,250,000 subject to the Underwriters' over-allotment option and
$31,750,000 representing the maximum number of shares of 15% Non-Voting
Senior Pay-in-Kind Special Stock, Series B, that may be issued as dividends
on outstanding shares of such stock pursuant to its pay-in-kind feature.
(2) Estimated solely for purposes of calculating the registration fee.
(3) $25,862 was previously paid for the registration of an indeterminate number
of shares of Common Stock and 15% Non-Voting Senior Pay-in-Kind Special
Stock, Series B, with an aggregate initial offering price not to exceed
$75,000,000, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a combined Prospectus relating to the
public offering by the Registrant of its Senior Secured Notes due 2003 (the
"Senior Secured Notes") and its 15% Non-Voting Senior Pay-in-Kind Special Stock,
Series B. The Senior Secured Notes are being registered separately pursuant to
the Registrant's Registration Statement on Form S-2 (Registration No.
333-02147).
<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; Available Information
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 Senior Secured Notes;
Description of Capital Stock; Material Federal
Income Tax Consequences to Holders of Preferred
Stock
10. Interest of Named Experts and Counsel............. *
11. Information with Respect to the Registrant........ Outside Front Cover Page of Prospectus; Prospectus
Summary; The Merger and Related Financings; Use
of Proceeds; Dividend Policy; Capitalization;
Unaudited Pro Forma Condensed Combined Financial
Information; Supplemental Analysis of Adjusted
Operating Cash Flow; Forecast of Operations;
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 Senior Secured
Notes; Description of Capital Stock; Material
Federal Income Tax Consequences to Holders of
Preferred Stock; 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>
- ------------------------
* 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 BE 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 MAY 28, 1996
PROSPECTUS
[LOGO]
$140,000,000 % SENIOR SECURED NOTES DUE 2003
$15,000,000 15% NON-VOTING SENIOR PAY-IN-KIND SPECIAL STOCK, SERIES B
--------------
ALLIANCE GAMING CORPORATION (THE "COMPANY") IS HEREBY OFFERING (EACH, AN
"OFFERING" AND TOGETHER, THE "OFFERINGS") (I) $140,000,000 AGGREGATE PRINCIPAL
AMOUNT OF ITS % SENIOR SECURED NOTES DUE 2003 (THE "SENIOR SECURED NOTES") AND
(II) $15,000,000 OF ITS 15% NON-VOTING SENIOR PAY-IN-KIND SPECIAL STOCK, SERIES
B (THE "PREFERRED STOCK", AND TOGETHER WITH THE SENIOR SECURED NOTES, THE
"SECURITIES"). THE SECURITIES 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 THE COMPANY. SEE "THE MERGER AND RELATED FINANCINGS"
AND "USE OF PROCEEDS." CONSUMMATION OF EACH OFFERING IS CONTINGENT UPON
CONSUMMATION OF THE OTHER OFFERING AND THE MERGER.
INTEREST ON THE SENIOR SECURED NOTES IS PAYABLE SEMI-ANNUALLY IN ARREARS ON
AND OF EACH YEAR, COMMENCING , 1996. THE SENIOR
SECURED NOTES WILL MATURE ON , 2003. THE SENIOR SECURED
NOTES WILL BE REDEEMABLE AT THE OPTION OF THE COMPANY, 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). UPON THE OCCURRENCE OF A CHANGE OF CONTROL (AS
DEFINED), THE COMPANY IS REQUIRED TO MAKE AN OFFER TO REPURCHASE THE SENIOR
SECURED 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 SENIOR SECURED NOTES."
THE COMPANY'S PAYMENT OBLIGATIONS UNDER THE SENIOR SECURED NOTES WILL BE
FULLY AND UNCONDITIONALLY GUARANTEED ON A SENIOR BASIS BY ALL EXISTING AND
FUTURE SUBSIDIARIES (AS DEFINED) OF THE COMPANY, OTHER THAN (I) THE
PARTIALLY-OWNED ENTITIES THROUGH WHICH ITS MISSISSIPPI CASINO AND LOUISIANA
GAMING MACHINE MANAGEMENT OPERATIONS ARE CONDUCTED AND (II) SPECIFIED ENTITIES
THROUGH WHICH ITS GERMAN OPERATIONS ARE TO BE CONDUCTED (COLLECTIVELY, THE
"GUARANTORS"). THE SENIOR SECURED NOTES WILL BE SECURED BY AN EXCLUSIVE PLEDGE
OF THE EQUITY INTERESTS DIRECTLY OR INDIRECTLY HELD BY THE COMPANY IN ITS
SUBSIDIARIES, EXCEPT FOR THE EQUITY INTERESTS IN BGII AND ITS SUBSIDIARIES, BUT
INCLUDING THE EQUITY INTERESTS IN ALLIANCE HOLDING COMPANY, WHICH HAS BEEN
FORMED TO HOLD THE EQUITY INTERESTS OF BGII AND ITS SUBSIDIARIES. THE SENIOR
SECURED NOTES AND GUARANTEES THEREOF WILL RANK PARI PASSU IN RIGHT OF PAYMENT
WITH EXISTING AND FUTURE SENIOR INDEBTEDNESS, AND SENIOR TO ALL SUBORDINATED
INDEBTEDNESS, OF THE COMPANY OR SUCH GUARANTOR. AFTER GIVING EFFECT TO THE
MERGER, THE OFFERINGS AND THE TRANSACTIONS CONTEMPLATED THEREBY, AT MARCH 31,
1996, ON A PRO FORMA BASIS, SUBSIDIARIES OF THE COMPANY WOULD HAVE HAD
OUTSTANDING APPROXIMATELY $33.4 MILLION OF SENIOR INDEBTEDNESS, SUBSTANTIALLY
ALL OF WHICH WOULD BE SECURED INDEBTEDNESS.
THE PREFERRED STOCK IS REDEEMABLE AT THE OPTION OF THE COMPANY AT ANY TIME,
IN WHOLE OR IN PART, AT A PRICE PER SHARE EQUAL TO $100.00, PLUS ACCRUED AND
UNPAID DIVIDENDS AND DISTRIBUTIONS THEREON, IF ANY, TO THE DATE OF REDEMPTION.
IN ADDITION, THE COMPANY IS REQUIRED TO REDEEM ALL OUTSTANDING SHARES OF
PREFERRED STOCK ON OR PRIOR TO , 2004 AT SUCH PRICE. DIVIDENDS WILL
ACCRUE FROM MAY 3, 1996 AND ARE PAYABLE QUARTERLY IN CASH IN AN AMOUNT PER SHARE
EQUAL TO $3.75 (OR 15% PER ANNUM), EXCEPT THAT THE COMPANY MAY PAY SUCH
DIVIDENDS IN ADDITIONAL SHARES OF PREFERRED STOCK (OR FRACTIONS THEREOF) UNTIL
, 2003, PROVIDED THAT THE PORTION OF ANY DIVIDENDS PAYABLE IN SHARES
OF PREFERRED STOCK AFTER , 2001 WILL BE LIMITED TO $2.00 PER SHARE
(OR 8% PER ANNUM). SEE "DESCRIPTION OF CAPITAL STOCK--SPECIAL STOCK." THE
COMPANY HAS APPLIED TO HAVE THE PREFERRED STOCK QUOTED ON THE NASDAQ NATIONAL
MARKET SYSTEM.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 19 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS IN CONNECTION WITH AN
INVESTMENT IN THE SECURITIES 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.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1)(2) DISCOUNTS(3) COMPANY(4)
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Per Senior Secured Note...................... $ $ $
Total...................................... $ $ $
Per Share of Preferred Stock................. $ $ $
Total(5)................................... $ $ $
Total........................................ $ $ $
</TABLE>
- ------------------
(1) Plus accrued interest on the Senior Secured Notes, if any, from the date of
issuance.
(2) Plus accrued dividends on the Preferred Stock from May 3, 1996.
(3) The Company and its subsidiaries have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting."
(4) Before deducting expenses payable by the Company, estimated at $ .
(5) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional $2,250,000 of Preferred Stock, on the same terms and
conditions set forth above, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Proceeds to Company, with respect to the Preferred Stock
Offering, will be $ , $ , and $ , respectively. See
"Underwriting."
------------------------
THE SECURITIES ARE OFFERED BY THE SEVERAL UNDERWRITERS, SUBJECT TO PRIOR
SALE, WHEN, AS AND IF ISSUED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO
APPROVAL OF CERTAIN LEGAL MATTERS BY COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT DELIVERY OF THE SECURITIES WILL BE MADE AGAINST PAYMENT THEREFOR
IN NEW YORK, NEW YORK ON OR ABOUT JUNE , 1996.
------------------------
Jefferies & Company, Inc.
Wasserstein Perella Securities, Inc.
Ladenburg, Thalmann & Co. Inc.
JUNE , 1996
<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 CASE OF THE PREFERRED STOCK), IN THE OPEN MARKET
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
ARTWORK
Pictures of selected slot and wall machines of BGII (inside front cover)
Picture of Rainbow Casino and Gambler's Bonus Cardless Slot Club of Alliance
(inside back cover)
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, December 31, 1995, and March 31, 1996, respectively.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents (other than exhibits to documents
unless such exhibits are specifically incorporated by reference) are available,
without charge, to any person to whom this Prospectus is delivered, on written
or oral request, to Alliance Gaming Corporation, 4380 Boulder Highway, Las
Vegas, Nevada 89121 (telephone number (702) 435-4200), Attention: John W.
Alderfer, Senior Vice President--Finance and Administration, Chief Financial
Officer and Treasurer.
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 (AS DEFINED), (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 AND THE
EXCHANGE OF $50.0 MILLION PRINCIPAL AMOUNT OF ALLIANCE'S 7 1/2% CONVERTIBLE
SUBORDINATED DEBENTURES DUE 2003 (THE "OLD CONVERTIBLE DEBENTURES") FOR A LIKE
AGGREGATE PRINCIPAL AMOUNT OF ALLIANCE'S 7 1/2% CONVERTIBLE SENIOR SUBORDINATED
DEBENTURES DUE 2003 (THE "NEW CONVERTIBLE DEBENTURES") IN THE EXCHANGE OFFER (AS
DEFINED) AND, UPON CONSUMMATION OF THE OFFERINGS AND THE MERGER, THE AUTOMATIC
CONVERSION (AS DEFINED) INTO ALLIANCE COMMON STOCK OF ALL OF THE NEW CONVERTIBLE
DEBENTURES. SEE "THE MERGER AND RELATED FINANCINGS." 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 (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 fueled principally by
sales to new casinos and to a lesser degree by replacement of machines (which
have an average replacement cycle of three to seven years) and the application
of new technology. In the future, management believes that annual sales growth
resulting from replacement requirements and the application of new technology
should outpace growth in demand generated by new casino openings, which
1
<PAGE>
growth rate is expected to decline. Management believes that the Merger provides
Alliance with an avenue for entering a business historically characterized by
effective barriers to entry in that the BGII assets being acquired are difficult
to replicate and would require significant time and investment to develop
successfully.
For the twelve-month period ended December 31, 1995, on a pro forma basis
after giving effect to the Merger and the related transactions described herein,
the Company would have had revenues and Adjusted Operating Cash Flow (as
defined; see the introduction to "Summary Financial Information") of
approximately $401.0 million and $47.3 million, respectively, and for the three
months ended March 31, 1996 of approximately $99.1 million and $11.3 million,
respectively. The pro forma ratios of Adjusted Operating Cash Flow to net
interest expense and of net debt to Adjusted Operating Cash Flow would have been
2.3x and 4.0x, respectively, for the twelve-month period ended December 31,
1995.
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 is expected to 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 as a director of Perot
Systems Corp. and as a senior advisor to 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) gaming machine management operations, (ii) casino operations, (iii) German
operations (consisting of the manufacture and distribution of wall-mounted
gaming machines and the distribution of other recreational and amusement
machines) and (iv) casino-style electronic gaming machine manufacturing and
systems operations.
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
2
<PAGE>
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 March 31, 1996. As of March 31, 1996, the
weighted average remaining term of Alliance's revenue-sharing arrangements was
approximately 3.6 years. Alliance's customer and machine base has remained
relatively stable 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 March 31, 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 (as defined; see Note (1) to
"Summary Financial Information--Summary Historical Financial
Information--Alliance Gaming Corporation") 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, as of March 31, 1996, contained approximately 450 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.
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 MANUFACTURING AND SYSTEMS OPERATIONS. BGII's United States
subsidiary, Bally Gaming, Inc., currently has two components: a domestic-based
electronic gaming machine manufacturing unit ("Gaming") and a data systems and
software and hardware support service unit ("Systems").
Gaming designs, manufactures and distributes a variety of slot machines and
video gaming machines. Gaming is the second largest electronic gaming machine
manufacturer in North America, and has significantly increased its penetration
in the gaming machine market with the successful introduction of its
ProSeries-TM- and Game Maker-Registered Trademark- lines in 1993 and 1994,
respectively. In the United States, Gaming historically has marketed electronic
gaming machines primarily to casinos in Atlantic City and Nevada and more
recently has marketed such machines in other jurisdictions. Gaming also
distributes electronic gaming machines outside the United States, principally in
Europe through Bally Gaming International GmbH ("GmbH") and, to a lesser extent,
in Canada, the Far East, Latin America and the Caribbean.
3
<PAGE>
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 March 31, 1996. For the twelve-month period ended
December 31, 1995, EBITDA for the gaming machine manufacturing and systems
operations unit was approximately $13.1 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.
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 $53.3
million of outstanding debt of BGII (including prepayment premium, original
issue discount and accrued and unpaid interest through the Effective Time (as
defined) of the Merger).
The Merger and related transactions will be financed through (i) the
Offering of the Senior Secured Notes (the "Note Offering"), (ii) the Offering of
the Preferred Stock (the "Preferred Stock Offering"), and (iii) the private
placement of $5.0 of Alliance's equity to an institutional investor in reliance
on an exemption from the registration requirements of the Securities Act (the
"Private Placement"). The Note Offering, the Preferred Stock Offering and the
Private Placement are contingent upon the Merger. In addition, Alliance has
offered to exchange up to $85.0 million aggregate principal amount of its New
Convertible Debentures for a like principal amount of its Old Convertible
Debentures (the "Exchange Offer"), which New Convertible Debentures, in
accordance with the Exchange Offer and subject to certain conditions, will, upon
consummation of the Merger within 60 days of the issuance thereof, be converted
(the "Automatic Conversion") into shares of Common Stock, $0.10 par value per
share, of Alliance (the "Common Stock") or, in lieu thereof, shares of the
Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E, of Alliance,
par value $0.10 per share (the "Series E Preferred Stock"). See "The Merger and
Related Financings." The Merger, the Offerings and the Private Placement, the
specified uses of proceeds therefrom, the Exchange Offer and the Wulff
Realignment (as defined) are sometimes referred to herein collectively as the
"Transaction."
4
<PAGE>
The following table sets forth the anticipated sources and uses of funds to
be used to consummate the Merger and the other elements of the Transaction based
on the Company's cash and debt balances as of March 31, 1996. The actual
balances and number of shares outstanding will vary based on the date of
consummation of the Transaction and the securities issued in connection with the
Merger and the financing thereof.
(IN MILLIONS)
<TABLE>
<S> <C>
ANTICIPATED SOURCES OF FUNDS
CASH SOURCES:
Senior Secured Notes.................. $ 140.0
Preferred Stock....................... 15.0
Common Stock (Private Placement)...... 5.0
---------
Total Cash Sources................ 160.0
---------
NON-CASH SOURCES:
New Convertible Debentures issued and
automatically converted into Common
Stock................................ 50.0
Preferred Stock to BGII
Stockholders(e)...................... 35.7
Common Stock to BGII
Stockholders(f)...................... 2.9
Common Stock(c)....................... 3.7
---------
Total Non-Cash Sources.............. 92.3
---------
Total Sources..................... $ 252.3
---------
---------
</TABLE>
<TABLE>
<S> <C>
ANTICIPATED USES OF FUNDS
CASH USES:
Cash to BGII Stockholders(a).......... $ 77.2
Retire BGII Debt(b)................... 53.3
Employee Contract Termination Costs
and Performance Unit Awards(c)....... 7.6
Fees and Expenses(d).................. 21.9
---------
Total Cash Uses................... 160.0
---------
NON-CASH USES:
Retire Old Convertible Debentures..... 50.0
Preferred Stock to BGII
Stockholders(e)...................... 35.7
Common Stock to BGII
Stockholders(f)...................... 2.9
Common Stock(c)....................... 3.7
---------
Total Non-Cash Uses................. 92.3
---------
Total Uses........................ $ 252.3
---------
---------
</TABLE>
- --------------------------
(a) Represents the cash consideration to be paid to BGII stockholders in the
Merger consisting of $7.83 per share of BGII common stock plus interest
accruing at a rate of 5.5% per annum from May 3, 1996 to the Effective Time,
calculated in accordance with the terms of the Merger Agreement.
(b) Represents retirement of the following debt of BGII outstanding at March 31,
1996:
(i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a
prepayment price of 101% plus original issue discount of $0.3 million;
(ii) $9.3 million under a bank revolving line of credit of Bally Gaming,
Inc., a wholly-owned subsidiary of BGII;
(iii) other notes payable of BGII, aggregating $1.6 million; and
(iv) accrued and unpaid interest on the foregoing debt instruments, through
the Effective Time, totaling approximately $2.0 million.
(c) Includes $5.0 million payable in cash to Richard Gillman, Chairman of the
Board and Chief Executive Officer of BGII, and $1.3 million payable to Neil
Jenkins, Executive Vice President and Secretary of BGII, consisting of $0.9
million in cash and $0.4 million in Common Stock, all pursuant to agreements
with Alliance in connection with the termination of their respective
employment agreements and performance unit awards. Additionally, Hans Kloss,
President and Chief Operating Officer of BGII and Managing Director of
Wulff, who will remain with the Company, will receive a total of $4.3
million consisting of $1.5 million in cash and $2.8 million in Common Stock,
and Robert Conover, President of Systems, who will remain with the Company,
will receive a total of $0.7 million consisting of $0.2 million in cash and
$0.5 million in Common Stock, in connection with their employment agreements
and performance unit awards. The Common Stock portion of each such payment
will be valued at the average daily closing price per share of Common Stock
as reported through the Nasdaq National Market System ("Nasdaq") for the ten
consecutive trading days ending on (and including) the fifth trading day
prior to the Merger (the "Alliance Average Trading Price") but in no event
more than $6.00 nor less than $4.25 per share. See "The Merger and Related
Financings."
(d) Total estimated Alliance and BGII Transaction-related fees and expenses are
$37.0 million, of which $15.1 million has been paid through March 31, 1996.
Excludes the value of Common Stock to be issued to an Underwriter as a
financial advisory fee. See "Underwriting."
(e) Represents the Preferred Stock consideration to be paid to BGII stockholders
in the Merger consisting of $3.57 of Preferred Stock 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.
(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.
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 Senior Secured Notes will bear interest at % per
annum, payable semi-annually in arrears on
and , commencing , 1996. Interest is
calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Security.......................... The Senior Secured Notes will be secured by an exclusive
pledge of the equity interests directly or indirectly
held by the Company in its Subsidiaries, except for the
equity interests in BGII and its Subsidiaries, but
including the equity interests in Alliance Holding
Company ("Holding"), which has been formed to hold the
equity interests of BGII and its Subsidiaries.
Guarantors........................ The Senior Secured Notes will be fully and
unconditionally guaranteed on a joint and several senior
basis by each present and future Subsidiary (which term,
as defined, excludes "Unrestricted Subsidiaries") of the
Company, other than (i) the partially-owned entities
through which its Mississippi casino and Louisiana gam-
ing machine management operations are conducted and (ii)
specified entities through which its German operations
are to be conducted.
Mandatory Redemption.............. None.
Optional Redemption............... The Senior Secured Notes will be redeemable in cash at
the option of the Company, 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 redemption date. In addition,
the Senior Secured 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 make an offer to repurchase
all outstanding Senior Secured Notes at a price equal to
101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase.
Ranking........................... The Senior Secured Notes will be senior secured
obligations of the Company and pari passu in right of
payment with all existing and future senior Indebtedness
and senior in right of payment to all future
subordinated Indebtedness of the Company.
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 (as defined) or issue
Disqualified Capital Stock (as defined); (ii) make
Restricted Payments (as defined); (iii) create
encumbrances on the ability of the Company's
Subsidiaries to pay dividends or make other distri-
butions; (iv) permit the existence of Liens (as defined)
on assets of the Company and its Subsidiaries; (v) use
the proceeds from certain asset sales by the Company and
its Subsidiaries; (vi) enter into transactions with
affiliates of the Company; (vii) merge, consolidate or
sell all or substantially all of the Company's assets;
and (viii) engage in unrelated lines of business.
Risk Factors...................... For a discussion of certain factors that should be
considered in connection with an investment in the
Senior Secured Notes, see "Risk Factors."
</TABLE>
7
<PAGE>
THE PREFERRED STOCK OFFERING
<TABLE>
<S> <C>
Issuer........................... Alliance Gaming Corporation.
Preferred Stock Offered.......... $15,000,000 15% Non-Voting Senior Pay-in-Kind Special
Stock, Series B and up to $2,250,000 of additional
Preferred Stock subject to the Underwriters'
over-allotment option.
Dividends........................ The Preferred Stock will entitle holders thereof to a
quarterly dividend in an amount per share of $3.75, or
15% per annum, payable in cash or, at the Company's
option through and including the first dividend payment
date occurring after the seventh anniversary of the
Effective Time, in additional shares of Preferred Stock
(valued at the liquidation value of $100.00 per share),
PROVIDED, that after the first dividend payment date
following the fifth anniversary of the Effective Time
the portion of the dividend that can be so paid in
additional shares is limited to $2.00 per share, or 8%
per annum. The Company expects that so long as the Pre-
ferred Stock remains outstanding, it will, subject to
the terms thereof, pay dividends thereon accruing
through the first dividend payment date occurring after
the seventh anniversary of the Effective Time in
additional shares of such stock, rather than in cash.
The Indenture will restrict the Company's ability to pay
cash dividends on the Preferred Stock.
Liquidation Value................ $100.00 per share, plus an amount equal to all accrued
and unpaid dividends and distributions.
Mandatory Redemption............. All shares of Preferred Stock are required to be
redeemed in cash on the eighth anniversary of the date
of initial issuance in an amount equal to the
Liquidation Value. If the Company fails to redeem such
shares by that date and the holders of Preferred Stock
have not elected two directors to the Board as described
under "Voting Rights" below, then the number of
directors constituting the Board of Directors of the
Company will be increased by two, and not more than two,
and the holders of the shares of Preferred Stock will
have the right until all such shares are redeemed,
voting separately as a class, to elect two directors to
the Board of Directors. In no event will holders of
Preferred Stock have the right to elect more than two
directors in total.
Optional Redemption.............. The Preferred Stock can be redeemed at any time in whole
or in part at the option of the Company for cash at a
price equal to the Liquidation Value.
Voting Rights.................... Upon default in the payment of dividends for six
consecutive dividend payment dates, the number of
directors constituting the Board of Directors will be
increased by two, and not more than two, and the holders
of the shares of Preferred Stock will have the right,
voting separately as a class, to elect two directors to
the Board of Directors. Such right will exist until all
dividends accumulated on such shares have been paid or
set apart for payment in full. In no event will the
holders of Preferred Stock have the right to elect more
than two directors in the aggregate.
Ranking.......................... The Preferred Stock ranks senior in right of payment of
dividends and liquidation preference. Upon liquidation,
the holders of shares of Preferred Stock are entitled
(in proportion to any parity stock) to be paid in cash
out of the assets of the Company an amount equal to the
Liquidation Value. Immediately following the
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Merger, no equity security will be pari passu with the
Preferred Stock and only the Common Stock and any Series
E Preferred Stock issued upon the Automatic Conversion
will be junior to the Preferred Stock.
Nasdaq Quotation................. Alliance has applied to have the Preferred Stock quoted
on Nasdaq under the symbol "ALLYP."
Material Federal Income Tax
Consequences to Holders of
Preferred Stock.................. For a discussion of certain material Federal income tax
consequences to holders of Preferred Stock that should
be considered in connection with an investment in the
Preferred Stock, see "Material Federal Income Tax
Consequences to Holders of Preferred Stock."
Risk Factors..................... For a discussion of certain factors that should be
considered in connection with an investment in the
Preferred Stock, see "Risk Factors."
</TABLE>
9
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following Summary Forecast of Operations (the "Summary Forecast") sets
forth, to the best of management's knowledge and belief and giving consideration
to actual results for Alliance and BGII for the three months ended March 31,
1996, management's expectations of the results of operations for the Company
(assuming consummation of the Merger and giving effect to the other elements of
the Transaction) for the twelve-month period ending December 31, 1996. The
Summary Forecast, which consists of forward-looking statements, is qualified by,
and subject to, the assumptions set forth below and the other information
contained in this Prospectus, and should be read in conjunction with the
"Forecast of Operations," including the "Summary of Significant Assumptions and
Accounting Policies for the Forecast."
The following Summary Historical Financial Information tables set forth
summary consolidated financial information of Alliance, which has been derived
from the audited consolidated financial statements of Alliance, including the
notes thereto, as of June 30, 1995 and for the fiscal years ended June 30, 1993,
1994 and 1995, and the unaudited interim condensed consolidated financial
statements of Alliance, including the notes thereto, as of March 31, 1996 and
for the nine-month periods ended March 31, 1995 and 1996, which are included
elsewhere in this Prospectus. The following Summary Historical Financial
Information tables also set forth summary consolidated financial information of
BGII, which has been derived from the audited consolidated financial statements
of BGII, including the notes thereto, as of December 31, 1995 and for the fiscal
years ended December 31, 1993, 1994 and 1995, and the unaudited interim
condensed consolidated financial statements of BGII, including the notes
thereto, as of March 31, 1996 and for the three-month periods ended March 31,
1995 and 1996, which are included elsewhere in this Prospectus. The Summary
Historical Financial Information for Alliance and BGII reflects all adjustments
which management believes necessary to present fairly the financial position,
results of operations and cash flows of Alliance and BGII. All such adjustments
are of a normal recurring nature. Interim results may not necessarily be
indicative of results which may be expected for any other interim period or for
the fiscal year as a whole.
The following tables also set forth Summary Unaudited Pro Forma Condensed
Combined Financial Information. The Pro Forma Statements of Operations Data
present results of operations of the Company assuming the Transaction occurred
on July 1, 1994 for the statements for the twelve months ended June 30, 1995 and
the nine months ended March 31, 1996, and further assuming that the Rainbow
Casino operations were consolidated. The detailed presentation of revenues is
derived from internally prepared supporting schedules not otherwise presented or
incorporated herein. The Pro Forma Balance Sheet Data presents the financial
position of the Company assuming the Transaction occurred on March 31, 1996. The
Summary Unaudited Pro Forma Condensed Combined Financial Information does not
purport to present the financial position or results of operations of the
Company had the Transaction and events assumed therein occurred on the dates
specified, nor is it necessarily indicative of the results of operations of the
Company as they may be in the future or as they may have been had the
Transaction and the consolidation of the Rainbow Casino operating results been
consummated on the dates described above. The Summary Unaudited Pro Forma
Condensed Combined Financial Information is based on certain assumptions and
adjustments described in the Notes to Unaudited Pro Forma Condensed Combined
Financial Information and should be read in conjunction therewith.
The tables should be read in conjunction with "Unaudited Pro Forma Condensed
Combined Financial Information," "Notes to Unaudited Pro Forma Condensed
Combined Financial Information," "Supplemental Analysis of Adjusted Operating
Cash Flow," "Forecast of Operations," "Summary of Significant Assumptions and
Accounting Policies for the Forecast," "Selected Historical Financial
Information of Alliance," "Selected Historical Financial Information of BGII,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the audited consolidated financial statements of Alliance,
including the notes thereto, the unaudited interim condensed consolidated
financial statements of Alliance, including the notes thereto, the audited
consolidated financial statements of BGII, including the notes thereto, the
unaudited interim condensed consolidated financial statements of BGII, including
the notes thereto, and other financial and operating information included
elsewhere in this Prospectus.
10
<PAGE>
SUMMARY FORECAST OF OPERATIONS (1)
<TABLE>
<CAPTION>
COMPARATIVE ANALYSIS OF
OPERATIONS (2)
--------------------------------------------------------------------
TWELVE MONTHS THREE MONTHS
ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- --------------------------------
1994 1995 1995 1996
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
STATEMENTS OF OPERATIONS INFORMATION:
Total Revenues.................................... $373,031 $400,964 $105,778 $99,112
Total Operating Costs............................. 361,753(3) 381,720(3) 96,337(3) 95,185(3)
--------------- --------------- --------------- -------
Operating Income.................................. 11,278 19,244 9,441 3,927
Net Income (Loss)................................. $(12,181)(4) $ (7,153)(4) $ 2,906(4) $(3,076)(4)
--------------- --------------- --------------- -------
--------------- --------------- --------------- -------
Income (Loss) per Common Share.................... $ (0.84) $ (0.60) $ 0.04 $ (0.18)
--------------- --------------- --------------- -------
--------------- --------------- --------------- -------
SUPPLEMENTAL INFORMATION:
Operating Income.................................. $ 11,278 $ 19,244 $ 9,441 $ 3,927
Depreciation and Amortization..................... 22,483 22,584 4,740 5,311
Casino Royalty.................................... (1,670) (3,674) (983) (1,024)
Minority Interest................................. (675) (504) (83) (432)
--------------- --------------- --------------- -------
Subtotal........................................ 31,416 37,650 13,115 7,782
Adjustments:
Rainbow Operations.............................. -- 1,912(6) 1,189(6) --
Unusual or Non-recurring
Charges........................................ 2,856(7) 7,783(7) 600(7) 3,487(7)
Direct Merger Costs............................. -- -- -- --
--------------- --------------- --------------- -------
Adjusted Operating Cash Flow...................... $ 34,272(10) $ 47,345(10) $ 14,904(10) $11,269(10)
--------------- --------------- --------------- -------
--------------- --------------- --------------- -------
OTHER DATA:
Net Interest Expense............................ $ 19,561 $ 20,743 $ 4,964 $ 5,191
--------------- --------------- --------------- -------
--------------- --------------- --------------- -------
Ratio of Adjusted Operating Cash Flow to Net
Interest
Expense.............................................................................................................
Ratio of Net Debt to Adjusted Operating Cash
Flow(11)............................................................................................................
<CAPTION>
FORECAST OF
OPERATIONS FOR
THE TWELVE MONTHS
ENDING
DECEMBER 31,
1996
-----------------
<S> <C>
STATEMENTS OF OPERATIONS INFORMATION:
Total Revenues.................................... $425,957
Total Operating Costs............................. 406,239(3)
--------
Operating Income.................................. 19,718
Net Income (Loss)................................. $(33,939)(4)
--------
--------
Income (Loss) per Common Share.................... $ (1.56)(5)
--------
--------
SUPPLEMENTAL INFORMATION:
Operating Income.................................. $ 19,718
Depreciation and Amortization..................... 23,192
Casino Royalty.................................... (4,368)
Minority Interest................................. (920)
--------
Subtotal........................................ 37,622
Adjustments:
Rainbow Operations.............................. --
Unusual or Non-recurring
Charges........................................ 4,479(8)
Direct Merger Costs............................. 12,815(9)
--------
Adjusted Operating Cash Flow...................... $ 54,916(10)
--------
--------
OTHER DATA:
Net Interest Expense............................ $ 20,491
--------
--------
Ratio of Adjusted Operating Cash Flow to Net
Interest
Expense....................................... 2.7x
Ratio of Net Debt to Adjusted Operating Cash
Flow(11)...................................... 3.4x
</TABLE>
- ------------------------------
(1) The Summary Forecast, which consists of forward-looking statements, gives
consideration to actual results for the three months ended March 31, 1996 as
well as a number of estimates and assumptions that, while presented with
numerical specificity and considered reasonable by management of the
Company, are inherently subject to significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of
which are difficult to predict and many of which are beyond the control of
the Company. The Summary Forecast is necessarily speculative in nature, and
it is usually the case that one or more of the assumptions do not
materialize. The Summary Forecast and actual results will vary, and those
variations may be material. Accordingly, the inclusion of the Summary
Forecast herein should not be regarded as a representation by the Company or
any other person (including the Underwriters) that the Summary Forecast will
be achieved. In addition, because the Summary Forecast has been prepared on
a consolidated basis, the Summary Forecast does not account for the
Company's holding company structure, which may result in cash flows earned
at some subsidiaries being unavailable for distribution to the Company
including to service indebtedness of the Company. Prospective purchasers are
cautioned not to place undue reliance on the Summary Forecast.
(2) See Note (2) -- Presentation of Supplemental Comparative Information of the
"Summary of Significant Assumptions and Accounting Policies for the
Forecast" elsewhere in the Prospectus.
(3) Selling, general and administrative costs are net of the following: direct
Merger costs (for all periods presented except for the twelve months ending
December 31, 1996); the business development costs over (under) the $3.0
million annual budgeted amount totaling $4.7 million, $1.0 million, $1.4
million and $(52,000) for the twelve months ended December 31, 1994 and 1995
and three months ended March 31, 1995 and 1996, respectively; and synergy
cost savings totaling $5.0 million for the twelve months ended December 31,
1994 and 1995 and for the twelve months ending December 31, 1996, and $1.3
million for the three months ended March 31, 1995 and 1996. See Note (8)
below for one-time $1.0 million costs to implement synergy cost savings in
1996. See Note (9) below for the 1996 presentation which includes direct
Merger costs.
(4) Excludes Preferred Stock dividends. 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.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
11
<PAGE>
(5) The loss per Common Share in the forecasted twelve-month period ending
December 31, 1996 is computed based on 26,900,000 common shares outstanding,
and includes depreciation and amortization of $23.2 million (or $0.86 per
share), direct Merger costs of $12.8 million (or $0.48 per share), loss on
assumed conversion of New Convertible Debentures of $24.5 million (or $0.91
per share) and Preferred Stock dividends of $8.0 million (or $0.30 per
share).
(6) Represents adjustment to reflect management's derivation of Rainbow Casino's
annualized results for the period, net of incremental royalty.
(7) Reflects items determined by management to be unusual or non-recurring
(which are also included in Total Operating Costs). The concepts of
non-recurring or unusual charges as used throughout the Prospectus are not
defined in generally accepted accounting principles ("GAAP"). See Notes
10(e),(f),(g) and (h) below.
(8) For the twelve months ending December 31, 1996, reflects items determined by
management to be non-recurring charges, consisting of a provision for
impaired assets of two development projects totaling $3.2 million; the $1.0
million of one-time charges (which are included in Total Operating Costs) to
implement the expected annual synergy cost savings (which are reflected in
Total Operating Costs as well); and certain charges of $0.3 million relating
to a regulatory investigation and legal proceedings in Louisiana.
(9) Direct Merger costs for the twelve months ending December 31, 1996 of $12.8
million have been included in Total Operating Costs and presented as an
adjustment in computing the Adjusted Operating Cash Flow. See Note (3) above
for the presentation of direct Merger costs in earlier periods.
(10) The following is a reconciliation of the historical EBITDA (as defined in
Note (1) -- Summary Historical Financial Information -- Alliance Gaming
Corporation) by business unit to the combined Adjusted Operating Cash Flow:
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED DECEMBER THREE MONTHS ENDED MONTHS
31, MARCH 31, ENDING
----------------------------- --------------------------- DECEMBER 31,
1994 1995 1995 1996 1996
----------- ----------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EBITDA by Business Unit:
Gaming Machine Management.................. $17,159 $18,260 $4,758 $4,469 $19,957
Casinos.................................... 2,927 10,546 731 3,889 14,958
Wulff...................................... 15,575 15,172 5,106(a) 3,406(a) 16,836
Gaming..................................... 7,304 7,305 2,659(a) 1,046(a) 10,750
Systems.................................... 3,593 5,788 1,997(a) 1,620(a) 6,303
Alliance Corporate Administrative
Expense................................... (10,609) (8,912) (1,654) (4,723) (8,979)
Alliance Development Expense............... (7,694) (15,072) (2,139) (3,497) (13,815)
BGII Corporate Administrative Expense...... (4,520) (3,732) (1,285) (604) (4,800)
Discontinued Operations/Other.............. (1,378)(b) (933)(b) (58)(b) (64)(b) --
Casino Royalty............................. -- (2,718) (27) (1,024) (4,368)
Minority Interest.......................... (675) (504) (83) (432) (920)
BGII Unusual Charges and Other............. (300)(c) (7,216)(c) (400)(c) (1,296)(c) (2,300)
----------- ----------- ---------- ---------- -------------
Combined EBITDA.............................. 21,382 17,984 9,605 2,790 33,622
Adjustments:
Direct Merger Costs........................ -- 13,106(d) -- 3,794(d) 12,815(d)
Alliance Development Expense............... 4,694(e) 966(e) 1,389(e) (52)(e) --
Rainbow Operations......................... 340(f) 2,506(f) 2,060(f) -- --
Unusual or Non-recurring Charges........... 2,856(g) 7,783(h) 600(i) 3,487(j) 4,479(k)
Synergy Cost Savings....................... 5,000(l) 5,000(l) 1,250(l) 1,250(l) 4,000(l)
----------- ----------- ---------- ---------- -------------
Adjusted Operating Cash Flow................. $34,272 $47,345 $14,904 $11,269 $54,916
----------- ----------- ---------- ---------- -------------
----------- ----------- ---------- ---------- -------------
</TABLE>
--------------------------------
(a)Differences in interim results for the three-month periods for Gaming and
Systems were affected by the timing and number of new casino openings, and
management believes that the interim results for Wulff in the 1996 quarter
were affected by regulations, which became effective January 1, 1996,
limiting the number of wall machines per square meter in arcade locations,
thereby reducing new sales opportunities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(b)Principally includes expenses by small casinos and taverns after Alliance
management discontinued their operations.
(c)See Notes (3), (6) and (7) to "Summary Historical Financial Information --
Bally Gaming International, Inc."
(d)For the twelve months ended December 31, 1995, $11.1 million of direct
Merger costs are included in Alliance Development Expense and $2.0 million
in BGII Unusual Charges and Other. No such costs were incurred by either
company in the three months ended March 31, 1995. For the three months
ended March 31, 1996, $2.8 million of direct Merger costs are included in
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
12
<PAGE>
Alliance Development Expense and $1.0 million in BGII Unusual Charges and
Other. For the forecasted twelve months ending December 31, 1996, $10.8
million of direct Merger costs are included in Alliance Development Expense
and $2.0 million in BGII Unusual Charges and Other.
(e)Reflects Alliance Development Expense, which relates to mergers,
acquisitions and joint ventures, adjusted to $3.0 million annually. The
adjustment to $3.0 million reflects the anticipated elimination of expenses
that were being incurred pending Alliance's accomplishment of its strategic
plan to acquire a major gaming machine manufacturing company. To accomplish
this reduction, Alliance reduced payroll costs and fees paid to consultants
and legal costs related to non-BGII transactions it had been pursuing. The
adjustment to eliminate direct costs related to the Merger is shown in Note
(b) above. For the three months ended March 31, 1996, Alliance Development
Expense was below the $3.0 million annual rate by $52,000.
(f)To adjust to reflect the operating results of the Rainbow Casino as if
owned during all of 1994 and 1995 and, for the twelve months ended December
31, 1995 and three months ended March 31, 1995, to reflect the recent
operating results of the Rainbow Casino, as if such results had occurred
for all of 1995 (including an adjustment for additional casino royalty
expense of approximately $1.7 million, $1.0 million and $1.0 million for
the twelve months ended December 31, 1994 and 1995 and the three months
ended March 31, 1995, respectively).
(g)Includes legal costs included as BGII Corporate Administrative Expense
related to a former executive totaling $0.5 million and $0.3 million
recorded as BGII Unusual Charges and Other relating to a regulatory
investigation and legal proceedings in Louisiana and a reserve for
discontinued operations of $2.0 million for Alliance included in Alliance
Corporate Administrative Expense.
(h)Includes one-time charges included in Alliance Corporate Administrative
Expense consisting of an executive signing bonus of $1.3 million paid in
Common Stock and $1.1 million of termination costs for certain officers and
directors, which were incurred during the quarter ended June 30, 1995. Also
includes $1.4 million relating to a regulatory investigation and legal
proceedings in Louisiana included in BGII Unusual Charges and Other, and
$0.2 million included in BGII Corporate Administrative Expense for legal
costs related to the "Bally" trade name litigation. BGII Unusual Charges
and Other also includes $2.0 million in costs related to the merger
agreement between BGII and WMS Industries Inc. ("WMS"), a provision of $0.8
million at Wulff to write down to net realizable value the carrying value
of a building to be sold and a provision of $1.0 million to increase
Wulff's tax reserves primarily for German value added taxes ("V.A.T.").
(i)Includes certain charges of $0.4 million included in BGII Unusual Charges
and Other relating to a regulatory investigation and legal proceedings in
Louisiana and $0.2 million included in BGII Corporate Administrative
Expense for legal costs related to the "Bally" trade name litigation.
(j)Includes a provision for impaired assets of two development projects
totaling $3.2 million included in Alliance Corporate Administrative
Expense. Also includes certain charges of $0.3 million included in BGII
Unusual Charges and Other relating to a regulatory investigation and legal
proceedings in Louisiana.
(k)Includes a provision for impaired assets of two development projects
totaling $3.2 million in Alliance Corporate Administrative Expense, $1.0
million of one-time charges to implement the expected annual synergy cost
savings, and certain charges of $0.3 million included in BGII Unusual
Charges and Other relating to a regulatory investigation and legal
proceedings in Louisiana.
(l)To adjust for estimated synergy cost savings identified by management to
date including elimination of certain duplicative costs, such as facility,
legal, accounting and compensation, which total approximately $5.0 million
on an annual basis. For the forecasted twelve months ending December 31,
1996, the synergy cost savings are presented net of the $1.0 million of
one-time charges to implement the cost savings (which are added back in (i)
above).
(11) Net Debt is defined as total long-term debt, including current maturities,
less cash and cash equivalents and securities available for sale.
13
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
ALLIANCE GAMING CORPORATION
<TABLE>
<CAPTION>
FISCAL YEARS NINE MONTHS
ENDED JUNE 30, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net Revenues.................................................. $ 113,091 $ 123,054 $ 131,988 $ 93,776 $ 116,796
Operating Loss................................................ (52) (7,468) (4,261) (2,544) (5,872)
Net Interest Expense.......................................... (4,048) (4,746) (5,335) (3,609) (5,135)
Net Loss...................................................... $ (3,650) $ (13,128) $ (10,751) $ (6,793) $ (14,829)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Loss per Common Share..................................... $ (0.38) $ (1.28) $ (0.95) $ (0.61) $ (1.21)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Deficit of Earnings to Fixed Charges.......................... $ (3,650) $ (12,887) $ (10,487) $ (6,399) $ (14,248)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro Forma Deficit of Earnings to Fixed Charges................ $ (1,164) $ (200) $ (9,821)
--------- --------- ---------
--------- --------- ---------
Pro Forma Deficit of Earnings to Fixed Charges and Preferred
Stock Dividend............................................... $ (9,203) $ (6,116) $ (15,737)
--------- --------- ---------
--------- --------- ---------
CASH FLOW INFORMATION:
Historical Cash Flow From:
Operating Activities........................................ $ 5,909 $ 9,062 $ 957 $ 167 $ (533)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Investing Activities........................................ $ (8,998) $ (27,299) $ (21,648) $ (9,791) $ 5,255
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Financing Activities........................................ $ 2,430 $ 45,742 $ (2,660) $ (1,509) $ (2,485)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro Forma Cash Flow From:
Operating Activities........................................ $ 7,225 $ 4,890 $ 20,564
--------- --------- ---------
--------- --------- ---------
Investing Activities........................................ $ (26,936) $ (13,637) $ 354
--------- --------- ---------
--------- --------- ---------
Financing Activities........................................ $ (757) $ 1,604 $ (3,358)
--------- --------- ---------
--------- --------- ---------
OTHER DATA:
Gaming Machine Management:
Units....................................................... 5,868 5,889 5,902 5,955 5,989
Locations................................................... 518 506 526 527 539
Casinos:
Tables...................................................... 9 9 37 9 35
Slots Operated.............................................. 428 434 1,005 433 1,038
Revenues:
Gaming Machine Management................................... $ 96,282 $ 102,830 $ 106,827 $ 79,389 $ 81,111
Casinos..................................................... 11,286 12,046 19,668 9,874 34,361
Discontinued Operations..................................... 5,523 8,178 5,493 4,513 1,324
--------- --------- --------- --------- ---------
Net Revenues.............................................. $ 113,091 $ 123,054 $ 131,988 $ 93,776 $ 116,796
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EBITDA (1):
Gaming Machine Management................................... $ 14,564 $ 16,820 $ 18,562 $ 13,558 $ 12,967
Casinos (2)................................................. 1,963 2,190 5,359 2,444 10,789
Corporate Development Expenses (3).......................... (900) (1,192) (7,843) (5,647) (14,234)
Corporate Administrative Expenses (4)....................... (6,191) (7,882) (10,177) (5,906) (7,710)
Discontinued Operations (5)................................. (770) (7,874) (642) (59) (357)
Casino Royalty.............................................. -- -- (810) (27) (2,931)
Minority Interest........................................... -- (506) (397) (252) (708)
--------- --------- --------- --------- ---------
Total EBITDA (1).......................................... $ 8,666 $ 1,556 $ 4,052 $ 4,111 $ (2,184)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Depreciation and Amortization................................. $ 8,718 $ 9,530 $ 9,520 $ 6,934 $ 7,328
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Capital Expenditures.......................................... $ 5,092 $ 7,022 $ 7,880 $ 5,038 $ 9,633
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents and Securities Available for Sale ........................................ $ 25,562
Working Capital..................................................................................... 15,583
Total Assets........................................................................................ 111,288
Long-Term Debt, Including Current Maturities........................................................ 99,089
Stockholders' Deficiency............................................................................ (5,595)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
14
<PAGE>
- --------------------------
(1) EBITDA is defined as earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA"). Corporate expenses, casino
royalty, minority interest and unusual charges and other are shown as
separate components of EBITDA and are not allocated back to business units.
EBITDA should not be construed as an alternative to net income or any other
GAAP measure of performance as an indicator of Alliance's performance or to
cash flows generated by operating, investing and financing activities as an
indicator of cash flows or a measure of liquidity. Management believes that
EBITDA is a useful adjunct to net income and other measurements under GAAP
and is a conventionally used financial indicator.
(2) Since March 29, 1995, the Rainbow Casino operations have been consolidated
with Alliance.
(3) Includes direct Merger costs of $1.7 million and $12.2 million for the
fiscal year ended June 30, 1995 and the nine months ended March 31, 1996,
respectively.
(4) Includes one-time charges incurred by Alliance consisting of an executive
signing bonus of $1.3 million paid in Common Stock and $1.1 million of
termination costs for certain officers and directors, which were incurred
during the quarter ended June 30, 1995, and a provision for impaired assets
of two development projects totaling $3.2 million incurred in the quarter
ended March 31, 1996.
(5) Includes businesses now or previously considered as discontinued operations.
15
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................. $168,707 $236,192 $249,312(1) $ 68,289 $ 58,544
Operating Income
(Loss).................. (18,536)(2) 13,381(3)(4) 8,364(1)(3)(4)(5)(6) 6,637(3)(4) 2,274(3)(7)
Interest Expense......... 4,424 6,768 6,853 1,733 1,665
Net Income (Loss)........ $(23,443) $ 3,793 $ (3,393) $ 2,862 $ (513)
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
Net Income (Loss) per
Share................... $ (2.19) $ 0.35 $ (0.31) $ 0.27 $ (0.05)
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
Ratio of Earnings to
Fixed Charges........... -- 1.93X 1.21X 3.69X 1.35X
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Deficit of Earnings to
Fixed Charges........... $(22,960) -- -- -- --
--------
--------
CASH FLOW INFORMATION:
Operating Activities... $(29,548) $ 1,224 $ 3,795 $ (5,605) $ (1,757)
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
Investing Activities... $(13,407) $ (6,391) $ (6,233) $ (2,108) $ (2,218)
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
Financing Activities... $ 38,980 $ 8,231 $ (1,961) $ 1,688 $ 590
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
OTHER DATA:
Unit Sales:
Gaming................. 10,156 21,625 18,084 4,862 4,041
Wulff.................. 12,552 13,100 12,000 2,900 2,400
Revenues:
Gaming (8)............. $ 49,298 $118,659 $111,849(1) $ 27,979 $ 24,784
Systems................ 12,748 13,386 20,681 6,088 5,004
-------- ---------- ---------- ---------- ----------
Gaming Machine
Manufacturing and
Systems............. 62,046 132,045 132,530 34,067 29,788
Wulff.................. 106,661 104,147 116,782 34,222 28,756
-------- ---------- ---------- ---------- ----------
Total Revenues....... $168,707 $236,192 $249,312 $ 68,289(9) $ 58,544(9)
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
EBITDA (10):
Gaming (8)............. $(24,747)(2) $ 7,304 $ 7,305(1)(5) $ 2,659 $ 1,046
Systems................ 3,829 3,593 5,788 1,997 1,620
-------- ---------- ---------- ---------- ----------
Gaming Machine
Manufacturing and
Systems............. (20,918)(2) 10,897 13,093(1)(5) 4,656 2,666
Wulff.................. 15,959 15,575 15,172 5,106 3,406
BGII Corporate
Administrative Expense
(8)................... (5,473) (4,520)(4) (3,732)(4) (1,285)(4) (604)
Unusual Charges and
Other................. -- (300)(3) (7,216)(3)(6) (400)(3) (1,296)(3)(7)
-------- ---------- ---------- ---------- ----------
Total EBITDA (10).... $(10,432) $ 21,652 $ 17,317 $ 8,077(9) $ 4,172(9)
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
Depreciation and
Amortization............ $ 8,103 $ 8,271 $ 8,953 $ 1,440 $ 1,898
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
Capital Expenditures..... $ 6,467 $ 9,537 $ 8,240 $ 2,232 $ 2,733
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1996
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents........................................................................ $ 2,009
Working Capital.................................................................................. 85,649
Total Assets..................................................................................... 186,936
Long-Term Debt, Including Current Maturities..................................................... 69,971
Stockholders' Equity............................................................................. 86,000
</TABLE>
- ------------------------------
(1) Includes the impact of sales returns of $0.3 million by Gaming related to
two riverboats at the River City Complex in New Orleans which filed for
bankruptcy.
(2) Includes $6.2 million in charges to increase inventory valuation reserves in
1993 principally related to inventory originally intended for sale in the
Louisiana video lottery terminal market. Includes $1.2 million in charges
related to a management reorganization at Gaming in 1993. Includes a
provision for doubtful receivables totaling $5.1 million recorded by Gaming
in 1993 related to a former distributor who filed for bankruptcy during the
second quarter of 1993.
(3) Includes certain charges 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,
and $0.4 million and $0.3 million for the three months ended March 31, 1995
and 1996, respectively.
(4) Includes legal costs related to a former executive totaling $0.5 million
during the year ended December 31, 1994. Also includes legal costs related
to the "Bally" trade name litigation totaling $0.2 million during both the
year ended December 31, 1995 and the three months ended March 31, 1995.
(5) Includes a provision for doubtful receivables of $0.9 million related to the
bankruptcy described in Note (1) above.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
16
<PAGE>
(6) Includes $2.0 million in Merger transaction costs and related litigation
expenses, $2.0 million in costs related to the merger agreement with WMS, a
provision of $0.8 million at Wulff to write-down to net realizable value the
carrying value of a building to be sold and a provision of $1.0 million to
increase Wulff's tax reserves primarily for V.A.T.
(7) Includes $1.0 million in Merger transaction costs.
(8) Includes results of GmbH and BGI Australia Pty Limited in Gaming's results,
along with certain reclassifications from historical presentation.
(9) Differences in interim results for the three-month periods for Gaming and
Systems were affected by the timing and number of new casino openings, and
management believes that the interim results for Wulff in the 1996 quarter
were affected by regulations, which became effective January 1, 1996,
limiting the number of wall machines per square meter in arcade locations,
thereby reducing new sales opportunities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(10)See Note (1) to "Summary Historical Financial Information -- Alliance Gaming
Corporation" in this Prospectus Summary.
17
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
JUNE 30, MARCH 31,
1995 1996
----------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................................................................... $ 400,821 $ 287,117
Operating Income....................................................................... 22,677 9,136
Net Interest Expense................................................................... (20,431) (15,716)
Casino Royalty......................................................................... (3,431) (2,931)
Minority Interest...................................................................... (397) (708)
Other, net............................................................................. 418 398
----------- ------------
Loss Before Taxes...................................................................... (1,164) (9,821)
Provisions for Income Taxes............................................................ (2,555) (1,508)
----------- ------------
Net Loss............................................................................... $ (3,719) $ (11,329)
----------- ------------
----------- ------------
Preferred Stock Dividend............................................................... $ (8,039) $ (5,916)
----------- ------------
----------- ------------
Net Loss per Common Share.............................................................. $ (0.47) $ (0.66)
----------- ------------
----------- ------------
OTHER DATA:
Depreciation and Amortization.......................................................... $ 22,642 $ 17,114
Capital Expenditures................................................................... 16,742 16,176
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents and Securities Available for Sale......................................... $ 19,817
Working Capital..................................................................................... 107,330
Total Assets........................................................................................ 345,564
Current Maturities of Long-Term Debt (1)............................................................ 19,506
Long-Term Debt, Excluding Current Maturities........................................................ 188,926
Stockholders' Equity................................................................................ 42,350
</TABLE>
- --------------------------
(1) Includes $14.8 million of borrowings under a working capital revolving
facility at Wulff.
18
<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 March 31, 1996, on a pro forma basis after giving effect to
the Transaction, the Company would have had outstanding debt of approximately
$208.4 million and a long-term debt to equity ratio of 4.9 to 1. If the
Preferred Stock were included in debt the pro forma long-term debt to equity
ratio would be 6.1 to 1. See "The Merger and Related Financings,"
"Capitalization" and "Unaudited Pro Forma Condensed Combined Financial
Information." In addition, if the maximum amount of dividends on the Preferred
Stock were paid in kind, as anticipated, the liquidation value of the Preferred
Stock would accrete to approximately $124.0 million after seven years. The high
level of indebtedness and the 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 (including the imputed fixed charges for contingent rental expense
related to revenue-sharing agreements in its Nevada gaming machine management
operations of approximately $18.0 million annually) by approximately $1.2
million for the year ended June 30, 1995 and $9.8 million for the nine-month
period ended March 31, 1996. On a pro forma basis after giving effect to the
Transaction, the Company would have annual fixed charges (including the imputed
fixed charges referred to in the immediately preceding sentence) of
approximately $44.4 million, plus dividends on the Preferred Stock (aggregating
$8.0 million in the first year permitted to be paid in kind for the first five
years after issuance and partially in kind for the next two years) and
additional dividends (payable in kind and only payable for the first three years
following issuance) on the Series E Preferred Stock. Future operating results
are subject to significant business, economic, regulatory and competitive
uncertainties and contingencies, many of which are beyond the control of the
Company. There can be no assurance that the Company will be able to generate the
cash flow necessary to permit the Company to meet its fixed charges and
repayment obligations. If the Company is unable to generate sufficient cash flow
from operations in the future, it may be required to refinance all or a portion
of its existing debt or to obtain additional financing. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained on terms that are favorable or acceptable to the
Company. Any inability of the Company to service its fixed charges and repayment
obligations would have a significant adverse effect on the Company and the
market value and marketability of the Securities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources of the Company (Pro Forma)."
Alliance is a holding company, the only material assets of which are equity
interests in its subsidiaries (including, after the Merger, BGII and its
subsidiaries). The ability of Alliance to make interest and principal payments
on its obligations, including the Senior Secured Notes, and to pay cash
dividends on the Preferred Stock, 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.
19
<PAGE>
The Company believes that its working capital needs will increase as a
result of the introduction of new machines and the expected increases in
production and sales levels from recent historical levels. The Company expects
that cash flow generated by operations and other available cash will be
sufficient to satisfy the Company's normal working capital needs, although there
can be no assurance the Company will generate such available cash. See "--
Implementation of the Merger." In order to be competitive in meeting the growing
customer demand for financing of gaming equipment in emerging gaming markets,
the Company also plans to continue to involve third-party finance companies to
secure additional financing; however, there can be no assurances that such
additional financing will be obtained. Failure to obtain such financing on terms
acceptable to the Company could impair the Company's operations and ability to
pursue its business strategy. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RESTRICTIONS ON CERTAIN ACTIVITIES
The Indenture pursuant to which the Senior Secured Notes will be issued (the
"Indenture") will provide that the Senior Secured Notes will be guaranteed by
subsidiaries of the Company and secured by the stock thereof as described herein
and will impose restrictions on Alliance and its subsidiaries, in addition to
restrictions imposed by existing instruments, including the indenture for the
Old Convertible Debentures. Generally, the restrictions contained in these
indentures relate to the incurrence of additional indebtedness, the distribution
of cash and/or property to shareholders, the repayment or repurchase of pari
passu or junior securities, investments, mergers and sales of assets and the
creation of liens. These restrictions and requirements could limit the ability
of the Company to respond to changing business and economic conditions. A
failure to comply with any of these obligations could also result in an event of
default under the Indenture, which could permit acceleration of the Senior
Secured 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 Senior Secured Notes."
CERTAIN CONSIDERATIONS RELATED TO THE COLLATERAL FOR THE SENIOR SECURED NOTES
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 Senior Secured Notes pursuant to the Indenture and the
Collateral Agreements (described herein under "Description of the Senior Secured
Notes -- Security for the Senior Secured Notes") would be sufficient to satisfy
any payment of the Senior Secured Notes. The amount of proceeds received on any
such sale of the Collateral would be influenced by many factors, including
limitations on the ownership of securities of the Company contained in various
gaming laws and the timing and manner of any such sale. 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 for its fiscal years ended June 30, 1993, 1994 and 1995, respectively,
and a net loss of $14.8 million for the nine months ended March 31, 1996,
whereas BGII had net income of $5.3 million, a net loss of $23.4 million, net
income of $3.8 million and a net loss of $3.4 million for its fiscal years ended
December 31, 1992, 1993, 1994 and 1995, respectively and a net loss of $0.5
million for the three months ended March 31, 1996. There can be no assurance
that the Company will be profitable in the future, that there will not be
similar or other unusual or non-recurring charges in the future, or that future
results will improve as a result of the Merger. See "Unaudited Pro Forma
Condensed Combined Financial Information," "Selected Historical Financial
Information of Alliance" and "Selected Historical Financial Information of
BGII."
The new wall machine unit sales of Wulff decreased by approximately 8% in
the year ended December 31, 1995 as compared to the year ended December 31, 1994
and by approximately 17% in the three months ended March 31, 1996 as compared to
the three months ended March 31, 1995. Management believes new wall machine
revenues for the last six months of 1995 and the first three months of 1996 were
adversely affected by an industry downturn caused by regulations imposed in
Germany limiting the number of wall machines per square meter in arcade
locations effective January 1, 1996, thereby reducing sales opportunities, and
by increased competition from the sale of foreign-manufactured token machines in
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Germany. Management expects the adverse impact of such regulations to continue
during the second quarter of 1996; however, there can be no assurance that this
impact will only be temporary. Foreign competition may also continue to have an
adverse impact on wall machine revenues.
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 (the "Forecast") set forth
under "Forecast of Operations." While such Forecast is presented with numerical
specificity, it is based on the Company's current best estimates of expected
results given the forecasted assumptions described in "Summary of Significant
Assumptions and Accounting Policies for the Forecast" for the period presented,
including consummation of the Merger and the other elements of the Transaction.
The Forecast, which consists of forward-looking statements, is qualified by and
subject to the assumptions set forth therein and the other information contained
in this Prospectus. The Company does not intend to update or otherwise revise
the Forecast to reflect events or circumstances existing or arising after the
date of this Prospectus or to reflect the occurrence of unanticipated events.
The Forecast necessarily is based upon a number of estimates and assumptions,
that, while presented with numerical specificity and considered reasonable by
the Company, are inherently subject to significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of which
are difficult to predict and many of which are beyond the control of the
Company. Financial forecasts are necessarily speculative in nature, and it is
usually the case that one or more of the assumptions underlying such projections
do not materialize. The Forecast and actual results will vary, and those
variations may be material. The inclusion of the Forecast herein should not be
regarded as a representation by the Company or any other person (including the
Underwriters) that the Forecast will be achieved. Prospective purchasers are
cautioned not to place undue reliance on the Forecast or the other
forward-looking information contained herein.
CHANGE OF CONTROL
Following consummation of the Transaction, Alliance's two largest
shareholders, Alfred Wilms and Kirkland Investment Corporation ("KIC"), who
currently own approximately 38.8% and 10.3%, respectively, of the outstanding
shares of Common Stock, will own approximately 18.8% and 5.0%, respectively, of
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the outstanding shares of Common Stock. Accordingly, following the Transaction,
no one person or group will hold a majority interest in the Company, and it is
possible that the Company could be subject to a change in control, either
pursuant to a takeover attempt or otherwise, to a greater degree than has been
the case. Mr. Wilms is contractually obligated until September 21, 1997 to vote
his shares of Common Stock in favor of four nominees of KIC to Alliance's
seven-member Board of Directors. See "Security Ownership of Certain Beneficial
Holders and Management."
The indentures for the Senior Secured Notes and the Old Convertible
Debentures contain provisions relating to certain changes of control of the
Company ("Change of Control"). Upon the occurrence of such a Change of Control,
the Company will be required, subject to certain conditions, to offer to
purchase all outstanding Senior Secured Notes and any remaining Old Convertible
Debentures, as applicable, at a price equal to 101% of the then outstanding
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. The Transaction will not constitute a Change of Control under the
indenture for the Old Convertible Debentures. On a pro forma basis after giving
effect to the Transaction, the Company will not have sufficient funds available
to purchase all of the outstanding Senior Secured Notes and/or Old Convertible
Debentures were they to be tendered in response to an offer made as a result of
a Change of Control. There can be no assurance that the Company would have or be
able to obtain such funds through a refinancing of the Senior Secured Notes or
the Old Convertible Debentures to be repurchased or otherwise. In addition, the
right to require Alliance to redeem the Old Convertible Debentures could create
an event of default under senior indebtedness as a result of which any
redemption could, absent a waiver, be blocked by the subordination provisions of
the indenture for the Old Convertible Debentures. Also, the requirement that
Alliance offer to repurchase the Senior Secured Notes and Old Convertible
Debentures in the event of a change of control may have the effect of deterring
a third party from effecting a transaction that would constitute a Change of
Control.
COMPETITION
GAMING MACHINE MANAGEMENT OPERATIONS. The competition for obtaining and
renewing gaming machine routes in Nevada is high and continues to intensify.
Such competition has, over time, reduced Alliance's gross profit margins for
such operations. In addition, such competition has required Alliance to provide
substantial financial incentives and incur financial risks to retain or obtain
certain gaming machine route locations. Such incentives include long-term lease
commitments, guarantees of leases in favor of owners of local establishments,
substantial advance deposits, payments of lease rentals in advance and loans for
buildings and tenant-improvement costs. Although Alliance believes that it now
has adequate procedures for evaluating and managing such risks, historically
substantial losses have been incurred in connection with such transactions
reflecting, in part, former management's willingness to accept higher levels of
risk to further its policy of emphasizing market share. Notwithstanding the
change in Alliance's business strategy to one emphasizing profitability rather
than market share, the future success of the Company's machine management
operations will continue to be dependent to some extent on its ability and
willingness to provide such financial inducements. Although Alliance has
historically generated sufficient new machine management contracts to offset the
loss of old machine management contracts, due to increased competition, the
increased sophistication and bargaining power of customers and possibly other
factors not yet known, there can be no assurance that the Company will be able
to obtain new machine management contracts or renew or extend its current space
lease 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. In Sparks/Reno, Nevada, the principal competition for the Company's
operations comes from larger casinos focusing on the local market. The Company's
one dockside casino in Vicksburg, Mississippi faces substantial direct
competition from other dockside gaming facilities in the region.
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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 and the
popularity of these machines. Token machines are not subject to the strict
German licensing requirements governing wall machines.
GAMING MACHINE MANUFACTURING AND SYSTEMS OPERATIONS. The market for gaming
machines is extremely competitive, and there are a number of established,
well-financed and well-known companies producing machines that compete with each
of BGII's product lines in each of the markets for BGII's gaming machine
manufacturing operations. The domestic market for gaming machines is dominated
by a single competitor, International Game Technology ("IGT"), with a number of
smaller competitors in the field. In addition, certain technology-oriented
companies have recently announced plans to enter the gaming machine market.
Management believes that some of these competitors have greater capital
resources than 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.
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.
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Wulff provides customer financing for approximately 20% of its sales, and
management expects this practice to increase during the latter half of 1996. See
"Business--German Operations--Operations of Wulff--Sales and Marketing."
SALES TO NON-TRADITIONAL GAMING MARKETS
The continued growth of the non-traditional markets outside of Nevada and
Atlantic City for electronic gaming machines is contingent upon the public's
acceptance of these markets and an ongoing regulatory approval process by
Federal, state and local governmental authorities. The Company cannot predict
which new jurisdictions or markets, if any, will approve the operation of
electronic gaming machines, the timing of any such approval or the level of the
Company's participation in any such markets or that jurisdictions currently
permitting gaming will continue to do so in the future.
FOREIGN OPERATIONS
The Company's business in foreign markets is subject to the risks
customarily associated with such activities. These risks include fluctuations in
foreign currency exchange rates and controls, expropriation, nationalization and
other economic, tax and regulatory policies of local governments as well as the
laws and policies of the United States affecting foreign trade and investment.
BGII does not generally enter into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations.
KEY PERSONNEL
The success of the Company will be dependent, to a significant extent, upon
the continued services of a relatively small group of executive personnel. The
loss or unavailability of one or more of such executive officers or the
inability to attract or retain key employees in the future could have an adverse
effect upon the Company's operations. See "Management."
STRICT REGULATION BY GAMING AUTHORITIES
The manufacture and distribution of gaming machines and the conduct of
gaming operations is subject to extensive Federal, state, local and foreign
regulation by various gaming authorities (each, a "Gaming Authority"). Although
the laws and regulations of the various jurisdictions in which the Company
operates vary in their technical requirements and are subject to amendment from
time to time, virtually all of these jurisdictions require licenses, permits,
documentation of the qualification, including evidence of integrity and
financial stability, and other forms of approval for companies engaged in the
manufacture and distribution of gaming machines and gaming operations as well as
for the officers, directors, major stockholders and key personnel of such
companies. Alliance and BGII and their key personnel have obtained, or applied
for, all government licenses, registrations, findings of suitability, permits
and approvals necessary for the manufacture and distribution, and operation
where permitted, of their gaming machines in the jurisdictions in which Alliance
and BGII currently do business. However, there can be no assurance that such
licenses, registrations, findings of suitability, permits or approvals will be
given or renewed in the future or that the Company will obtain the licenses
necessary to operate in emerging markets.
BGII was pursuing a permanent manufacturer's license for Gaming as it
relates to the land-based casino in New Orleans. However, in November 1995, the
operator of the land-based casino in New Orleans filed for bankruptcy
reorganization and ceased operations. That action resulted in the termination of
funding for the regulatory operations of the Louisiana Economic Development
Gaming Corporation ("LEDGC") and, shortly thereafter, the Attorney General of
Louisiana took control of the agency and effectively closed its operations and
dismissed its President and employees. The Louisiana legislature recently passed
a bill which created a single gaming control board for the regulation of gaming
in Louisiana who will issue all licensing after May 1, 1996 for video draw poker
devices. The foregoing occurred prior to completion of review of Gaming's
pending application. In addition, BGII's application for renewal of Gaming's
license as a gaming-related casino service industry in New Jersey is pending
before the New Jersey Casino Control Commission (the "New Jersey Commission").
See "--Ongoing BGII Regulatory Investigations" and "Gaming Regulation and
Licensing."
Alliance currently has an agreement with Fair Grounds Corporation, Jefferson
Downs Corporation and Finish Line Management Corporation (collectively, "Fair
Grounds") to be the exclusive operator of video
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poker machines at the only racetrack and ten associated OTBs in the greater New
Orleans area. The Louisiana legislature has recently passed a bill which will
result in an election to be held in November 1996 which will 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 Orleans Parish or certain other parishes in
which Alliance operates so elect, the cessation of the Company's video poker
operations would have a material adverse effect on the operations of the
Company. The Company's operations also depend on the financial viability of the
racetrack, which is beyond the control of the Company.
OWNERSHIP LIMITATIONS ON SECURITIES OF THE COMPANY
The Gaming Authorities may, at their discretion, require the holder of any
security of the Company, such as the Senior Secured Notes or the Preferred
Stock, to file applications, be investigated and be found suitable to own such
security of the Company. If a record or beneficial owner of the Senior Secured
Notes or the Preferred Stock is required by a Gaming Authority to be found
suitable, such owner will be required to apply for a finding of suitability
within 30 days after request by such Gaming Authority, or within such earlier
time as required by such Gaming Authority. As a general matter, assuming a
passive investment intent, only owners of specified percentages of the Company's
voting securities are required to be found suitable, absent unusual
circumstances, which percentage is typically between 10% to 15% of any class of
such securities. In the event that there is a default in the payment of
dividends for six consecutive dividend payment dates, the Preferred Stock will
qualify as a voting security and will be considered as a separate class of
voting securities for purposes of determining beneficial ownership. 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 Senior Secured Notes or the Preferred Stock 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; (iv) makes any payment to the unsuitable person by way
of principal, redemption, conversion, exchange, liquidation, or similar
transaction; or (v) fails to pursue all lawful efforts to require such person to
relinquish his voting securities including, if necessary, the immediate purchase
of such voting securities for cash at fair market value. The Company will be
permitted to repurchase a holder's Senior Secured Note pursuant to a Required
Regulatory Redemption. See "Description of the Senior Secured 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
Securities found unsuitable and who holds, directly or indirectly, any
beneficial ownership of the Securities 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
resulted in the indictment by a United States grand jury and subsequent
conviction in New Orleans of 18 individuals including certain of the former
distributor's officers, directors, employees and others. In addition, Alan
Maiss, a former director and president of BGII, pled guilty to misprision of a
felony in connection with such investigation. BGII, its subsidiaries and its
current employees were not subject to such investigation. BGII's activities with
regard to its former VLT distributor in Louisiana have been the subject of
current inquiries by gaming regulators. The gaming authorities in Ontario,
Canada, who have investigated the matter, issued a gaming registration to Bally
Gaming, Inc. on February 8, 1996. The New Jersey Commission is currently
reviewing such proceedings in connection with Gaming's application for a license
renewal. An adverse determination by a Gaming Authority
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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
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 this 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 Senior Secured 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 Senior Secured 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 Senior Secured Notes and direct the return of any amounts
paid thereunder to the Company or to a fund for the benefit of its creditors.
Similarly, the obligations of each Guarantor under its guarantee of the
Senior Secured Notes, as well as the security interest granted by certain
Guarantors in equity interests in such Guarantors' subsidiaries to secure the
Senior Secured Notes, may be subject to review under such laws in the event of
the bankruptcy or other financial difficulty of such Guarantor. In the event
that a court were to find that at the time such Guarantor incurred such
obligations or granted such security interest the factors set forth in either
clause (a) or (b) in the foregoing paragraph applied to such Guarantor, such
court could avoid such Guarantor's obligations under its guarantee, as well as
the security interests securing the Senior Secured Notes, and direct the return
of any amounts paid under such guarantee to such Guarantor or to a fund for the
benefit of its creditors.
Among other things, a court might conclude that a Guarantor did not receive
reasonably equivalent value or fair consideration for its guarantee to the
extent that the economic benefits realized by it in the Transaction were less
than the aggregate amount of its liability under its guarantee.
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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.
ABSENCE OF PUBLIC MARKET; POTENTIAL VOLATILITY OF MARKET PRICES
SENIOR SECURED NOTES. The Company does not intend to list the Senior
Secured Notes on a national securities exchange or to seek the admission thereof
for trading on Nasdaq. The Underwriters have advised the Company that, following
the consummation of the Note Offering, they intend to make a market in the
Senior Secured Notes, but are not obligated to do so and may discontinue any
such market making at any time without notice. There can be no assurance as to
the liquidity of, or that an active trading market will develop for, the Senior
Secured 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 Senior Secured Notes to fluctuate
substantially.
PREFERRED STOCK. Although the Company has applied to have the Preferred
Stock quoted on Nasdaq, there is no assurance that this will occur. The
Preferred Stock has no existing trading market and there can be no assurance as
to the type of trading market that will develop. Further, there can be no
assurance with respect to the prices at which the Preferred Stock will trade
after the date hereof. The trading price of the Preferred Stock could be subject
to wide fluctuations in response to quarter-to-quarter variations in operating
results and other events or factors, including the success of the Company's
development activities, legislation approving or defeating gaming, other
governmental actions, developments in the gaming industry generally and
announcements by the Company or by competitors. In addition, the stock market,
and the gaming industry in particular, have experienced extreme price and volume
fluctuations in a manner which has often been unrelated to the operating
performance of the companies within the gaming industry. These broad market
fluctuations may adversely affect the market price of the Preferred Stock. A
shift away from investor interest in gaming in general could adversely affect
the trading price of the Preferred Stock.
PREFERRED STOCK
The Preferred Stock dividend may be paid in kind in whole or in part through
and including the first dividend payment date occurring after the seventh
anniversary of the Effective Time of the Merger. The Preferred Stock is
mandatorily redeemable on the eighth anniversary of the Effective Time; however,
if the Company fails to so redeem all outstanding shares of the Preferred Stock
by such date, the remedies of holders are limited to the right to elect two
directors to the Board of Directors, and to prohibit the payment of dividends or
other distributions on, or the purchase or redemption of, any other stock of the
Company ranking junior or pari passu to the Preferred Stock. The Preferred Stock
will be callable for cash at any time at the Company's option at the Liquidation
Value. The Preferred Stock does not limit the Company's right to issue other
series of special stock ranking on a parity with the Preferred Stock as to
receipt of dividends or distributions. Furthermore, while fractional shares of
such Preferred Stock will be issued in connection with the Merger, holders of
such fractional shares will not be able to trade such fractional shares on
Nasdaq. These factors may adversely affect the market price and marketability of
the Preferred Stock.
LIMITATIONS ON NET OPERATING LOSSES; DISCHARGE OF DEBT INCOME
Alliance had net operating loss carryforwards ("NOLs") of approximately
$46.0 million, which Alliance believes are not currently subject to an annual
limitation on their utilization under Section 382 of the Internal Revenue Code
of 1986, as amended (the "Code"). There is a material risk that the Transaction
will result in an "ownership change" under Section 382 of the Code, in which
event the use of these NOLs will likely be subject to an annual limitation on
their utilization. For tax purposes the Automatic Conversion may result in an
extinguishment of debt gain. However, it is anticipated that this tax gain would
be entirely offset by the Company's NOLs, based on current Common Stock prices.
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THE MERGER AND RELATED FINANCINGS
On October 18, 1995, Alliance entered into the Merger Agreement with BGII, a
Delaware corporation, and BGII Acquisition Corp. (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 that the Effective Time occurs on or about
June 18, 1996 and 10,799,501 shares of BGII common stock are outstanding, less
1,000,000 shares owned by Alliance which will be canceled upon consummation of
the Merger. Alliance will also retire approximately $53.3 million of BGII's
outstanding debt (including prepayment premium, original issue discount and
accrued and unpaid interest through the Effective Time), 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"), certain executive officers of BGII
will be entitled, pursuant to the termination of their employment agreements and
performance unit awards with BGII, to lump-sum payments, without discount to
present value, in connection with the termination of their respective employment
agreements and performance unit awards, as described further below. 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 Merger and related transactions will be financed through (i) the
issuance of $140.0 million aggregate principal amount of the Senior Secured
Notes in the Note Offering, (ii) the issuance of $15.0 million of Preferred
Stock in the Preferred Stock Offering and (iii) the issuance of $5.0 million of
Common Stock in the Private Placement. The Note Offering, the Preferred Stock
Offering and the Private Placement are contingent upon consummation of the
Merger.
Alliance has offered to exchange up to $85.0 million aggregate principal
amount of its New Convertible Debentures for a like principal amount of its Old
Convertible Debentures. The terms of the New Convertible Debentures are
substantially identical to the terms of the Old Convertible Debentures, except
that if the Merger is consummated within 60 days after the issuance of the New
Convertible Debentures, then at the effective time of the Merger the New
Convertible Debentures will automatically be converted pursuant to the Automatic
Conversion into Common Stock at a conversion price of $4.76 per share
(equivalent to a conversion rate of approximately 210 shares per $1,000
principal amount of New Convertible Debentures), subject to adjustment under
certain circumstances. A holder tendering Old Convertible Debentures in the
Exchange Offer may elect, at the time such Old Convertible Debentures are
tendered, to forego receipt of all or any portion of the Common Stock that such
holder would otherwise be entitled to receive upon the occurrence of the
Automatic Conversion with respect to the New Convertible Debentures issued in
exchange for such Old Convertible Debentures and to receive in lieu thereof ten
shares of the Series E Preferred Stock, for each $1,000 principal amount of New
Convertible Debentures. Each share of Series E Preferred Stock will accrue
dividends for the first three years only following issuance, at an annual rate
of 11 1/2%, payable quarterly in cash or, at the Company's option, in additional
shares of Series E Preferred Stock, will be convertible into Common Stock at an
initial conversion price of $5.88 per share (equivalent to a conversion rate of
approximately 17.004 shares of Common Stock per share of Series E Preferred
Stock), subject to adjustment under certain circumstances, and will have a $100
liquidation preference per share. Alliance has determined to limit the principal
amount of Old Convertible Debentures the holders of which may elect to receive
Series E Preferred Stock in the Automatic Conversion to $30.0 million. The
Preferred Stock offered hereby will rank senior to the Series E Preferred Stock.
See "Description of Capital Stock."
A financial institution has agreed to purchase privately in the Private
Placement, simultaneously with the consummation of the Merger, $5.0 million of
the Common Stock of Alliance at a price equal to the lower of $4.56 per share
(the average trading price of the Common Stock for the five trading day period
immediately preceding the agreement) and 91% of the lowest of the averages of
the last sales prices of
28
<PAGE>
Common Stock during any consecutive period of five trading days ending on any
date in the period occuring between May 20, 1996 and the Effective Time. This
investment would be in the form of Common Stock to the extent of 4.9% of the
total Common Stock outstanding at the time, taking into account Common Stock to
be issued in the Merger and the Automatic Conversion, with the remainder to be
in the form of non-voting special stock convertible into Common Stock. Alliance
anticipates, and it is assumed for all purposes herein, that all $5.0 million
will be issued in the form of Common Stock.
Immediately following the Merger, Holding, a newly-formed wholly-owned
Nevada subsidiary of Alliance, will purchase for a promissory note all the
shares of stock of BGII's German subsidiaries, Bally Wulff Automaten GmbH
("Automaten") and Bally Wulff Vertriebs GmbH ("Vertriebs") from BGII, which
currently holds all of the economic interest in such subsidiaries. At the same
time, the Company will contribute to Holding all the shares of capital stock of
BGII and, indirectly, its domestic subsidiary, Bally Gaming, Inc. Holding will
then immediately contribute the Automaten and Vertriebs shares directly to a
newly-formed German limited partnership ("KG") which is also intended to be a
partnership for U.S. Federal income tax purposes, in exchange for a 99% limited
partnership interest in KG. The general partner of KG will be a newly-formed
German corporation, which will be a wholly-owned subsidiary of Holding and will
own 0.5% of the economic interest in KG. KG, its general partner, Automaten,
Vertriebs and their subsidiaries are sometimes collectively referred to herein
as the "Wulff Entities" and the above transactions are collectively referred to
herein as the "Wulff Realignment." The effect of the Wulff Realignment is that,
after the Merger, Holding will hold all of the economic interests in the
entities comprising BGII and its subsidiaries prior to the Merger.
29
<PAGE>
USE OF PROCEEDS
The proceeds of the Offerings, net of underwriting discounts, are estimated
to be approximately $ million. The following table sets forth the anticipated
sources and uses of funds to be used to consummate the Transaction based on the
Company's cash and debt balances as of March 31, 1996. The actual balances and
number of shares outstanding may vary based on the date of consummation of the
Transaction.
(IN MILLIONS)
<TABLE>
<S> <C>
ANTICIPATED SOURCES OF FUNDS
CASH SOURCES:
Senior Secured Notes.................. $ 140.0
Preferred Stock....................... 15.0
Common Stock (Private Placement)...... 5.0
---------
Total Cash Sources................ 160.0
---------
NON-CASH SOURCES:
New Convertible Debentures issued and
automatically converted into Common
Stock................................ 50.0
Preferred Stock to BGII
Stockholders(e)...................... 35.7
Common Stock to BGII
Stockholders(f)...................... 2.9
Common Stock(c)....................... 3.7
---------
Total Non-Cash Sources.............. 92.3
---------
Total Sources..................... $ 252.3
---------
---------
</TABLE>
<TABLE>
<S> <C>
ANTICIPATED USES OF FUNDS
CASH USES:
Cash to BGII Stockholders(a).......... $ 77.2
Retire BGII Debt(b)................... 53.3
Employee Contract Termination Costs
and Performance Unit Awards(c)....... 7.6
Fees and Expenses(d):................. 21.9
---------
Total Cash Uses................... 160.0
---------
NON-CASH USES:
Retire Old Convertible Debentures..... 50.0
Preferred Stock to BGII
Stockholders(e)...................... 35.7
Common Stock to BGII
Stockholders(f)...................... 2.9
Common Stock(c)....................... 3.7
---------
Total Non-Cash Uses................. 92.3
---------
Total Uses........................ $ 252.3
---------
---------
</TABLE>
- --------------------------
(a) Represents the cash consideration to be paid to BGII stockholders in the
Merger consisting of $7.83 per share of BGII common stock plus interest
accruing at a rate of 5.5% per annum from May 3, 1996 to the Effective Time,
calculated in accordance with the terms of the Merger Agreement.
(b) Represents retirement of the following debt of BGII outstanding at March 31,
1996:
(i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a
prepayment price of 101% plus original issue discount of $0.3 million;
(ii) $9.3 million under a bank revolving line of credit of Bally Gaming,
Inc., a wholly-owned subsidiary of BGII, which matures on March 31,
1997 and bears interest at a fluctuating rate based on the bank's prime
rate plus 1 1/2% (9.75% per annum at March 31, 1996);
(iii) other notes payable of BGII aggregating $1.6 million due in varying
amounts from 1996 through 1999 bearing interest at rates varying from
5% to 12%; and
(iv) accrued and unpaid interest on the foregoing debt instruments, through
the Effective Time, totaling approximately $2.0 million.
(c) Includes $5.0 million payable in cash to Richard Gillman and $1.3 million
payable to Neil Jenkins consisting of $0.9 million in cash and $0.4 million
in Common Stock, all pursuant to agreements with Alliance in connection with
the termination of their respective employment agreements and performance
unit awards. Additionally, Hans Kloss, who will remain with the Company,
will receive a total of $4.3 million consisting of $1.5 million in cash and
$2.8 million in Common Stock, and Robert Conover, who will remain with the
Company, will receive a total of $0.7 million consisting of $0.2 million in
cash and $0.5 million in Common Stock, in connection with their employment
agreements and performance unit awards. The Common Stock portion of each of
such 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.
(d) Total estimated Alliance and BGII Transaction-related fees and expenses are
$37.0 million, of which $15.1 million has been paid through March 31, 1996.
Excludes the value of Common Stock to be issued to an Underwriter as a
financial advisory fee. See "Underwriting."
(e) Represents the Preferred Stock consideration to be paid to BGII stockholders
in the Merger consisting of $3.57 of Preferred Stock 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.
(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.
30
<PAGE>
DIVIDEND POLICY
The Company intends to retain all future earnings for use in the development
of its business and does not anticipate paying any cash dividends (including
with respect to the Preferred Stock for the first five years following issuance
and the Series E Preferred Stock) in the foreseeable future. The payment of all
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company and general
business conditions. The ability of the Company or its subsidiaries to pay
dividends is restricted by the Indenture. If a holder of securities is
disqualified by any Gaming Authority from owning such securities, such holder
will not be permitted to receive any dividends with respect to such securities.
See "Gaming Regulations and Licensing."
CAPITALIZATION
The following table sets forth the consolidated capitalization as of March
31, 1996 (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 MARCH 31, 1996
--------------------------------------
THE COMPANY
ALLIANCE BGII PRO FORMA
ACTUAL ACTUAL AS ADJUSTED
---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-Term Debt:
Senior Secured Notes(1)................................................ $ -- $ -- $ 140,000
Old Convertible Debentures(2).......................................... 85,000 -- 35,000
Hospitality Franchise Systems.......................................... 6,902 -- 6,902
Due to Stockholder, Net of Unamortized Discount of $0.6 million at
March 31, 1996........................................................ 1,442 -- 1,442
10 3/8% Senior Secured Notes due July 1998............................. -- 39,688 --
Other Notes Payable.................................................... 1,704 5,605 5,582
---------- ---------- --------------
Total Long-Term Debt, excluding current maturities(3).................... 95,048 45,293 188,926
New Preferred Stock(1)(4)................................................ -- -- 50,662
Total Stockholders' Equity (Deficiency)(1)(2)(5)......................... (5,595) 86,000 42,350
---------- ---------- --------------
Total Capitalization..................................................... $ 89,453 $ 131,293 $ 281,938
---------- ---------- --------------
---------- ---------- --------------
</TABLE>
- ------------------------
(1) Issuance costs relative to the Note Offering and the Preferred Stock
Offering are assumed to be capitalized and amortized over the relative terms
of these instruments. Issuance costs relative to the Private Placement have
been offset against proceeds.
(2) Assumes $50.0 million of New Convertible Debentures are issued in exchange
for a like amount of Old Convertible Debentures and are converted into
Common Stock at a conversion price of $4.76 per share pursuant to the
Exchange Offer and the Automatic Conversion.
(3) Actual amounts exclude borrowings under lines of credit of $9.3 million at
Bally Gaming, Inc. (which are being repaid in connection with the Merger)
and $14.8 million at Wulff and current maturities of long-term debt of $4.7
million. Cash, cash equivalents and securities available for sale at March
31, 1996 on a pro forma basis were $19.8 million. The Wulff lines of credit
have additional availability of $7.1 million and are expected to remain in
place upon consummation of the Transaction. Alliance currently anticipates
obtaining one or more working capital revolving facilities at Gaming,
Systems and Wulff providing up to an aggregate of $40.0 million of
borrowings (of which approximately $22.0 million of Wulff's existing lines
of credit are anticipated to remain in place) which would be secured by
inventory and accounts receivable. Alliance has not received any commitment
for any such facility and
31
<PAGE>
no assurance can be given that it will be able to obtain any such facility
on terms acceptable to Alliance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources of the Company (Pro Forma)."
(4) For a description of the Preferred Stock, see "Description of Capital
Stock."
(5) Excludes shares underlying certain options and warrants and other equity
equivalents. See "Security Ownership of Certain Beneficial Holders and
Management--Outstanding Options and Convertible Securities" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Combined Statements of Operations present
results of operations of the Company assuming the Transaction occurred on July
1, 1994 for the statements for the twelve months ended June 30, 1995 and the
nine months ended March 31, 1996, and further assuming that the Rainbow Casino
operations were consolidated. Adjustments necessary to reflect these assumptions
and to restate historical combined results of operations are presented in the
Pro Forma Adjustments columns, which are further described in the Notes to
Unaudited Pro Forma Condensed Combined Financial Information.
The Unaudited Pro Forma Condensed Combined Balance Sheet presents the
financial position of the Company assuming the Transaction occurred on March 31,
1996. In preparing the following Pro Forma Financial Information, the Company
has also assumed that $50.0 million of the $85.0 million principal amount of the
Old Convertible Debentures are exchanged in the Exchange Offer and that all the
resulting New Convertible Debentures are converted into Common Stock pursuant to
the Automatic Conversion. Adjustments necessary to reflect this assumption and
to restate historical combined balance sheets are presented in the Pro Forma
Adjustments column, which are further described in the Notes to Unaudited Pro
Forma Condensed Combined Financial Information.
The historical unaudited financial information for Alliance is derived from
the audited financial statements of Alliance for the year ended June 30, 1995,
and the unaudited financial statements of Alliance for the nine-month period
ended March 31, 1996. The historical unaudited financial information for BGII is
derived from the unaudited interim information generated as of and for the
periods ended June 30, 1994 and 1995 and March 31, 1996. BGII operating results
for the twelve-month period ended June 30, 1995 are calculated by subtracting
the unaudited six-month period ended June 30, 1994 results from the audited year
ended December 31, 1994 results and adding the unaudited six-month period ended
June 30, 1995 results. BGII operating results for the nine-month period ended
March 31, 1996 are calculated by subtracting the unaudited six-month period
ended June 30, 1995 results from the audited year ended December 31, 1995
results and adding the unaudited three-month period ended March 31, 1996 results
thereto.
The Unaudited Supplemental Pro Forma Information presents pro forma cash
flow and fixed charges information and includes related pro forma adjustments,
consistent with those assumed elsewhere herein.
The following information does not purport to present the financial position
or results of operations of the Company had the Transaction and events assumed
therein occurred on the dates specified, nor is it necessarily indicative of the
results of operations of the Company as they may be in the future or as they may
have been had the Transaction and the effect of consolidating the Rainbow Casino
operating results been consummated on the dates shown. The Unaudited Pro Forma
Condensed Combined Financial Information is based on certain assumptions and
adjustments described in the Notes to Unaudited Pro Forma Condensed Combined
Financial Information and should be read in conjunction therewith and with "The
Merger and Related Financings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited and unaudited
historical consolidated financial statements and related notes thereto of
Alliance and BGII included elsewhere herein.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1996 (1)(2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
ALLIANCE BGII COMBINED ADJUSTMENTS COMBINED
---------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents and Securities
Available for Sale............................ $ 25,562 $ 2,009 $ 27,571 $ 152,900(a) $ 19,817
(52,190)(b)
(77,220)(c)
(7,559)(c)
(10,410)(c)
1,535(d)
(14,810)(e)
Receivables, Net............................... 2,060 82,872 84,932 84,932
Inventories.................................... 661 51,961 52,622 52,622
Other.......................................... 3,775 4,450 8,225 8,225
---------- ---------- ---------- -----------
Total Current Assets......................... 32,058 141,292 173,350 165,596
Property and Equipment, Net...................... 52,065 23,615 75,680 75,680
Other Assets:
Long-Term Receivables, Net..................... 5,600 9,696 15,296 15,296
Excess of Costs over Net Assets of an Acquired
Business, Net................................. 2,074 5,290 7,364 46,523(c) 53,887
4,998(c)
Intangible Assets, Net......................... 11,273 5,127 16,400 (2,478)(f) 18,920
6,500(a)
Other, Net..................................... 8,218 1,916 10,134 (449)(b) 16,185
---------- ---------- ---------- -----------
Total Other Assets........................... 27,165 22,029 49,194 104,288
---------- ---------- ---------- -----------
Total Assets................................. $ 111,288 $ 186,936 $ 298,224 $ 345,564
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable............................... $ 2,089 $ 14,707 $ 16,796 $ 16,796
Accrued Liabilities............................ 10,345 16,258 26,603 (3,789)(e) 21,964
(850)(b)
Current Maturities of Long-Term Debt........... 4,041 24,678 28,719 (9,213)(b) 19,506
---------- ---------- ---------- -----------
Total Current Liabilities.................... 16,475 55,643 72,118 58,266
---------- ---------- ---------- -----------
140,000(a)
(41,415)(b)
Long-Term Debt, Less Current Maturities.......... 95,048 45,293 140,341 (50,000)(f) 188,926
Other Liabilities................................ 4,325 4,325 4,325
---------- ---------- ---------- -----------
Total Liabilities............................ 115,848 100,936 216,784 251,517
Minority Interest................................ 1,035 1,035 1,035
15,000(a)
Preferred Stock.................................. 35,662(c) 50,662
STOCKHOLDERS' EQUITY (DEFICIENCY):
125(a)
74(c)
93(c)
(108)(c)
Common Stock, Par.............................. 1,298 108 1,406 1,050(f) 2,640
4,275(a)
(68,345)(c)
2,866(c)
3,637(c)
48,950(f)
Paid-in Capital................................ 32,134 68,345 100,479 22,000(f) 113,862
(712)(b)
(449)(b)
(1,329)(c)
522(d)
(11,021)(e)
Retained Earnings (Accumulated Deficit)........ (37,960) 1,329 (36,631) (24,478)(f) (74,098)
Cumulative Translation Adjustments............. 16,708 16,708 (16,708)(c)
490(c)
Other Stockholders' Equity..................... (1,067) (490) (1,557) 1,013(d) (54)
---------- ---------- ---------- -----------
Total Stockholders' Equity (Deficiency)...... (5,595) 86,000 80,405 42,350
---------- ---------- ---------- -----------
Total Liabilities and Stockholders' Equity
(Deficiency)................................ $ 111,288 $ 186,936 $ 298,224 $ 345,564
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1995(1)(3)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ALLIANCE
----------------------------------- AS PRO FORMA
AS BGII ADJUSTED ------------------------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL COMBINED ADJUSTMENTS COMBINED
---------- ----------- -------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Gaming........................... $128,114 $14,809(g) $142,923 $ $142,923 $ $142,923
Food and Beverage Sales.......... 3,847 891(g) 4,738 4,738 4,738
Net Equipment Sales.............. 27 27 248,701 248,728 248,728
Other............................ 4,432 4,432 4,432
---------- -------- ---------- ---------- ----------
Total Revenues................. 131,988 147,688 253,133 400,821 400,821
---------- -------- ---------- ---------- ----------
OPERATING COSTS:
Gaming........................... 91,311 2,127(g) 93,438 93,438 93,438
Food and Beverage................ 2,795 334(g) 3,129 3,129 3,129
Equipment Sales.................. 12 12 157,538 157,550 157,550
Selling, General and
Administrative.................. 32,611 9,716(g) 39,153 67,651 106,804 (5,000)(i) 100,135
(3,174)(h) (1,669)(j)
Unusual Charges and Other........ 1,500 1,500 (250)(j) 1,250
Depreciation and Amortization.... 9,520 893(g) 10,413 8,482 18,895 1,166(k) 22,642
2,404(l)
(298)(m)
800(n)
(325)(o)
---------- -------- ---------- ---------- ----------
Total Operating Costs.......... 136,249 146,145 235,171 381,316 378,144
---------- -------- ---------- ---------- ----------
Operating Income (Loss)............ (4,261) 1,543 17,962 19,505 22,677
OTHER INCOME (EXPENSES):
Interest Income.................. 2,798 2,798 2,798 2,798
Interest Expense................. (8,133) (988)(g) (9,121) (7,090) (16,211) (7,018)(n) (23,229)
Casino Royalty................... (810) (2,621)(g) (3,431) (3,431) (3,431)
Minority Interest................ (397) (397) (397) (397)
Other, Net....................... 317 101(g) 418 418 418
---------- -------- ---------- ---------- ----------
Income (Loss) Before Taxes......... (10,486) (8,190) 10,872 2,682 (1,164)
Domestic Tax Expense............... (265) (265) (290) (555) (555)
Foreign Tax Benefit (Expense)...... (5,779) (5,779) 3,779(p) (2,000)
---------- -------- ---------- ---------- ----------
Net Income (Loss).................. $(10,751) $ (8,455) $ 4,803 $ (3,652) $ (3,719)
---------- -------- ---------- ---------- ----------
---------- -------- ---------- ----------
Preferred Stock Dividend........... $ (8,039)
----------
Net Loss Applicable to Common
Shares............................ $(11,758)
----------
----------
Income (Loss) Per Common Share(5).. $ (0.95) $ 0.45 $ (0.47)
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL INFORMATION:(6)
PRO FORMA CASH FLOW INFORMATION:
Cash Flow from Operating Activities.......................................................................... $ 7,225
----------
----------
Cash Flow from Investing Activities.......................................................................... $(26,936)
----------
----------
Cash Flow from Financing Activities.......................................................................... $ (757)
----------
----------
Pro Forma Deficit of Earnings to Fixed Charges................................................................. $ (1,164)
----------
----------
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend.................................... $ (9,203)
----------
----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED MARCH 31, 1996(1)(4)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ALLIANCE
------------------------------------ AS PRO FORMA
AS BGII ADJUSTED ------------------------
HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL COMBINED ADJUSTMENTS COMBINED
----------- ----------- -------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Gaming........................... $113,809 $ $113,809 $ $113,809 $ $113,809
Food and Beverage Sales.......... 2,976 2,976 2,976 2,976
Net Equipment Sales.............. 11 11 166,328 166,339 166,339
Other............................ 3,993 3,993 3,993
----------- -------- ---------- ---------- ----------
Total Revenues................. 116,796 116,796 170,321 287,117 287,117
----------- -------- ---------- ---------- ----------
OPERATING COSTS:
Gaming........................... 77,019 77,019 77,019 77,019
Food and Beverage................ 1,992 1,992 1,992 1,992
Equipment Sales.................. 3 3 107,831 107,834 107,834
Selling, General and
Administrative.................. 33,147 252(q) 33,399 48,842 82,241 (3,750)(r) 66,256
(12,235)(s)
Unusual Charges and Other........ 3,179 3,179 7,312 10,491 (2,725)(s) 7,766
Depreciation and Amortization.... 7,328 7,328 6,977 14,305 874(t) 17,114
1,803(u)
(224)(v)
600(w)
(244)(x)
----------- -------- ---------- ---------- ----------
Total Operating Costs.......... 122,668 122,920 170,962 293,882 277,981
----------- -------- ---------- ---------- ----------
Operating Income (Loss)............ (5,872) (6,124) (641) (6,765) 9,136
OTHER INCOME (EXPENSES):
Interest Income.................. 1,206 1,206 1,206 1,206
Interest Expense................. (6,341) (6,341) (4,949) (11,290) (5,632)(w) (16,922)
Casino Royalty................... (2,931) (2,931) (2,931) (2,931)
Minority Interest................ (708) (708) (708) (708)
Other, Net....................... 398 398 398 398
----------- -------- ---------- ---------- ----------
Income (Loss) Before Taxes......... (14,248) (14,500) (5,590) (20,090) (9,821)
Domestic Tax Expense............... (581) (581) (216) (797) (797)
Foreign Tax (Expense) Benefit...... (2,032) (2,032) 1,321(y) (711)
----------- -------- ---------- ---------- ----------
Net Loss........................... $(14,829) $(15,081) $ (7,838) $(22,919) $(11,329)
----------- -------- ---------- ---------- ----------
----------- -------- ---------- ----------
Preferred Stock Dividend........... $ (5,916)
----------
Net Loss Applicable to Common
Shares............................ $(17,245)
----------
----------
Loss Per Common Share(5)........... $ (1.21) $ (0.73) $ (0.66)
----------- ---------- ----------
----------- ---------- ----------
SUPPLEMENTAL INFORMATION:(6)
PRO FORMA CASH FLOW INFORMATION:
Cash Flow from Operating Activities............................................................................ $ 20,564
----------
----------
Cash Flow from Investing Activities............................................................................ $ 354
----------
----------
Cash Flow from Financing Activities............................................................................ $ (3,358)
----------
----------
Pro Forma Deficit of Earnings to Fixed Charges................................................................... $ (9,821)
----------
----------
Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend...................................... $(15,737)
----------
----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
36
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
1. The Unaudited Pro Forma Condensed Combined Financial Statements of
Operations are presented as if the combination of Alliance and BGII occurred on
July 1, 1994. The Unaudited Pro Forma Condensed Combined Balance Sheet is
presented assuming the combination occurred on March 31, 1996. The combination
is expected to be recorded as a purchase transaction in accordance with
generally accepted accounting principles and, accordingly, BGII assets and
liabilities are presented at their estimated fair values as of that date.
The Merger Agreement provides that BGII stockholders will receive in the
Merger, in exchange for each of their issued and outstanding shares of common
stock, (i) an amount of cash (the "Cash Consideration") determined by dividing
$76.7 million by the number of shares of BGII common stock issued and
outstanding immediately prior to the Effective Time ($7.83 per share for
purposes of presentation of the pro forma financial information) (plus interest
accruing at a rate of 5.5% per annum from May 3, 1996 to the Effective Time),
(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). The price per share of
Common Stock used for purposes of the Unaudited Pro Forma Condensed Combined
Financial Information is $4.00, based on the closing price of the Common Stock
as reported on Nasdaq on May 23, 1996. The assumed price per share of the $5.0
million Private Placement is computed as the lower of $4.56 (the average trading
price of the Common Stock for the five trading day period immediately preceding
the Private Placement agreement) and 91% of the lowest of the averages of the
last sales prices of Common Stock during any consecutive period of five trading
days ending on any date in the period occurring between May 20, 1996 and the
Effective Time. The price per share is assumed to be $4.00 for purposes of the
pro forma calculations. See "The Merger and Related Financings."
Foreign taxes result from the income generated by Wulff. Domestic taxes
result from Federal consolidated alternative minimum taxes and state and local
income taxes.
The Rainbow Casino in Vicksburg began operations in July 1994. In March
1995, Alliance completed its acquisition of the general partnership interest in
the limited partnership owning the casino and from that point forward, the
Rainbow Casino's operations have been consolidated with those of Alliance. The
Rainbow Casino's operating results have been included in the Unaudited Pro Forma
Condensed Combined Statements of Operations as if it was owned for each period
presented.
Certain reclassifications of BGII balances have been made to conform to the
Alliance reporting format.
The following adjustments have been made to arrive at the Unaudited Pro
Forma Condensed Combined Financial Information:
2. PRO FORMA CONDENSED COMBINED BALANCE SHEET ADJUSTMENTS AT MARCH 31, 1996
(a) To adjust for the net cash proceeds of the Offerings and the Private
Placement, less estimated fees and expenses which have been capitalized in
the case of the Offerings and netted against the gross proceeds in the case
of the Private Placement. For every 1.0% increase in the effective dividend
rate on the Preferred Stock, which is assumed to be issued at a 15% annual
rate, the correlative change in the Preferred Stock dividend would be an
increase of $0.2 million, or a $0.01 increase in loss per common share.
(b) To adjust for the repayment of $52.2 million of certain BGII debt as
such instruments are intended to be repaid with the proceeds of the
Offerings, including the remaining original issue discount and other costs
associated with the prepayment of the BGII debt totaling $0.7 million and
accrued and unpaid interest of $0.9 million. Additionally, certain deferred
financing costs related to the BGII debt totaling $0.4 million will be
written off. Based on the passage of time from March 31, 1996 to June 18,
37
<PAGE>
1996, it is anticipated that at the Effective Time the total repayment of
debt including accrued and unpaid interest, original issue discount and
other costs associated with the prepayment, will be $53.3 million.
(c) The purchase of BGII is presented as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
CONSIDERATION PAID:
Cash paid for original 1 million shares of BGII common stock owned by
Alliance..................................................................... $ 10,410
Cash consideration............................................................ 77,220
Value of Common Stock to be exchanged for BGII shares......................... 2,940
Value of Preferred Stock to be exchanged for BGII shares...................... 35,662
Contract termination costs for certain BGII personnel (see below)............. 6,291
--------------
Total consideration........................................................... 132,523
Estimated value of BGII's underlying net assets............................... (86,000)
--------------
Excess of costs over the net assets of BGII acquired.......................... $ 46,523
--------------
--------------
</TABLE>
The compensation to be paid to BGII personnel consists of cash payable
to Messrs. Gillman and Jenkins totaling $5.9 million and Common Stock valued
at $0.4 million (determined using the Alliance Average Trading Price but in
no event more than $6.00 nor less than $4.25 per share). As each of the
above individuals will not be employed by the Company after the Merger, such
costs have been included in the computation of goodwill.
Consideration to be paid to Messrs. Kloss and Conover consists of $1.7
million in cash and $3.3 million of Common Stock (determined using the
Alliance Average Trading Price but in no event more than $6.00 nor less than
$4.25 per share). As Messrs. Kloss and Conover will remain with the Company,
such amounts have been capitalized and will be amortized over the
approximately 2 1/2 and one year life of each of their employment
agreements, respectively. These transactions have been effected in the
Unaudited Pro Forma Condensed Combined Financial Information since they are
conditions of the Merger Agreement.
The allocation of purchase cost in the pro forma financial statements is
based on available information. After consummation of the Merger, Alliance
will arrange for independent appraisal of the significant assets and
liabilities of BGII to determine the final allocation of purchase
cost. Alliance management does not currently believe that any adjustments to
the final allocation of purchase price will have a material effect on the
Unaudited Pro Forma Condensed Combined Financial Information.
(d) To add back the $1.0 million valuation adjustment, net of the tax
effect of $0.5 million, for the Alliance-owned BGII common stock,
representing the difference between the purchase cost of $10.4 million and
the market value at March 31, 1996 of $8.9 million.
(e) To record the payment of certain Merger and related expenses assumed
to be incurred prior to and concurrent with the date of the Unaudited Pro
Forma Condensed Combined Balance Sheet totaling $14.8 million, of which $3.8
million has been accrued for at March 31, 1996.
(f) Represents the assumed conversion of all $50.0 million of the New
Convertible Debentures assumed to be issued in the Exchange Offer into
shares of Common Stock. Each $1,000 principal amount of Old Convertible
Debentures is convertible into 100 shares of Common Stock. Each $1,000
principal amount of the New Convertible Debentures will be converted in the
event of the Automatic Conversion into approximately 210 shares of Common
Stock. The additional 110 shares of Common Stock per $1,000 of principal are
treated as a "sweetener" to the original terms of the Old Convertible
Debentures and recorded at the fair value of the stock consideration being
offered as a non-cash charge for inducement for early conversion.
38
<PAGE>
In accordance with the rules and regulations of the Commission, the net
charge for inducement for early conversion resulting from the Exchange Offer
was not considered in the Unaudited Pro Forma Condensed Combined Statements
of Operations and has been reflected in the Unaudited Pro Forma Condensed
Combined Balance Sheet as a charge against retained earnings. The assumed
$50.0 million of New Convertible Debentures to be issued in the Exchange
Offer and converted into Common Stock pursuant to the Automatic Conversion
would result in a non-cash charge of $24.5 million, representing the value
of the Common Stock inducement of $22.0 million and the write-off of the
proportionate amount of the existing deferred financing costs. For tax
purposes the Automatic Conversion results in an extinguishment of debt gain.
However, this tax gain would be entirely offset against the Company's net
operating loss carry-forwards, based on current Common Stock prices.
The pro forma loss per common share amount presented in the Pro Forma
Unaudited Condensed Combined Statements of Operations assumes that all of
the $50.0 million of New Convertible Debentures convert into Common Stock.
The holders of the New Convertible Debentures may elect to convert into
Series E Preferred Stock that will accrue quarterly pay-in-kind dividends,
at an annual rate of 11.5%. For each $1.0 million of New Convertible
Debentures converted in the Automatic Conversion into Series E Preferred
Stock instead of Common Stock, there would be an increase in the pay in kind
preferred stock dividends for the first year of $120,055, an increase in the
loss per common share of $.01 for the year ended June 30, 1995, and a
decrease in the non-cash charge for inducement for early conversion referred
to in the preceding paragraph of $0.5 million. Based on the terms of the
Series E Preferred Stock, issuance of this security, if any, will be
reported in the stockholders' equity section of the balance sheet.
Therefore, there is no net effect on total stockholders' equity if New
Convertible Debentures are converted into Series E Preferred Stock instead
of Common Stock.
3. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR
THE YEAR ENDED JUNE 30, 1995
(g) To recognize operations of the Rainbow Casino as if owned for the
entire year.
(h) Alliance development expenses, which relate to mergers, acquisitions
and joint ventures, were reduced to $3.0 million annually resulting in an
adjustment of $3.2 million. Such adjustment does not include any effect from
the elimination of direct costs related to the Merger shown separately in
(j) below. The reduction to $3.0 million reflects the elimination of costs
that were being incurred prior to Alliance's accomplishment of its strategic
plan to acquire a major gaming machine manufacturing company. To accomplish
this reduction Alliance reduced payroll costs and fees paid to consultants
and legal costs related to non-BGII transactions it had been pursuing.
(i) To adjust for estimated synergy cost savings identified by
management to date including elimination of certain duplicative costs, such
as facility, legal, accounting and compensation, which total approximately
$5.0 million on an annual basis.
(j) To eliminate costs associated with the Merger incurred by Alliance
and BGII totaling $1.7 million and $0.3 million, respectively, consisting of
legal, accounting and investment banking fees and related costs.
(k) To record the amortization of the goodwill resulting from the
Merger. The goodwill is being amortized over 40 years.
(l) To amortize the costs associated with the termination of Messrs.
Kloss and Conover's existing employment contracts with BGII over the life of
their respective employment contracts.
(m) To eliminate the amortization of goodwill on the historical
financial statements of BGII.
(n) To adjust for the $16.8 million increase in interest expense from
the issuance of the Senior Secured Notes, and to amortize the related debt
issuance costs over 7 years, offset by the elimination of the $6.0 million
interest on the BGII debt being refinanced. For every 0.50% change in the
interest rate for the Senior Secured Notes, the correlating change in
interest expense for the year would be $0.7
39
<PAGE>
million on a pre-tax basis. Also represents the reduction of interest
expense of $3.8 million caused by the Exchange Offer and the Automatic
Conversion into Common Stock of an assumed $50.0 million of principal of the
New Convertible Debentures.
(o) Represents the reduction of the amortization of the deferred
financing costs related to the assumed $50.0 million of New Convertible
Debentures exchanged and converted into Common Stock.
(p) To adjust for the estimated effect of foreign income tax savings
resulting from acquisition restructuring which will enable Alliance to
allocate items such as interest expense to Wulff.
4. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR
THE NINE-MONTH PERIOD ENDED MARCH 31, 1996
(q) Alliance development expenses, which relate to mergers, acquisitions
and joint ventures, were reduced to $3.0 million annually. For the
nine-month period ended March 31, 1996, Alliance was below this $3.0 million
annualized amount by $0.3 million. The elimination of direct costs related
to the Merger is shown separately in note (s) below.
(r) To adjust for estimated synergy cost savings identified by
management to date including elimination of certain duplicative costs, such
as facility, legal, accounting and compensation, which total approximately
$5.0 million on an annual basis.
(s) To eliminate costs associated with the Merger incurred by Alliance
and BGII of $12.2 million and $2.7 million, respectively, consisting of
legal, accounting and investment banking fees and related costs.
(t) To record the amortization of the goodwill resulting from the
Merger. The goodwill is being amortized over 40 years.
(u) To amortize the costs associated with the termination of Messrs.
Kloss and Conover's existing employment contracts with BGII over the life of
their respective employment contracts.
(v) To eliminate the amortization of goodwill on the historical
financial statements of BGII.
(w) To adjust for the $12.6 million increase in interest expense from
the issuance of the Senior Secured Notes, and to amortize the related debt
issuance costs over 7 years, net of the elimination of the $4.2 million
interest on the BGII debt being refinanced. Also represents the reduction of
interest expense of $2.8 million caused by the Exchange Offer and the
Automatic Conversion into Common Stock of an assumed $50.0 million of
principal of the New Convertible Debentures.
(x) Represents the reduction of the amortization of the deferred
financing costs related to the assumed $50.0 million of New Convertible
Debentures exchanged and converted into Common Stock.
(y) To adjust for the estimated effect of foreign income tax savings
resulting from acquisition restructuring which will enable Alliance to
allocate items such as interest expense to Wulff.
40
<PAGE>
5. SHARE INFORMATION
The following table reflects computations of the pro forma number of shares
of Common Stock outstanding and the per share computations (shares in millions):
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED MARCH 31,
1995 1996
---------------- ---------------
<S> <C> <C>
Historical weighted average shares outstanding................... 11.3(a) 12.2
Shares to be sold in the Private Placement....................... 1.3 1.3
Shares to be issued to BGII stockholders......................... 0.7 0.7
Common Stock to be issued to terminate contracts for certain BGII
personnel....................................................... 0.9 0.9
Common Stock to be issued in the Automatic Conversion and as
advisory compensation........................................... 11.0 11.0
--- ---
Pro forma weighted average shares outstanding................ 25.2 26.1
--- ---
--- ---
</TABLE>
- ------------------------
(a) Excludes 1.3 million shares of non-voting special stock held by KIC, which
was converted into Common Stock in December 1995.
Effect of the Merger on the shareholders of Alliance, assuming a stock price
of $4.00, exchange of $50.0 million of Old Convertible Debentures and conversion
of New Convertible Debentures solely into Common Stock, is as follows (shares in
millions):
<TABLE>
<S> <C> <C> <C> <C>
Common Stock outstanding at March 31, 1996....................... 13.0
Shares of BGII common stock outstanding at March 31, 1996........ 10.8
Less the shares of BGII common stock already owned by
Alliance.................................................... 1.0
-----
BGII common stock to be converted.......................... 9.8
-----
-----
Common Stock to be issued to BGII stockholders................... 0.7
Common Stock to be issued to terminate contracts for certain BGII
personnel....................................................... 0.9
Common Stock to be sold in Private Placement..................... 1.3
Common Stock to be issued in the Automatic Conversion and as
advisory compensation........................................... 11.0
-----
Pro forma total outstanding shares........................... 26.9
-----
-----
</TABLE>
If all $85.0 million outstanding Old Convertible Debentures were exchanged
and the resulting New Convertible Debentures converted into Common Stock, the
pro forma total of outstanding shares would increase by an additional 7.4
million.
6. SUPPLEMENTAL PRO FORMA INFORMATION
Additional supplemental information regarding cash flow and fixed charges
has been presented with adjustments consistent with those shown in the pro forma
operating results. The earnings required to cover the 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.
41
<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 combined operating
income and has made further adjustments thereto to arrive at a measure of
adjusted operating cash flow ("Adjusted Operating Cash Flow"). As is more fully
described below, such adjustments consist of the elimination of certain charges
that management has determined to be non-recurring or unusual, as well as
adjustments made to reflect the most recent operating results of the Rainbow
Casino by annualizing the most recent nine month operating results (seasonally
adjusted), and presenting such results as if they had occurred for each period
presented. The concepts of non-recurring or unusual charges are not defined in
GAAP. In making these adjustments, management considered non-recurring revenue
items as well as non-recurring expense items. There can be no assurance that
other unusual charges will not occur in the future.
<TABLE>
<CAPTION>
ESTIMATED
ALLIANCE BGII SYNERGY ADJUSTED OPERATING
-------------------------- ------------- COST CASH FLOW AND PRO FORMA
HISTORICAL AS ADJUSTED AS ADJUSTED SAVINGS NET INTEREST EXPENSE
----------- ------------- ------------- ----------- -----------------------
(DOLLARS IN THOUSANDS)
<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 Non-recurring Charges........ 2,367 1,950
------------- -------------
Adjusted Operating Cash Flow.................... $ 17,383 $ 28,644 $ 5,000 $ 51,027
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.................. $ 20,431
-------
-------
NINE-MONTH PERIOD ENDED MARCH 31, 1996
Operating Income (Loss)......................... $ (5,872) $ (6,124) $ (641)
Depreciation and Amortization................... 7,328 7,328 6,977
Minority Interest............................... (708) (708) --
Casino Royalty.................................. (2,931) (2,931) --
----------- ------------- -------------
$ (2,183) (2,435) 6,336
----------- ------------- -------------
-----------
Reclassification of Certain Direct Merger
Costs........................................ 12,235 2,725
ADJUSTMENTS:
Rainbow Operations............................ (160) --
Other Unusual or Non-recurring Charges........ 3,179 4,566
------------- -------------
Adjusted Operating Cash Flow.................... $ 12,819 $ 13,627 $ 3,750 $ 30,196
------------- ------------- ----------- -------
------------- ------------- ----------- -------
Pro Forma Net Interest Expense.................. $ 15,716
-------
-------
</TABLE>
The above supplemental analysis should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Information and the notes
thereto. In this regard, for the year ended June 30, 1995, the Company's pro
forma deficit of earnings to fixed charges was $1.2 million, and the pro forma
deficit of earnings to fixed charges after the Preferred Stock dividend was $9.2
million. The Company's pro forma deficit of earnings to fixed charges, both
before and after the Preferred Stock dividend, for the nine-month period ended
March 31, 1996 was $9.8 million, and $15.7 million, respectively.
42
<PAGE>
The direct Merger costs have been reclassified and presented in computing
the separate company Adjusted Operating Cash Flow, as management believes that
such presentation provides additional relevant information to the potential
purchasers of the Company's securities, after eliminating direct costs related
to the Merger.
DIRECT MERGER COSTS. Both Alliance and BGII have incurred direct costs
related to the Merger consisting of legal, accounting, and investment banking
fees and related costs. For Alliance, such costs totaled $1.7 million and $12.2
million for the year ended June 30, 1995 and the nine months ended March 31,
1996. BGII's direct costs incurred relating to the Merger totaled $0.3 million
and $2.7 million for the year ended June 30, 1995 and the nine months ended
March 31, 1996, respectively.
The adjustments which were made in determining the supplemental analysis of
Adjusted Operating Cash Flow which were not considered in the preceding
Unaudited Pro Forma Condensed Combined Statements of Operations reflect the
following:
RAINBOW OPERATIONS. The final elements of the Rainbow Casino facility,
consisting of an 89-room hotel and an amusement park and the completion of the
casino exterior decor, parking, landscaping and signage, were not completed
until July 1995, although the Rainbow Casino had been open without these
amenities since July 1994. Although the hotel and amusement park are not owned
or operated by Alliance, management believes that such facilities have
contributed significantly to the recent strong financial results of the Rainbow
Casino. Therefore, Alliance management believes that the results of operations
for the nine months ended March 31, 1996 after considering seasonality (which
management believes was immaterial) are more reflective of the property's
ongoing results of operations. Accordingly, such results for the twelve months
ended June 30, 1995 and the nine months ended March 31, 1996 have been
annualized based on the actual financial results for the six months ended
December 31, 1995, as Alliance management believes that such results better
portray the Rainbow Casino's contribution to Adjusted Operating Cash Flow. This
annualization involves forward-looking statements that involve risks and
uncertainties, including the risks of competition, gaming regulation and the
other risks detailed in this Prospectus, included under "Risk Factors."
BGII ONE-TIME COSTS. Certain charges incurred by BGII consist of costs
relating to a regulatory investigation and legal proceedings in Louisiana
totaling $1.0 million, legal costs related to a former executive totaling $0.5
million, and legal costs related to the "Bally" trade name litigation that were
directly caused by the investigation totaling $0.2 million during the fiscal
year ended June 30, 1995. Results for the nine months ended March 31, 1996 were
adjusted for charges consisting of a reserve for V.A.T and the write-down of a
building in Germany, which had been acquired in the purchase of a distributor
and never used by Wulff, to its net realizable value in anticipation of its
sale, totaling $1.8 million, as well as to adjust for legal costs relating to
Louisiana of $1.0 million.
In June 1995, BGII entered into a merger agreement with WMS, which was
ultimately terminated to enter into the Merger Agreement with Alliance. Based on
management's assessment and allocation of the total costs incurred for both the
WMS and Alliance merger transactions, one-time costs related to the WMS
transaction were $0.2 million and $1.8 million for the fiscal year ended June
30, 1995 and the nine months ended March 31, 1996, respectively.
ALLIANCE ONE-TIME COSTS. One-time charges incurred by Alliance consist of
an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million
of termination costs for certain directors. These charges were incurred during
the quarter ended June 30, 1995 and are therefore included as adjustments only
for the twelve months ended June 30, 1995. Also, for the nine months ended March
31, 1996 Alliance recorded a provision for impaired assets of two business
development projects, totaling $3.2 million.
SYNERGY COST SAVINGS. Although management cannot precisely quantify future
savings, the Company has identified and expects to realize synergy cost savings
of approximately $5.0 million on an annual basis (primarily through the
reduction of duplicative costs, such as facility, legal, accounting and
compensation costs) as a result of the Merger. The Company further expects to
incur approximately $1.0 million in one-time implementation costs in realizing
these savings, which expenditures have been added back in arriving at the above
supplemental analysis.
43
<PAGE>
FORECAST OF OPERATIONS
The following Forecast of Operations (the "Forecast") sets forth, to the
best of management's knowledge and belief and giving consideration to actual
results for Alliance and BGII for the three months ended March 31, 1996,
management's expectations of the results of operations for the Company (assuming
consummation of the Merger and giving effect to the other elements of the
Transaction) for the twelve-month period ending December 31, 1996. The Forecast
is based on Alliance's current best estimates of expected results for the period
presented given the forecasted assumptions described in "Summary of Significant
Assumptions and Accounting Policies for the Forecast." The Forecast, which
consists of forward-looking statements, is qualified by, and subject to, the
assumptions set forth below and the other information contained in this
Prospectus, and should be read in conjunction with "Summary of Significant
Assumptions and Accounting Policies for the Forecast" as well as "Unaudited Pro
Forma Condensed Combined Financial Information," "Supplemental Analysis of Pro
Forma Adjusted Operating Cash Flow," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited and unaudited
historical consolidated financial statements and related notes thereto of
Alliance and BGII included elsewhere herein.
Alliance does not intend to update or otherwise revise the Forecast to
reflect events or circumstances existing or arising after the date of this
Prospectus or to reflect the occurrence of unanticipated events. BGII's
independent accountants, Coopers & Lybrand L.L.P., have neither examined nor
compiled nor had any other involvement with the preparation of the Forecast and
accordingly do not express an opinion or any other form of assurance with
respect thereto, nor do they assume any responsibility for the Forecast.
Independent accountants for Alliance, KPMG Peat Marwick LLP, have not examined
the Forecast presented herein and, accordingly, do not express an opinion or any
other form of assurance with respect thereto, and no other independent expert
has examined the Forecast.
The Forecast is based upon a number of estimates and assumptions that while
presented with numerical specificity and considered reasonable by management of
Alliance are inherently subject to significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
to predict and many of which are beyond the control of Alliance. However, the
Forecast does represent management's good faith estimate of the most likely 1996
results of operations including operating income, net income (loss), net income
(loss) applicable to Common Shares, income (loss) per share, EBITDA and Adjusted
Operating Cash Flow. The assumptions disclosed herein are those that Alliance
believes are significant to the Forecast and reflect management's judgment as of
the date hereof. The Forecast is necessarily speculative in nature, and it is
usually the case that one or more of the assumptions do not materialize. Not all
assumptions used in the preparation of the Forecast have been set forth herein.
In addition, as disclosed elsewhere in this Prospectus under "Risk Factors", the
business and operations of the Company are subject to substantial risks which
increase the uncertainty inherent in the Forecast. Many of the factors disclosed
under "Risk Factors" in this Prospectus could cause actual results to differ
materially from those expressed in the Forecast. The Forecast and actual results
will vary, and those variations may be material. The inclusion of the Forecast
herein should not be regarded as a representation by Alliance or any other
person (including the Underwriters) that the Forecast will be achieved.
Prospective purchasers are cautioned not to place undue reliance on the
Forecast.
Alliance was the sole preparer of the Forecast, which was prepared in
accordance with guidelines established by the American Institute of Certified
Public Accountants, except that it combines Alliance and BGII as if the
Transaction had occurred and it omits the disclosure of certain non-operating
items, income taxes, extraordinary items, and significant changes in financial
position.
The Forecast reflects, among other things, the results of operations, EBITDA
and Adjusted Operating Cash Flow, but it may not fully reflect the Company's
ability to pay cash interest requirements because it does not reflect other cash
obligations and requirements, such as mandatory payments on debt principal and
preferred stock redemptions, and operating requirements relating to capital
maintenance and expansion. Because the Forecast has been prepared on a
consolidated basis, the Forecast does not account for the Company's holding
company structure, which will result in cash flow earned at certain subsidiaries
being unavailable for distribution to the Company, including to service
indebtedness of the Company.
44
<PAGE>
ALLIANCE GAMING CORPORATION
FORECAST OF OPERATIONS
<TABLE>
<CAPTION>
COMPARATIVE ANALYSIS OF
OPERATIONS (1)
--------------------------------------------------------- FORECAST OF
OPERATIONS FOR
TWELVE MONTHS THREE MONTHS THE TWELVE
ENDED DECEMBER 31, ENDED MARCH 31, MONTHS ENDING
------------------------- ----------------------------- DECEMBER 31,
1994 1995 1995 1996 1996
----------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
STATEMENTS OF OPERATIONS INFORMATION:
Revenues
Gaming................................ $129,690 $147,590 $ 36,365 $ 39,707 $163,389
Food and Beverage Sales............... 7,096 4,045 1,118 856 4,189
Net Equipment Sales................... 231,371 244,488 67,664 57,440 254,467
Other................................. 4,874 4,841 631 1,109 3,912
----------- ----------- ------------- ------------ --------------
Net Revenues........................ 373,031 400,964 105,778 99,112 425,957
----------- ----------- ------------- ------------ --------------
Operating Costs
Gaming................................ 90,125 98,377 22,972 26,771 103,331
Food and Beverage..................... 4,755 2,884 701 566 3,150
Equipment Sales....................... 152,582 157,800 42,889 36,740 158,804
Selling, General and Administrative... 91,508(2) 94,859(2) 24,635(2) 22,318(2) 113,283(2)
Unusual Charges and Other............. 300 5,216 400 3,479 4,479
Depreciation and Amortization......... 22,483 22,584 4,740 5,311 23,192
----------- ----------- ------------- ------------ --------------
Total Operating Costs............. 361,753 381,720 96,337 95,185 406,239
----------- ----------- ------------- ------------ --------------
Operating Income........................ $ 11,278 $ 19,244 $ 9,441 $ 3,927 $ 19,718
----------- ----------- ------------- ------------ --------------
----------- ----------- ------------- ------------ --------------
Net Income (Loss)....................... $(12,181) $ (7,153) $ 2,906 $ (3,076) $(33,939)
Preferred Stock Dividends............... (8,039) (8,039) (1,900) (1,900) (8,039)
----------- ----------- ------------- ------------ --------------
Net Income (Loss) Applicable to Common
Shares................................. $(20,220) $(15,192) $ 1,006 $ (4,976) $(41,978)
----------- ----------- ------------- ------------ --------------
----------- ----------- ------------- ------------ --------------
Income (Loss) per Common Share.......... $ (0.84) $ (0.60) $ 0.04 $ (0.18) $ (1.56)(3)
----------- ----------- ------------- ------------ --------------
----------- ----------- ------------- ------------ --------------
Common Shares Outstanding............... 24,100 25,300 25,200 26,900 26,900
----------- ----------- ------------- ------------ --------------
----------- ----------- ------------- ------------ --------------
SUPPLEMENTAL INFORMATION:
Operating Income........................ $ 11,278 $ 19,244 $ 9,441 $ 3,927 $ 19,718
Depreciation and Amortization........... 22,483 22,584 4,740 5,311 23,192
Casino Royalty.......................... (1,670) (3,674) (983) (1,024) (4,368)
Minority Interest....................... (675) (504) (83) (432) (920)
----------- ----------- ------------- ------------ --------------
Subtotal.............................. 31,416 37,650 13,115 7,782 37,622
Adjustments:
Rainbow Operations.................... -- 1,912(4) 1,189(4) -- --
Unusual Charges and Other............. 2,856(5) 7,783(5) 600(5) 3,487(5) 4,479(6)
Direct Merger Costs................... -- -- -- -- 12,815(7)
----------- ----------- ------------- ------------ --------------
Adjusted Operating Cash Flow............ $ 34,272 $ 47,345 $ 14,904 $ 11,269 $ 54,916
----------- ----------- ------------- ------------ --------------
----------- ----------- ------------- ------------ --------------
OTHER DATA:
Net Interest Expense.................. $ 19,561 $ 20,743 $ 4,964 $ 5,191 $ 20,491
----------- ----------- ------------- ------------ --------------
----------- ----------- ------------- ------------ --------------
Ratio of Adjusted Operating
Cash Flow to Net Interest
Expense......................................................................................... 2.7x
Ratio of Net Debt to
Adjusted Operating Cash
Flow............................................................................................ 3.4x
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
45
<PAGE>
- ------------------------------
(1) See Note (2) -- Presentation of Supplemental Comparative Information of the
"Summary of Significant Assumptions and Accounting Policies for the
Forecast."
(2) Selling, general and administrative costs are net of the following: direct
Merger costs (for all periods presented except for the twelve months ending
December 31, 1996); the business development costs over (under) the $3.0
million budgeted annual amount totaling $4.7 million, $1.0 million, $1.4
million and $(52,000) for the twelve months ended December 31, 1994 and 1995
and the three months ended March 31, 1995 and 1996, respectively; and
synergy cost savings totaling $5.0 million for the twelve months ended
December 31, 1994 and 1995 and for the twelve months ending December 31,
1996 and $1.3 million for the three months ended March 31, 1995 and 1996.
See Note (6) below for one-time $1.0 million costs to implement synergy cost
savings in 1996. See Note (7) below for the 1996 presentation which includes
direct Merger costs.
(3) The loss per Common Share in the forecasted twelve-month period ending
December 31, 1996 is computed based on 26,900,000 common shares outstanding,
and includes depreciation and amortization of $23.2 million (or $0.86 per
share), direct Merger costs of $12.8 million (or $0.48 per share), loss on
assumed conversion of New Convertible Debentures of $24.5 million (or $0.91
per share) and Preferred Stock dividends of $8.0 million (or $0.30 per
share).
(4) Represents adjustment to reflect management's derivation of Rainbow Casino's
annualized results for the period, net of incremental royalty.
(5) Reflects items determined by management to be unusual or non-recurring
(which are also included in Total Operating Costs). The concepts of
non-recurring or unusual charges are not defined in GAAP.
(6) For the twelve months ending December 31, 1996, reflects items determined by
management to be non-recurring charges, consisting of a provision for
impaired assets of two development projects totaling $3.2 million included
in Alliance's Selling, General and Administrative costs; the $1.0 million of
one-time charges (which are included in Selling, General and Administrative
costs) to implement the expected annual synergy cost savings (which are
reflected in Total Operating Costs as well); and certain charges of $0.3
million relating to a regulatory investigation and legal proceedings in
Louisiana.
(7) Direct Merger costs for the twelve months ending December 31, 1996 of $12.8
million have been included in Total Operating Costs and presented as an
adjustment in computing the Adjusted Operating Cash Flow. See Note (2) above
for the presentation of direct Merger costs in earlier periods.
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 Operations for the twelve-month period ending December 31,
1996 and the accompanying related Summary of Significant Assumptions and
Accounting Policies of Alliance Gaming Corporation and subsidiaries, after
consummation of the Transaction, represent Alliance's best estimate as of the
date of this Prospectus for the first twelve months of combined operations
(after elimination of all significant intercompany accounts and transactions).
The Forecast reflects management's judgment, based on present circumstances, of
the expected set of conditions and their expected courses of action, to the
extent such conditions or action are anticipated to affect the results described
in the Forecast.
The assumptions described herein are those that management believes are
significant to the Forecast or are the key factors upon which the results shown
in the Forecast depend. However, not all assumptions used in the preparation of
the Forecast have been set forth herein. The estimates and assumptions, though
considered reasonable by management, may not be achieved and are inherently
subject to significant business, economic, regulatory and competitive
uncertainties and contingencies, including possible competitive responses, many
of which are not within the control of the Company and are not possible to
assess accurately. Therefore, the actual results achieved during the forecast
period will vary from those set forth in the Forecast, and the variations may be
material. 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 "The Merger and
Related Financings" and "Use of Proceeds;" (ii) there will be no change in GAAP
that may have a direct material effect on the reporting of financial results of
the Company; (iii) there will be no material changes made to gaming regulations
that would affect the operations of the Company; and (iv) that management will
realize the anticipated synergies. Management believes that these assumptions,
when taken together with management's extensive experience in operating in such
markets, provide a reasonably objective basis to forecast the Company's
operations for the period presented.
Alliance does not intend to update or otherwise revise the Forecast to
reflect events or circumstances existing or arising after the date hereof or to
reflect the occurrence of unanticipated events. The Forecast is provided solely
for the 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, Alliance has presented a Comparative Analysis for the twelve-month
periods ended December 31, 1994 and 1995 and the three-month periods ended March
31, 1995 and 1996 which have been derived using accounting principles and
assumptions consistent with those used in deriving the Pro Forma Unaudited
Condensed Combined Statements of Operations included elsewhere in this
Prospectus. Each period in the Comparative Analysis includes adjustments for the
planned reduction of the Company's ongoing development costs to $3.0 million per
year, certain estimated annual synergy cost savings (net of one-time
implementation costs) and items management believes to be one-time charges, and
assumes that the Rainbow Casino was consolidated since its opening in July 1994.
The Comparative Analysis has been prepared by management to provide potential
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.
47
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS
The assumptions disclosed herein are those that management believes are
significant to the Forecast. There will be differences between forecasted and
actual results, because events and circumstances frequently do not occur as
expected, and those differences may be material. Costs and Expenses presented
for the individual business units below exclude depreciation and amortization,
which are non-cash charges.
REVENUES AND COSTS AND EXPENSES
GAMING MACHINE MANAGEMENT OPERATIONS
NEVADA
In its Nevada gaming machine management operations, Alliance selects, owns,
installs, manages and services gaming devices (approximately 5,250 devices at
December 31, 1995) in third-party owned local establishments such as taverns,
restaurants, supermarkets, drug stores and convenience stores (approximately 520
locations at December 31, 1995).
Alliance has agreements with local bars, taverns, restaurants and
convenience stores for either space lease or revenue-sharing arrangements. Under
the revenue-sharing arrangements, Alliance shares the revenues from the machines
with the location operator, and with space lease arrangements Alliance pays a
fixed rental to the owner of the establishment and then Alliance receives all of
the revenues derived from the gaming devices. At December 31, 1995, the weighted
average remaining term of Alliance's revenue-sharing arrangements was
approximately 3.9 years, and for space lease arrangements was approximately 2.9
years.
NEVADA GAMING MACHINE MANAGEMENT OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS MONTHS
ENDED DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average Number of Machines.......................................... 5,180 5,288 5,482
Average Number of Locations......................................... 504 521 541
Net Revenues........................................................ $90,092 $91,949 $101,579
Costs and Expenses.................................................. $76,248 $77,507 $85,582
</TABLE>
Gaming machine management revenues are a function of the average number of
machines installed, times the average net win per machine. The revenues are
assumed to increase due to the increase in the number of Alliance's machines
installed, which reflects increased demand caused in part by Nevada's
significant population growth trend, as well as due to an increase in average
net win per machine based primarily on the assumed implementation of Gambler's
Bonus discussed below. The Forecast assumes that of the contracts expiring
during the forecast period Alliance intends to retain 80%, which is consistent
with historical renewal rates. For the year ended June 30, 1995, Alliance did
not renew 17% of expiring agreements, including those Alliance had determined to
allow to lapse.
Additionally, in December 1995, Alliance implemented the Gambler's Bonus
cardless slot player's club and player tracking system. Alliance assumes, for
the purpose of this Forecast, that there will be 88 locations, or an aggregate
of 980 machines, installed at June 1996, increasing to 130 locations, or 1,490
machines, at December 1996. Consistent with results of previously installed
machines linked to Gambler's Bonus, the Forecast assumes that there will be an
increase in the average net win per machine at these locations based on an
anticipated increase in the play at these machines. Consistent with contracts
signed to date, the Forecast assumes that the contracts with the additional
locations will allow Alliance to receive a percentage of the increased gaming
win generated by Gambler's Bonus in addition to its existing revenue
participation. Forecasted results of the Nevada gaming operations are directly
dependent upon the realization of these assumptions. Variations from the
realization of these assumptions will have a material effect upon the forecasted
results.
48
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
The Forecast assumes that costs and expenses (which include selling, general
and administrative costs) related to Nevada gaming machine management operations
are relatively stable as a percentage of revenues as compared to the 1995
levels.
LOUISIANA
VSI operates video poker devices in the greater New Orleans area under an
exclusive agreement with the owner of the only full service thoroughbred horse
racing facility and its 10 associated OTBs. The tenth OTB location opened in
Metairie, Louisiana in October 1995, bringing the total number of machines in
operation to approximately 700 (which is the assumed number of machines for the
forecasted period). Only the operator of the full service horse racing facility
may own OTBs.
LOUISIANA GAMING MACHINE MANAGEMENT OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE MONTHS TWELVE
ENDED DECEMBER MONTHS
31, ENDING
---------------- DECEMBER 31,
1994 1995 1996
------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average Number of Machines....................................... 724 702 700
Net Revenues..................................................... $17,196 $15,739 $16,946
Costs and Expenses............................................... $13,882 $11,921 $12,985
</TABLE>
Revenues are assumed to increase as a result of the full year impact of the
Metairie OTB location completed in October 1995.
The Forecast assumes that the statute that permits the operation of
unlimited numbers of video poker devices in pari-mutuel horse racing tracks and
the associated OTBs is not changed by referendum. See "Risk Factors -- Strict
Regulation by Gaming Authorities." Forecasted results of the Louisiana gaming
machine management operations are directly dependent upon this assumption. An
unfavorable result in legislation or referendum will have a material adverse
effect upon the forecasted results. Alliance's operations also depend on the
financial viability of the racetrack, which is beyond the control of Alliance.
Pursuant to the terms of a subordinated loan of up to $6.5 million made in
March 1992 by Mr. Wilms to VSI, a majority-controlled subsidiary of Alliance (as
amended, the "VSI Loan"), VSI may not pay cash dividends or make any
distribution of its property. The loan, which had an outstanding balance of $3.4
million at December 31, 1995, amortizes quarterly until due in full in September
1998 and may be prepaid at any time without penalty. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Forecast assumes that costs and expenses (which include selling, general
and administrative costs) related to Louisiana gaming machine management
operations will be approximately the same during the forecast period as a
percentage of revenues as during 1995.
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
Net Revenues........................................................... $ 12,847 $ 12,183 $ 12,653
Costs and Expenses..................................................... $ 10,425 $ 10,150 $ 10,555
</TABLE>
Total revenues include food and beverage sales, which are assumed to remain
relatively stable compared to 1995; however, the food and beverage sales provide
only minimal gross profit.
The Forecast assumes that total revenues will experience a 4% increase from
the previous year. The Forecast also assumes that the Sparks/Reno, Nevada gaming
market will increase by 3% in 1996, compared to 5% growth for calendar 1995 as
reported by the Nevada Gaming Control Board. In addition, because the negative
impact on Plantation Station of a major street, sidewalk, and landscaping
redevelopment project by the City of Sparks ended in December 1995, the Forecast
assumes that revenues will increase in 1996. Forecasted results of the
Plantation Station operations are directly dependent upon the realization of
these assumptions. Variations from these assumptions will have a material effect
upon the forecasted results.
The Forecast also assumes that costs and expenses (which includes selling,
general and administrative costs) related to Plantation Station operations are
approximately the same during the forecast period as a percentage of revenues as
in 1995.
50
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
RAINBOW CASINO
RAINBOW CASINO OPERATIONS (a)
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT UNIT
DATA)
<S> <C> <C> <C>
TOTAL VICKSBURG MARKET
Average Number of Slot Machines........................................ 2,849 2,847 2,880
Average Number of Tables............................................... 152 154 155
Win/Slot/Day........................................................... $ 124 $ 142 $ 153
% CHANGE............................................................. -- 15.2% 7.4%
Win/Table/Day.......................................................... $ 851 $ 789 $ 730
% CHANGE............................................................. -- -7.2% -7.5%
Win/Position/Day....................................................... $ 128 $ 140 $ 145
% CHANGE............................................................. -- 9.2% 4.0%
RAINBOW
Average Number of Slot Machines........................................ 573 589 589
Average Number of Tables............................................... 28 28 25
Win/Position/Day....................................................... $ 72 $ 102 $ 132
% CHANGE............................................................. -- 42.7% 29.2%
Net 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 actual results of the
Rainbow Casino, which opened in July 1994 and was not consolidated with
Alliance until March 1995, when Alliance completed its acquisition of the
general partnership interest in the limited partnership owning the casino.
From that point forward, the Rainbow Casino's operations have been
consolidated with those of Alliance.
The total gaming market for the Vicksburg, Mississippi area is assumed to
increase 5% to approximately $200 million for 1996. Management assumes that the
Company's location at Vicksburg Landing and the adjoining amenities will enable
the Rainbow Casino to attract visitors from the existing tourism market of the
historic city of Vicksburg as well as a significant share of the local market.
The Rainbow Casino market share is assumed to be 18% (versus its current level
of approximately 19%) which is up from 13% prior to the opening of the Days Inn
Hotel, the Funtricity Entertainment Center and the restaurant in July 1995. Both
the hotel and entertainment park are operated by third parties. The Forecast
assumes that there are no new entrants into the market and no relocation of
existing facilities within the market. Forecasted results of Mississippi gaming
operations are directly dependent upon the realization of these assumptions.
Variations from these assumptions will have a material effect upon forecasted
results.
The Forecast assumes that costs and expenses (which include selling, general
and administrative but do not include the casino royalty related to the Rainbow
Casino operations) are relatively stable as a percentage of revenues as compared
to the 1995 levels.
NET EQUIPMENT SALES
Forecasted equipment results include the operating results from Gaming,
Systems and Wulff. There are numerous factors which affect any forecast of
gaming equipment sales, including gaming regulatory factors and casino or arcade
machine demand and patron preferences. The impact of such factors on the Company
will be material.
51
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
GAMING
Equipment sales reflect the sales of video and reel-type gaming machines to
casinos in various jurisdictions, including casinos in Nevada and Atlantic City,
riverboats, Native American casinos, and international markets. Equipment sales
is a function of the number of unit sales and the net sales price per unit.
Gaming's results include GmbH and BGI Australia Pty Limited along with certain
reclassifications from historical presentation.
GAMING OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
UNIT SALES
United States.............................................................. 17,126 12,586 15,000
International.............................................................. 4,499 5,498 5,500
---------- ---------- ------------
Total.................................................................. 21,625 18,084 20,500
Net Revenues............................................................... $ 118,659 $ 111,849 $ 122,483
Costs and Expenses......................................................... $ 111,355 $ 104,544 $ 111,733
</TABLE>
Although worldwide electronic gaming machine sales (for these purposes,
primarily slot and video machines) decreased in 1995 by approximately 18%
primarily because of a reduced number of new casino openings and delays in
previously expected riverboat activity, management assumes that 1996 worldwide
gaming machine sales will increase as a result of (1) three major casino
openings in Las Vegas, (2) the opening of Indiana riverboat casinos, (3) the
expansion of certain other markets and (4) the expected increase in demand for
replacement machines as a result of an increasing portion of the installed base
reaching its natural replacement cycle. However, particularly in the case of
non-traditional gaming markets, the timing and magnitude of electronic gaming
machine sales is difficult to predict with accuracy. The Forecast assumes a
relatively constant market share during the forecast period while Gaming's share
during the past two years has grown significantly.
The Forecast assumes gross margin increases during the forecast period due
to a 1.5% increase in net unit price, continued reduction in the new material
cost per unit (although at a lower rate than experienced during the past two
years) and improved manufacturing efficiencies as a result of higher production
levels during the forecast period than during the year ended December 31, 1995.
Gaming's forecasted operating results are directly dependent upon the
realization of these assumptions. The Forecast assumes selling, general and
administrative expenses will increase by approximately 18% as a result of
increased product development and sales efforts. Variations from these
assumptions will have a material effect upon forecasted results. As Gaming's
manufacturing overhead costs and selling, general and administrative expenses
are relatively fixed, variances from the forecasted unit sales impact margins to
a greater extent than if such costs were predominantly variable.
52
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
SYSTEMS
Systems' revenues reflect the sales of computer hardware and computer
software, as well as maintenance and upgrades of such hardware and software, to
casinos in various jurisdictions, including Nevada and Atlantic City,
riverboats, Native American casinos and, to a lesser extent, in international
markets. Hardware and software sales are based on the contracts that Systems
enters into with each of the individual casinos. Such contracts generally
reflect pre-determined prices for goods and services provided by Systems.
Maintenance revenues are generally a function of the total installed base of
Systems' GMUs.
SYSTEMS OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Revenues....................................................... $ 13,386 $ 20,681 $ 20,565
Costs and Expenses................................................. $ 9,793 $ 14,893 $ 14,262
</TABLE>
The Forecast assumes that revenues during the forecast period will be
comparable to the prior year. The forecasted net revenues assumes that
approximately 40% of Systems' sales result from product upgrades and expansions.
The Forecast assumes gross margin will increase during the forecast period due
to lower average discounts from list price primarily due to a change in customer
mix and the absence of a provision for product upgrades which was recorded
during the year ended December 31, 1995. The Forecast assumes selling, general
and administrative expenses will increase approximately 13%. Systems' forecasted
operating results are directly dependent upon the realization of these
assumptions. Variations from these assumptions will have a material effect upon
forecasted results. In particular, because Systems' revenues are concentrated in
a relatively small number of customers, a change in circumstantial delay or
other change in a small number of orders will materially impact Systems'
operating results.
WULFF
Wulff sales reflect the sales of new and used wall machine units,
third-party wall machines, pinball machines and other related amusement devices
and used equipment primarily in Germany to various arcades, taverns, hotels and
amusement galleries. Wulff's revenues are a function of the number of unit sales
and the sales price per unit.
WULFF OPERATIONS
<TABLE>
<CAPTION>
FORECASTED
TWELVE MONTHS TWELVE
ENDED MONTHS
DECEMBER 31, ENDING
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
New Wall Machine Units..................................................... 13,100 12,000 12,000
Net Revenues (all machines)................................................ $ 104,147 $ 116,782 $ 115,331
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 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. The Forecast assumes demand for new wall machines to continue to
be lower during the first half of 1996 than during the first half of 1995, but
to increase, and to exceed the 1995 level of demand, in the second half of 1996
principally due to the expected impact of new regulations going into effect on
January 1, 1997,
53
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
which will require all wall machines in use to have meters to monitor the amount
inserted by players and paid out by the machine. There can be no assurance that
the downturn in the first half of 1996 will be less than the downturn in the
last half of 1995, nor that the downturn is solely related to the regulatory
change, and, accordingly, temporary in nature. Further, there can be no
assurance that the forecasted positive impact of the 1997 regulations will be
realized or that demand will increase in the second half of 1996 as forecasted.
The Forecast assumes gross margin will increase during the forecast period
due to lower raw material costs per unit partially offset by a lower average
price per unit. Wulff's forecasted operating results will be directly dependent
upon the realization of these assumptions. The Forecast assumes selling, general
and administrative expenses will remain relatively constant. Variations from the
realization of these assumptions will have a material effect upon forecasted
results. As Wulff's manufacturing overhead costs and selling, general and
administrative expenses are relatively fixed, variances from forecasted unit
sales could impact margins to a greater extent than if such costs were
predominantly variable.
OTHER OPERATING COSTS AND EXPENSES (ALL BUSINESS UNITS)
The Forecast gives effect to assumed cost savings as a result of Merger
synergies and further assumes a reduction in corporate development costs, all on
the basis reflected under "Supplemental Analysis of Adjusted Operating Cash
Flow." In contrast to the actual results presented in the Comparative Analysis
for 1995, the Forecast assumes that other than as presented, no charges will be
incurred of the sort reflected in the "Supplemental Analysis of Adjusted
Operating Cash Flow" as Other Unusual or Non-recurring Charges, although the
concepts of non-recurring or unusual charges are not defined under GAAP. In
developing the Forecast, management included anticipated Merger costs for the
forecast period, and reviewed the Comparative Analysis period for non-recurring
revenue items as well as non-recurring expense items. The forecast of other
operating costs and expenses are particularly dependent upon the assumptions
concerning synergy cost savings and reduction of corporate development costs.
There is a possibility that a variation from the assumed savings may occur, and
the effect may be material. Assumptions for forecasted overhead levels and
certain other expenses as reflected above (E.G., for litigation costs) may be
subject to factors substantially outside of the Company's control, to a greater
degree than assumptions regarding its business units' revenues and cost of
sales.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization (which were not included in the business unit
discussion above) are expected to continue to be charged to earnings on
substantially the same basis as has been done historically. There are no
significant capital additions expected during the forecast period, nor is there
any expected material change to depreciation or amortization rates. Capital
replacement is expected to continue during the year at a moderate rate. The
Forecast also gives effect to expected increases in amortization of goodwill and
other assets resulting from the Merger.
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
FORECASTED
TWELVE
TWELVE MONTHS ENDED MONTHS
DECEMBER 31, ENDING
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gaming Machine Management................................................... $ 6,166 $ 7,773 $ 5,132
Casinos..................................................................... 644 3,803 1,580
Gaming...................................................................... 1,522 879 750
Systems..................................................................... 626 294 276
Wulff....................................................................... 7,389 7,067 5,682
Other....................................................................... 1,169 444 65
--------- --------- ------------
Total................................................................... $ 17,516 $ 20,260 $ 13,485
--------- --------- ------------
--------- --------- ------------
</TABLE>
54
<PAGE>
NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED)
Management believes that it has substantial discretion to reduce forecasted
levels of capital expenditures without materially reducing operating results for
the forecasted period, principally in the case of the Gaming Machine Management
and Casino expenditures. The significant capital expenditures in 1994 and 1995,
including upgrading the Plantation Casino, completing the Rainbow Casino and
upgrading the Gaming Machine Management installed base, are assumed to further
enhance the Company's ability to reduce 1996 capital expenditures on a
discretionary basis. Management estimates the minimum level of capital
expenditures for maintenance purposes is approximately $8.0 million.
NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT
The following is a reconciliation of the historical EBITDA by business unit
to the combined Adjusted Operating Cash Flow:
<TABLE>
<CAPTION>
FORECASTED
TWELVE
MONTHS
TWELVE MONTHS ENDED THREE MONTHS ENDED MARCH ENDING
DECEMBER 31, 31, DECEMBER
------------------------- ------------------------ 31,
1994 1995 1995 1996 1996
---------- ----------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EBITDA by Business Unit:
Gaming Machine Management............. $ 17,159 $ 18,260 $ 4,758 $ 4,469 $ 19,957
Casinos............................... 2,927 10,546 731 3,889 14,958
Wulff................................. 15,575 15,172 5,106(a) 3,406(a) 16,836
Gaming................................ 7,304 7,305 2,659(a) 1,046(a) 10,750
Systems............................... 3,593 5,788 1,997(a) 1,620(a) 6,303
Alliance Corporate Administrative
Expense.............................. (10,609) (8,912) (1,654) (4,723) (8,979)
Alliance Development Expense.......... (7,694) (15,072) (2,139) (3,497) (13,815)
BGII Corporate Administrative
Expense.............................. (4,520) (3,732) (1,285) (604) (4,800)
Discontinued Operations/Other......... (1,378)(b) (933)(b) (58)(b) (64)(b) --
Casino Royalty........................ -- (2,718) (27) (1,024) (4,368)
Minority Interest..................... (675) (504) (83) (432) (920)
BGII Unusual Charges and Other........ (300)(c) (7,216)(c) (400)(c) (1,296)(c) (2,300)
---------- ----------- ---------- ---------- -----------
Combined EBITDA......................... 21,382 17,984 9,605 2,790 33,622
Adjustments:
Direct Merger Costs................... -- 13,106(d) -- 3,794(d) 12,815(d)
Alliance Development Expense.......... 4,694(e) 966(e) 1,389(e) (52)(e) --
Rainbow Operations.................... 340(f) 2,506(f) 2,060(f) -- --
Unusual or Non-recurring Charges...... 2,856(g) 7,783(h) 600(i) 3,487(j) 4,479(k)
Synergy Cost Savings.................. 5,000(l) 5,000(l) 1,250(l) 1,250(l) 4,000(l)
---------- ----------- ---------- ---------- -----------
Adjusted Operating Cash Flow............ $ 34,272 $ 47,345 $ 14,904 $ 11,269 $ 54,916
---------- ----------- ---------- ---------- -----------
---------- ----------- ---------- ---------- -----------
</TABLE>
- --------------------------
(a) Differences in interim results for the three-month periods for Gaming and
Systems were affected by the timing and number of new casino openings, and
management believes that the interim results for Wulff in the 1996 quarter
were affected by regulations, which became effective January 1, 1996,
limiting the number of wall machines per square meter in arcade locations,
thereby reducing new sales opportunities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(b) Principally includes expenses by small casinos and taverns after Alliance
management discontinued their operations.
(c) See Notes (3), (6) and (7) to "Selected Historical Financial Information of
BGII."
(d) For the twelve months ended December 31, 1995, $11.1 million of direct
Merger costs are included in Alliance Development Expense and $2.0 million
in BGII Unusual Charges and Other. No such costs were incurred by either
company in the three months ended March 31, 1995. For the three months ended
March 31, 1996, $2.8 million of direct Merger costs are included in Alliance
Development Expense and $1.0 million in BGII Unusual Charges and Other. For
the forecasted twelve months ending December 31, 1996, $10.8 million of
direct Merger costs are included in Alliance Development Expense and $2.0
million in BGII Unusual Charges and Other.
(e) Reflects Alliance Development Expense, which relates to mergers,
acquisitions and joint ventures, adjusted to $3.0 million annually. The
adjustment to $3.0 million reflects the anticipated elimination of expenses
that were
55
<PAGE>
NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT (CONTINUED)
being incurred pending Alliance's accomplishment of its strategic plan to
acquire a major gaming manufacturing company. To accomplish this reduction,
Alliance reduced payroll costs and fees paid to consultants and legal costs
related to non-BGII transactions it had been pursuing. The adjustment to
eliminate direct costs related to the Merger is shown in Note (b) above. For
the three months ended March 31, 1996, Alliance Development Expense was
below the $3.0 million annual rate by $52,000.
(f) To adjust to reflect the operating results of the Rainbow Casino as if owned
during all of 1994 and 1995 and, for the twelve months ended December 31,
1995 and three months ended March 31, 1995, to reflect the recent operating
results of the Rainbow Casino, as if such results had occurred for all of
1995 (including an adjustment for additional casino royalty expense of
approximately $1.7 million, $1.0 million and $1.0 million, for the twelve
months ended December 31, 1994 and 1995 and the three months ended March 31,
1995, respectively).
(g) Includes legal costs included as BGII Corporate Administrative Expense
related to a former executive totaling $0.5 million and $0.3 million
recorded as BGII Unusual Charges and Other relating to a regulatory
investigation and legal proceedings in Louisiana and a reserve for
discontinued operations of $2.0 million for Alliance included in Alliance
Corporate Administrative Expense.
(h) Includes one-time charges included in Alliance Corporate Administrative
Expense consisting of an executive signing bonus of $1.3 million paid in
Common Stock and $1.1 million of termination costs for certain officers and
directors, which were incurred during the quarter ended June 30, 1995. Also
includes $1.4 million relating to a regulatory investigation and legal
proceedings in Louisiana included in BGII Unusual Charges and Other, and
$0.2 million included in BGII Corporate Administrative Expense for legal
costs related to the "Bally" trade name litigation. BGII Unusual Charges and
Other also includes $2.0 million in costs related to the merger agreement
between BGII and WMS, a provision of $0.8 million at Wulff to write down to
net realizable value the carrying value of a building to be sold and a
provision of $1.0 million to increase Wulff's tax reserves primarily for
V.A.T.
(i) Includes certain charges of $0.4 million included in BGII Unusual Charges
and Other relating to a regulatory investigation and legal proceedings in
Louisiana and $0.2 million included in BGII Corporate Administrative Expense
for legal costs related to the "Bally" trade name litigation.
(j) Includes a provision for impaired assets of two development projects
totaling $3.2 million included in Alliance Corporate Administrative Expense.
Also includes certain charges of $0.3 million included in BGII Unusual
Charges and Other relating to a regulatory investigation and legal
proceedings in Louisiana.
(k) Includes a provision for impaired assets of two development projects
totaling $3.2 million in Alliance Corporate Administrative Expense, $1.0
million of one-time charges to implement the expected annual synergy cost
savings, and certain charges of $0.3 million included in BGII Unusual
Charges and Other relating to a regulatory investigation and legal
proceedings in Louisiana.
(l) To adjust for estimated synergy cost savings indentified by management to
date including elimination of certain duplicative costs such as facility,
legal, accounting and compensation, which total approximately $5.0 million
on an annual basis. For the forecasted twelve months ending December 31,
1996, the synergy cost savings are presented net of the $1.0 million of
one-time charges to implement the cost savings (which are added back in Note
(i) above).
NOTE 5. -- MANDATORY PRINCIPAL PAYMENTS
Because the Forecast has been prepared on a consolidated basis, the Forecast
does not account for the Company's holding company structure, which will result
in cash flows earned at certain subsidiaries being unavailable for distribution
to the Company, including to service indebtedness of the Company during the
forecast period. Mandatory principal payments for the twelve months ending
December 31, 1996 (all of which relate to indebtedness of subsidiaries) consist
of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
VSI Loan.......................................................................................... $ 1,074
Rainbow Casino debt............................................................................... 2,810
Other............................................................................................. 773
------
$ 4,657
------
------
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources of the Company (Pro Forma)."
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 nine months ended March 31, 1995 and 1996. The
historical financial information of Alliance as of June 30, 1991, 1992 and 1993
and for the years ended June 30, 1991 and 1992 as set forth below has been
derived from the audited consolidated financial statements of Alliance not
included in this Prospectus. The results for the period ended March 31, 1996
will not necessarily be indicative of the results for the fiscal year ended June
30, 1996, and in the opinion of Alliance include all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the information set
forth herein. The table should also be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Pro Forma Condensed Combined Financial Information," the audited
consolidated financial statements of Alliance and the unaudited interim
condensed consolidated financial statements of Alliance including the notes
thereto and other financial and operating information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED JUNE 30, ENDED MARCH 31,
------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ------- ------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
NET REVENUES:
Gaming:
Routes.............................. $ 77,150 $77,940 $96,282 $102,830 $106,827 $ 79,389 $ 81,111
Casinos and Taverns................. 11,281 11,560 12,526 15,679 21,287 11,523 32,698
Food and Beverage Sales............... 3,120 3,376 4,184 4,480 3,847 2,842 2,976
Net Equipment Sales (1)............... 214 379 99 65 27 22 11
-------- ------- ------- -------- -------- -------- -----------
Total Net Revenues.................. 91,765 93,255 113,091 123,054 131,988 93,776 116,796
COSTS AND EXPENSES:
Cost of Gaming:
Routes.............................. 58,299 58,585 72,614 76,332 79,875 59,411 62,293
Casinos and Taverns................. 8,528 8,459 8,667 11,871 11,436 6,743 14,726
Cost of Food and Beverage............. 2,249 2,367 2,876 3,084 2,795 2,038 1,992
Cost of Equipment Sales............... 151 284 49 20 12 10 3
Selling, General and Administrative... 8,059 8,950 12,667 13,555 14,633 9,279 14,308
Business Development Costs............ -- -- 900 1,192 7,843 5,647 14,233
Corporate Expenses.................... 7,567 5,290 6,191 7,882 9,735 6,258 4,606
Provision for Impaired Assets......... -- -- -- -- -- -- 3,179
Bad Debt Expense...................... 4,845 539 461 705 400 -- --
Write-off of Inventories, Intangibles
and Other Assets..................... 4,982 -- -- -- -- -- --
Loss on Abandoned Casinos............. 7,847 2,307 -- 3,713 -- -- --
Loss on Abandoned Taverns............. -- -- -- 2,638 -- -- --
Depreciation and Amortization......... 7,092 7,355 8,718 9,530 9,520 6,934 7,328
-------- ------- ------- -------- -------- -------- -----------
Total Costs and Expenses............ 109,619 94,136 113,143 130,522 136,249 96,320 122,668
-------- ------- ------- -------- -------- -------- -----------
Operating Loss.......................... (17,854) (881) (52) (7,468) (4,261) (2,544) (5,872)
OTHER INCOME (EXPENSE):
Interest Income....................... 1,750 1,324 998 2,084 2,798 2,235 1,206
Interest Expense...................... (4,663) (4,505) (5,046) (6,830) (8,133) (5,844) (6,341)
Minority Interest..................... -- -- -- -- (397) (252) (708)
Royalty............................... -- -- -- -- (810) (27) (2,931)
Other Net............................. (1,007) (618) 450 (673) 317 33 398
-------- ------- ------- -------- -------- -------- -----------
Loss Before Income Taxes................ (21,774) (4,680) (3,650) (12,887) (10,486) (6,399) (14,248)
Income Tax (Expense) Benefit............ 5,958 -- -- (241) (265) (394) (581)
-------- ------- ------- -------- -------- -------- -----------
Net Loss............................ $(15,816) $(4,680) $(3,650) $(13,128) $(10,751) $ (6,793) $ (14,829)
-------- ------- ------- -------- -------- -------- -----------
-------- ------- ------- -------- -------- -------- -----------
Net Loss Per Common Share............... $ (1.73) $ (0.51) $ (0.38) $ (1.28) $ (0.95) $ (0.61) $ (1.21)
-------- ------- ------- -------- -------- -------- -----------
-------- ------- ------- -------- -------- -------- -----------
Weighted Average Common Shares
Outstanding............................ 9,151 9,248 9,696 10,251 11,300 11,192 12,245
-------- ------- ------- -------- -------- -------- -----------
-------- ------- ------- -------- -------- -------- -----------
Deficit of Earnings to Fixed Charges
(2).................................... $(21,744) $(4,680) $(3,650) $(12,887) $(10,487) $ (6,399) $ (14,248)
-------- ------- ------- -------- -------- -------- -----------
-------- ------- ------- -------- -------- -------- -----------
Pro Forma Deficit of Earnings to Fixed
Charges................................ $ (1,164) $ (200) $ (9,821)
-------- -------- -----------
-------- -------- -----------
Pro Forma Deficit of Earnings to Fixed
Charges and Preferred Stock
Dividends.............................. $ (9,203) $ (6,116) $ (15,737)
-------- -------- -----------
-------- -------- -----------
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
FISCAL YEARS ENDED JUNE 30, 31,
------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ------- ------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CASH FLOW INFORMATION:
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Cash Flow From:
Operating Activities................ $ 4,889 $12,311 $ 5,909 $ 9,062 $ 957 $ 167 $ (533)
-------- ------- ------- -------- -------- -------- -----------
-------- ------- ------- -------- -------- -------- -----------
Investing Activities................ $ (7,159) $(6,887) $(8,998) $(27,299) $(21,648) $ (9,791) $ 5,255
-------- ------- ------- -------- -------- -------- -----------
-------- ------- ------- -------- -------- -------- -----------
Financing Activities................ $ 766 $ (959) $ 2,430 $ 45,742 $ (2,660) $ (1,509) $ (2,485)
-------- ------- ------- -------- -------- -------- -----------
-------- ------- ------- -------- -------- -------- -----------
Pro Forma Cash Flow From:
Operating Activities................ $ 7,225 $ 4,890 $ 20,564
-------- -------- -----------
-------- -------- -----------
Investing Activities................ $(26,936) $(13,637) $ 354
-------- -------- -----------
-------- -------- -----------
Financing Activities................ $ (757) $ 1,604 $ (3,358)
-------- -------- -----------
-------- -------- -----------
<CAPTION>
AT JUNE 30, AT MARCH 31,
------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ------- ------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents............... $ 5,774 $10,239 $ 9,580 $ 37,085 $ 13,734 $ 25,952 $ 15,791
Securities Available for Sale........... -- -- -- 12,489 23,680 13,240 9,591
Working Capital......................... 10,450 11,557 7,991 50,926 31,746 37,749 15,583
Total Assets............................ 79,024 75,594 73,768 119,416 126,348 128,103 111,288
Total Long-term Debt, including
Current Maturities..................... 44,450 43,282 44,798 90,726 101,397 102,718 99,089
Total Stockholders' Equity
(Deficiency)........................... 27,008 23,660 22,665 15,099 9,985 12,699 (5,595)
Book Value per Share.................... 2.95 2.51 2.27 1.28(3) 0.77(3) 1.00(3) (0.43)(3)
Pro Forma Book Value per Share.......... 2.16 1.58
</TABLE>
- ------------------------------
(1) Includes sales to related parties of $86 (1991), $236 (1992), $2 (1993), $6
(1994), $0 (1995) and $0 for the nine-month periods ended March 31, 1995 and
1996.
(2) No dividends were paid by Alliance during any period presented.
(3) Computed including Common Stock and Special Stock owned by KIC which was
converted into Common Stock in December 1995.
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 and as of
and for the three months ended March 31, 1995 and 1996, of which certain periods
are included elsewhere in this Prospectus. See "Basis of Presentation and
Description of Business" in BGII's Notes to Consolidated Financial Statements.
The historical financial information of BGII as of December 31, 1991, 1992 and
1993 and for the years ended December 31, 1991 and 1992 as set forth below has
been derived from the audited financial statements of BGII not included in this
Prospectus. The unaudited results for the period ended March 31, 1996 will not
necessarily be indicative of the results for the year ending December 31, 1996
and in the opinion of BGII include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the information set forth
herein. The selected historical consolidated financial data for periods prior to
November 18, 1991 (the date BGII completed its initial public offering of common
stock), present, on a historical cost basis, the financial position, results of
operations and cash flows of the subsidiaries and divisions of BEC which
formerly conducted operations as Gaming, Systems and Wulff. This table should
also be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Unaudited Pro Forma Condensed
Combined Financial Information", the audited consolidated financial statements
of BGII including the notes thereto and the unaudited interim condensed
consolidated financial statements of BGII including the notes thereto and other
financial and operating information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993(1) 1994(1) 1995(1) 1995(1) 1996(1)
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues................................ $ 153,648 $ 163,781 $ 168,707 $ 236,192 $ 249,312(2) $ 68,289 $ 58,544
Cost of Sales........................... 102,357 99,906 121,710(3) 157,059 163,131(2) 43,500 37,757
Selling, General and Administrative
Expenses............................... 36,725 46,348 57,357(4) 59,989 65,289 16,998 16,526
Provision for Doubtful Receivables...... 2,176 3,597 8,176(5) 5,763 6,712(2) 1,154 991
Unusual Charges......................... -- -- -- -- 5,816(6) -- 996(7)
Interest Expense, Primarily Charged by
BEC in 1991............................ 1,602 1,951 4,424 6,768 6,853 1,733 1,665
Provision for Income Taxes.............. 5,784 6,725 4,242 2,820 4,904 2,042 1,122
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) before Extraordinary
Gain................................... 5,004 5,254 (27,202) 3,793 (3,393) 2,862 (513)
Extraordinary Gain on Early
Extinguishment of Debt................. -- -- 3,759 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss)....................... $ 5,004 $ 5,254 $ (23,443) $ 3,793 $ (3,393) $ 2,862 $ (513)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) Per Share before
Extraordinary Gain..................... $ 0.48 $ 0.50 $ (2.54) $ 0.35 $ (0.31) $ 0.27 $ (0.05)
Extraordinary Gain on Early
Extinguishment of Debt Per Share....... -- -- 0.35 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) Per Share............. $ 0.48 $ 0.50 $ (2.19) $ 0.35 $ (0.31) $ 0.27 $ (0.05)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro Forma Net Income.................... $ 2,435(8)
---------
---------
Pro Forma Net Income Per Share.......... $ 0.23(8)
---------
---------
Average Number of Common Shares
Outstanding............................ 10,450 10,573 10,685 10,727 10,776 10,751 10,805
Ratio of Earnings to Fixed Charges...... 6.51X 6.56X -- 1.93X 1.21X 3.69X 1.35X
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Deficit of Earnings to Fixed Charges.... -- -- $ (22,960) -- -- -- --
---------
---------
CASH FLOW INFORMATION:
Historical Cash Flow From:
Operating Activities.................. $ 24,960 $ (17,604) $ (29,548) $ 1,224 $ 3,795 $ (5,605) $ (1,757)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Investing Activities.................. $ (2,878) $ (5,175) $ (13,407) $ (6,391) $ (6,233) $ (2,108) $ (2,218)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Financing Activities.................. $ (13,134) $ 18,506 $ 38,980 $ 8,231 $ (1,961) $ 1,688 $ 590
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents............... $ 14,429 $ 9,800 $ 5,436 $ 9,204 $ 5,526 $ 3,959 $ 2,009
Working Capital......................... 69,350 82,481 83,009 95,772 97,357 103,369 85,649
Property, Plant and Equipment, Net...... 19,650 18,695 24,042 24,358 23,244 26,412 23,615
Total Assets............................ 131,342 150,805 170,830 192,242 194,316 205,112 186,936
Long-term Debt, Including Current
Maturities............................. 7,186 25,950 62,458 69,762 69,944 73,936 69,971
Stockholders' Equity.................... 98,605 101,277 74,879 85,883 88,410 97,314 86,000
</TABLE>
- ------------------------------
(1) Includes results from the acquisition of a distribution business by Wulff in
January 1993.
(2) Includes the impact of sales returns of $0.3 million and a provision for
doubtful receivables of $0.9 million recorded in the second quarter of 1995
by Gaming related to two riverboats at the River City Complex in New Orleans
which filed for bankruptcy.
(3) Includes $6.2 million in charges to increase inventory valuation reserves in
1993 principally related to inventory originally intended for sale in the
Louisiana video lottery terminal market.
(4) Includes $1.2 million in charges related to a management reorganization at
Gaming in 1993.
(5) Includes a provision for doubtful receivables totaling $5.1 million recorded
by Gaming in 1993 related to a former distributor who filed for bankruptcy
during the second quarter of 1993.
(6) Includes $4.0 million in merger transaction costs and related litigation
expenses, a provision of $0.8 million at Wulff to write down to net
realizable value the carrying value of a building to be sold and a provision
of $1.0 million to increase Wulff's tax reserves primarily for V.A.T.
(7) Includes $1.0 million in Merger transaction costs.
(8) Includes pro forma income tax information for the year ended December 31,
1991 to reflect the provision for income taxes and net income as if Gaming
and Systems had filed separate income tax returns. The pro forma information
assumes that Gaming and Systems would have been unable to utilize operating
losses on a carry back basis.
60
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides an assessment of the liquidity and capital
resources of Alliance, the pro forma liquidity and capital resources of the
Company, and the results of operations of each of Alliance and BGII. The
discussion should be read in conjunction with the audited consolidated financial
statements of Alliance and BGII, and the unaudited interim condensed
consolidated financial statements of Alliance, in each case including the notes
thereto, which are included elsewhere in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES OF ALLIANCE
At March 31, 1996, Alliance had working capital of approximately
$15,583,000, a decrease of approximately $16,163,000 from June 30, 1995. The
decrease in working capital is due in part to a decrease in cash and cash
equivalents which were used to fund development activities in connection with
Alliance's business strategy. As of March 31, 1996, Alliance had $25,562,000 in
cash, cash equivalents and securities available for sale (including $8,875,000
representing the market value of the 1,000,000 shares of BGII common stock owned
by Alliance), of which approximately $9,000,000 is necessary to fund ongoing
gaming operations in the ordinary course of business. At June 30, 1995, Alliance
had working capital of approximately $31,746,000 and $37,414,000 in cash, cash
equivalents and securities available for sale.
For the nine months ended March 31, 1996, Alliance incurred development
costs associated with pursuing Alliance's business strategy relating to mergers
and acquisition of approximately $14,233,000 consisting of $12,235,000 of direct
costs incurred related to the Merger and the previous tender offer and consent
solicitation by Alliance and $1,998,000 of salaries and administrative costs of
the mergers and acquisitions unit. During fiscal 1995, Alliance incurred
approximately $7,843,000 in expenses associated with pursuit of Alliance's
business strategy, of which $1,669,000 related to the Merger. Alliance's
business strategy is to use its strengthened management team, diversified gaming
expertise and business and investment community relationships to develop new
opportunities in the operation of land-based, dockside and riverboat casinos
(including Native American casinos), gaming systems and technology and the
supply and management of electronic gaming machines.
On July 16, 1994 the Rainbow Casino located in Vicksburg, Mississippi
permanently opened for business. In connection with the completion of the casino
and the acquisition of its original 45% limited partnership interest in 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
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became the general partner and RCC became the limited partner of RCVP and (ii)
the respective partnership interests were adjusted. As of March 31, 1996,
amounts outstanding under the HFS facility and the related financings aggregated
$9.4 million. As adjusted, RCC is entitled to receive 10% of the net available
cash flows (which amount shall increase to 20% of such amount of revenues
exceeding $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 $1.0
million in cash or shares of Common Stock 180 days after the occurrence. The
casino has achieved the required earnings as adjusted, and Alliance is obligated
to make the required payment or issue the Common Stock (with the issuance being
its expected course of action) by September 30, 1996. Also, Alliance's 5.2%
royalty on gross revenues was terminated on the date it became general partner.
Alliance and Casino Magic Corporation, through wholly-owned subsidiaries,
are members in Kansas Gaming Partners, L.L.C. ("KGP") and Kansas Financial
Partners, L.L.C. ("KFP"), both Kansas limited liability companies. Under an
option agreement (the "Option Agreement") granted to KGP by Camptown and The
Racing Association of Kansas-Southeast ("TRAK Southeast"), KGP has been granted
the exclusive right, which right expires on September 13, 2013, to operate
gaming machines and/or casino-type gaming at Camptown's racing facility in
Frontenac, Kansas if and when such gaming is permitted in Kansas. In December
1994, Camptown received a $3,205,000 loan from Boatmen's Bank which was
guaranteed by KFP. Alliance and Casino Magic Corporation each invested
$1,580,000 in KFP which amounts were used by KFP to purchase a certificate of
deposit to collateralize its guaranty. Construction of Camptown's racing
facility has been completed and the facility opened for business in May 1995.
The racing facility was temporarily closed on November 5, 1995 due to poor
financial results. Camptown filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in January 1996 and has stated its intention to reopen for
business following bankruptcy reorganization. Boatmen's Bank demanded payment of
the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan
and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed
Boatmen's Bank's position in the loan to Camptown which is secured by a second
mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK
Southeast and Camptown continue to be bound by the Option Agreement. KFP intends
to vigorously pursue all of its rights and remedies which may include, among
other things, seeking authority from the bankruptcy court to commence a
foreclosure action. In the case of a foreclosure action, KFP would be required
to assume or pay the existing first mortgage of approximately $2,000,000 if KFP
becomes the purchaser at any such sale. The Kansas legislature considered gaming
bills during the 1996 session although none passed. There can be no assurance
that gaming of any type will ever be legalized in Kansas. Management has
evaluated this investment and determined it to be impaired because it does not
appear to be recoverable. Alliance fully reserved the net book value of
approximately $1,585,000 through a charge to operations which has been recorded
in the quarter ended March 31, 1996.
Native American Investments, Inc. ("NAI"), a wholly-owned subsidiary has a
contract to develop Class II and III gaming opportunities with an Indian tribe
in California. Class II gaming is subject to the concurrent jurisdiction of the
National Indian Gaming Commission ("NIGC") and the applicable Indian tribe.
Class III gaming is a residual category composed of all forms of gaming that are
not Class I gaming or Class II gaming, including casino style gaming. The
contract is subject to negotiations resulting in satisfactory compacts with the
state and approval of the contract by the NIGC. The Governor of California has
to date refused to negotiate a compact covering Class III electronic gaming
machines and house-banked games in California and is currently engaged in
related litigation over the scope of gaming issues with certain Indian tribes.
There can be no assurance as to the ultimate outcome of these litigation
activities or successful completion of any part of the Alliance project. On
March 27, 1996, the United States Supreme Court ruled that a portion of the
Indian Gaming Regulatory Act was unconstitutional. As a result, Federal courts
cannot oversee negotiations between Indian tribes and state officials. Alliance
believes that this ruling will have a materially adverse effect upon its Native
American casino development activities in California. Accordingly, management
has evaluated this investment and determined it to be impaired because it now
appears to be
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unrecoverable. Management has fully reserved the net book value of approximately
$1,594,000 through a charge to operations which has been recorded in the quarter
ended March 31, 1996. Management will continue to monitor the status of Class II
and III gaming in California.
In March 1992, Alfred H. Wilms committed to provide to VSI, a
majority-controlled subsidiary of Alliance, a subordinated loan of up to $6.5
million dollars. The VSI Loan, as amended, bears interest at a rate equal to the
London Interbank Offered Rate for a period of ninety days plus 2%, payable
quarterly, and is due on September 21, 1998. The VSI Loan is secured by liens in
favor of N.V. Continental Trust Company ("CTC"), an affiliate of Mr. Wilms, on
substantially all of VSI's assets. Pursuant to the terms of the VSI Loan, VSI
may not pay cash dividends or make any distribution of its property. Alliance
also issued to Mr. Wilms warrants to purchase 2,000,000 shares of Common Stock
at $2.50 per share in connection with such loan which expire on September 1,
1998 (the "Wilms Warrants"). As of March 31, 1996, there was an outstanding
balance of $3.1 million on this loan.
Cash provided by operations for the nine months ended March 31, 1996
decreased by approximately $700,000 from amounts reported for the same period in
1995 resulting in negative cash flow from operations of $553,000. The change is
primarily due to an increase in business development costs over the same period
from the prior year of $8,586,000, primarily related to the Merger, partially
offset by an increase in cash provided by the casino operations of approximately
$7,795,000 attributable to the Rainbow Casino.
Cash provided by operations for fiscal 1995 decreased approximately
$8,105,000 from fiscal 1994. Included in fiscal 1994's cash provided by
operations was a non-recurring gain of $3,600,000 associated with the
termination of Alliance's letter agreement with Capital Gaming International,
Inc. ("Capital Gaming"), which concerned Alliance's proposed equity investment
in Capital Gaming, and the payment by Capital Gaming of $4,000,000 (offset by
transaction expenses) to Alliance in connection therewith, and $6,351,000 of
charges related to Alliance's decision to exit the downtown Las Vegas gaming
market and dispose of its tavern operations. Exclusive of these items,
expenditures related to supporting Alliance's business strategy relating to
mergers and acquisitions in fiscal 1995 increased approximately $3,051,000 from
fiscal 1994. Long-term accrued expenses decreased by approximately $1,031,000
from fiscal 1994 as Alliance paid rent and other exit expenses against the
amounts accrued in fiscal 1994 as noted above. The remaining increase in accrued
expenses accounted for the use of cash in the amount of $4,710,000. These uses
of cash were partially offset by an increase in cash flows from operations of
approximately $2,666,000 from Alliance's ongoing business operations and an
operating cash contribution of approximately $3,089,000 from the first year of
operations by the Rainbow Casino. Significant non-cash items added back to cash
flows from operations for fiscal 1995 include $1,313,000 in non-cash
compensation expense and $1,075,000 related to certain service contracts and
termination costs.
Cash provided by investing activities for the nine months ended March 31,
1996, increased $15,046,000 over that in 1995 due primarily to the proceeds of
approximately $12,950,000 from the sale of securities. Also, proceeds from the
sale of property and equipment increased $1,885,000 compared to the same period
last year.
Cash flows used for investing activities in fiscal year 1995 decreased by
$5,651,000 from the prior year. Net collections on receivables in fiscal 1995
improved by $2,605,000 over those in fiscal 1994. In fiscal 1994, Alliance
funded approximately $7,250,000 in loans to Capital Gaming and the original
general partner in RCVP, which additions were partially offset by increased
collections of receivables related primarily to the collection of the Capital
Gaming loan in fiscal 1994.
Cash used in financing activities for the nine months ended March 31, 1996,
increased $976,000 from the same period in 1995 due primarily to an increase in
Alliance's principal reductions on its existing long-term debt of $1,192,000 in
1996.
Cash flows from financing activities in fiscal year 1995 declined
$48,402,000 from fiscal 1994. In fiscal 1994, Alliance completed the private
placement of $85,000,000 aggregate principal amount of the Old Convertible
Debentures. Concurrent with the closing of the issuance of the Old Convertible
Debentures, Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") invested
$5,000,000 in Alliance (the "Kirkland
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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 Non-Voting Junior Convertible Special
Stock into an equivalent number of shares of Common Stock.
EBITDA as a percent of the related revenues changed for Nevada gaming
machine management operations from 15.3% in fiscal 1994 to 16.7% in fiscal 1995
and to 14.5% in the first nine months of fiscal 1996 and for Louisiana gaming
machine management operations from 17.5% to 19.1% and to 20.6% for the same
periods. EBITDA as a percent of revenues for casino operations (excluding
discontinued operations), excluding certain one-time charges, was 18.2% in
fiscal 1994 and 23.3% in fiscal 1995 and 31.4% in the first nine months of
fiscal 1996. The increase in the first nine months of fiscal 1996 was due
primarily to the acquisition of the Rainbow Casino. EBITDA should not be
construed as an alternative to net income or any other GAAP measure of
performance as an indicator of Alliance's performance or to cash flows generated
by operating, investing and financing activities as an indicator of cash flows
or a measure of liquidity. Management believes that EBITDA is a useful adjunct
to net income and other GAAP measurements and is a conventionally used financial
indicator. On a pro forma basis, earnings would have been inadequate to cover
fixed charges by approximately $1.2 million for the year ended June 30, 1995 and
would have been inadequate to cover fixed charges by approximately $9.8 million
for the nine-month period ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (PRO FORMA)
On October 18, 1995 Alliance entered into the Merger Agreement with BGII.
Pursuant to the Merger, BGII will become a wholly-owned subsidiary of Alliance.
The aggregate Merger consideration to BGII stockholders will be approximately
$77.2 million in cash (including interest accruing at a rate of 5.5% per annum
from May 3, 1996 to the Effective Time), $35.7 million in Preferred Stock
(including dividends accruing at a rate of 15% per annum from May 3, 1996 to the
Effective Time) and $2.9 million in Common Stock. Alliance will also retire
approximately $53.3 million of long-term debt of BGII (including prepayment
premium, original issue discount and unpaid interest accrued through the
Effective Time of the Merger) in connection with the Merger, and will generally
assume BGII's obligations with respect to outstanding options and warrants to
purchase shares of BGII common stock. See "The Merger and Related Financings."
Alliance currently anticipates obtaining one or more working capital
revolving facilities at Gaming, Systems and Wulff providing up to an aggregate
of $40.0 million of borrowings (of which approximately $22.0 million of Wulff's
existing lines of credit are anticipated to remain in place) which would be
secured by inventory and accounts receivable. Alliance has not received any
commitment for any such facility and no assurance can be given that it will be
able to obtain any such facility on terms acceptable to Alliance.
Following the Transaction, 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 Old
Convertible Debentures and the Senior Secured Notes at maturity if its cash flow
from operations does not increase substantially. On a pro forma basis after
giving effect to the Transaction, the Company's earnings would have been
inadequate to cover fixed charges and Preferred Stock dividends by approximately
$9.2 million and approximately $15.7 million for the 12-month period ended June
30, 1995 and the nine-month period ended March 31, 1996, respectively. The
Company believes that its working capital needs will increase as a result of 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
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Senior Secured Notes will restrict the Company's ability to incur indedtedness
as set forth herein. See "Risk Factors -- High Leverage and Fixed Charges after
the Merger; Holding Company Structure; Working Capital" and "Description of the
Senior Secured 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 $16.7 million at March 31,
1996. It is possible that one or more of Gaming's customers whose obligation has
been guaranteed by Gaming may be unable to make payments as such become due. In
this case Gaming may become responsible for repayment of at least a portion of
such amounts over the term of the receivables. In general, under the terms of
these contracts, the Company may be responsible for monthly payments of the
outstanding obligations. Accordingly, the Company will have greater exposure to
the financial condition of its customers in emerging markets than has
historically been the case in established markets like Nevada and Atlantic City.
Wulff provides customer financing for approximately 20% of its sales, and
management expects this practice temporarily to increase during the latter half
of 1996. In order to be competitive in meeting customer demand for financing of
gaming equipment in emerging markets, the Company plans to continue to evaluate
the need to involve third party finance companies or secure additional
financing, although there is no assurance that such additional financing will be
obtained.
ALLIANCE RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1995
REVENUES
Total revenues for the nine months ended March 31, 1996 were $116,796,000,
an increase of $23,020,000 (24.5%) over those for the same period in fiscal year
1995. Revenues from all gaming machine management operations increased
$1,722,000 (2.2%) to approximately $81,111,000 in the first nine months of
fiscal 1996. Revenues from the Louisiana gaming machine management operations
increased $467,000 (an increase of 3.9%) primarily as a result of an expansion
of operations from the opening of a new OTB in October 1995. Revenues from
Nevada gaming machine management operations increased approximately $1,255,000
(1.9%) over those for the same period last year. The increase in the Nevada
gaming machine management revenues was attributable to a $0.66 increase in the
average net win per gaming device per day for the nine months ended March 31,
1996 compared to the same period in fiscal year 1995 (accounting for an increase
of approximately $942,000) and an increase in the weighted average number of
gaming devices on location for the nine months ended March 31, 1996 as compared
to the same period in fiscal year 1995 (accounting for an increase of
approximately $313,000). Revenues from casino and tavern operations, including
food and beverage sales, increased approximately $21,309,000 (148.3%) during the
current nine months as compared to those for the prior year as revenues
recognized from the Rainbow Casino, which were consolidated beginning March 29,
1995, exceeded the revenues lost with the termination of Alliance's lease at the
Royal Casino and the reduction of operations at Alliance's tavern locations.
COSTS AND EXPENSES
COSTS OF REVENUES. Cost of gaming machine management revenues for the nine
months ended March 31, 1996 increased $2,882,000 (4.8%) over the same period in
fiscal year 1995. Costs of revenues from gaming machine management operations in
Louisiana increased $187,000 (an increase of 2.4% from last year) as a result of
an expansion of operations from the opening of a new OTB parlor in October 1995.
Costs of gaming revenues for Nevada gaming machine management revenues increased
$2,695,000 (5.2%) as compared to the prior year as revenues increased, and
increased slightly as a percent of Nevada gaming 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
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cost of casino and tavern revenues including costs of food and beverage revenues
increased $7,937,000 (90.4%) compared to the same period of fiscal year 1995
results primarily due to the Rainbow Casino cost of revenues which were
consolidated beginning March 29, 1995. This increase was partially offset by the
termination of Alliance's lease at the Royal Casino and the reduction of
operations at Alliance's tavern locations. Cost of casino and tavern revenues
includes cost of goods sold, gaming taxes, rent and direct labor, including
related taxes and benefits.
EXPENSES. For the nine months ended March 31, 1996 Alliance incurred
developmental costs associated with pursuing Alliance's business development
strategy relating to mergers and acquisitions of approximately $14,233,000,
consisting of $12,235,000 of direct costs incurred related to the Merger and the
previous tender offer and consent solicitation by Alliance and $1,998,000 of
salaries and administrative costs of the mergers and acquisitions unit, which
represented an increase of $8,586,000 (152.0%). These business development
expenses include salaries and wages, related taxes and benefits, professional
fees, travel expense and other expenses associated with supporting Alliance's
strategy. The level of business development activities, exclusive of Merger
costs, has been reduced from prior periods due to the termination of two
executives in this business unit in order to reduce costs and the relocation of
this unit to lower cost office space. Alliance believes that such reduced level
of costs will be adequate to pursue its business development strategies on a
more limited basis in accordance with its business plan following consummation
of the Merger.
Selling, general and administrative expenses for the nine months ended March
31, 1996 increased approximately $5,029,000 (54.2%) over the same period in
1994. Expenses for casinos and taverns for the nine months ended March 31, 1996
increased $5,577,000 (209.5%) over the prior year primarily due to the Rainbow
Casino expenses which were consolidated beginning March 29, 1995. This increase
was partially offset by the termination of Alliance's lease at the Royal Casino
and the reduction of operations at Alliance's tavern locations. Such expenses
related to gaming machine management operations for the nine months ended March
31, 1996 decreased $548,000 (8.3%) over the same period in fiscal year 1995
reflecting steps taken to reduce costs, including reduced staffing levels.
Corporate general and administrative expenses decreased $1,652,000 (26.4%). This
decrease was caused primarily by controlling costs and reducing staffing levels.
Alliance expects that there may be further increases in selling, general and
administrative expenses related to the addition of new management and
development personnel and other costs associated with supporting Alliance's
business strategy. Included in last year's other income and expenses is a charge
of $386,000 representing Alliance's equity in the net loss of the Rainbow Casino
in its first nine months of operations prior to Alliance's acquisition of the
general partnership interest in RCVP on March 29, 1995.
Interest expense for the period increased $497,000 (8.5%) over the same
period last year due principally to the increased interest expense related to
the debt of Rainbow Casino.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUES
Total revenues for the fiscal year ended June 30, 1995 were approximately
$131,988,000, an increase of $8,934,000 (7.3%) over those for fiscal 1994.
Revenues from all gaming machine management operations increased $3,997,000
(3.9%) to approximately $106,827,000 in fiscal 1995. Revenues from gaming
machine management operations in the State of Louisiana declined $1,796,000
(10.3%) primarily as a result of increased competition from riverboat
operations. Revenue from Nevada gaming machine management operations for fiscal
1995 increased approximately $5,739,000 (6.7%) over those for fiscal 1994. The
increase in the Nevada gaming machine management revenues was attributable to a
$2.15 increase in the average net win per gaming device per day in fiscal 1995
compared to fiscal 1994 (accounting for approximately $4,042,000 of such
increase) and an increase in the weighted average number of gaming devices on
location during fiscal 1995 as compared to fiscal 1994 (accounting for an
increase of approximately $1,751,000). Revenues from casino and tavern
operations, including food and beverage sales, increased approximately
$4,975,000 (24.6%) during fiscal 1995 over those for fiscal 1994 as revenues
recognized from the Rainbow
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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 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, including the cost of food and beverage sales, for fiscal
1995 decreased $724,000 (4.8%) over that in fiscal 1994 primarily due to the
closing of Alliance's properties in downtown Las Vegas and the termination of
Alliance's lease at the Royal Casino. These decreases were partially offset by
increases in Rainbow Casino costs of revenues which were consolidated beginning
in March 1995. Cost of casino and tavern revenues includes cost of goods sold,
gaming taxes, rent and direct labor expenses, including taxes and benefits.
Although the gross margin percentage for Nevada operations declined slightly
during fiscal 1995, the decline was completely offset by the addition of the
Rainbow Casino and a small improvement in the Louisiana gross margin percentage.
As a result, the total cost of revenues as a percentage of total revenues
declined by 2.9% over that in fiscal 1994.
EXPENSES. In fiscal 1995, Alliance incurred development costs associated
with pursuing Alliance's long term growth strategy of approximately $7,843,000,
an increase of approximately $6,651,000 (558.0%) over fiscal 1994. Included in
the development costs for fiscal 1995 was $1,669,000 of costs related to the
Merger. Included as an offset to development costs for fiscal 1994 was a
non-recurring gain of $3,600,000 related to Alliance's effort to acquire Capital
Gaming and the payment by Capital Gaming to extinguish its obligation to issue
warrants to Alliance in connection therewith. Fiscal 1994 development costs also
include certain significant expenses associated with Alliance's purchase of
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
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operations declined approximately $660,000 (23.8%) as staff reductions and cost
containment measures were implemented to counter increased competition in that
market. The same costs for Nevada gaming machine management operations in fiscal
1995 decreased $680,000 (9.8%) as the benefit of staff reductions and cost
controls taken in late fiscal 1994 was realized. Selling, general and
administrative costs increased for casino and tavern operations by $1,595,000
(44.0%) over those in fiscal 1994. The acquisition of the Rainbow Casino, which
contributed $1,984,000 to the increase, was partially offset by the closing of
Alliance's downtown Las Vegas properties and the termination of the lease at the
Royal Casino. Also contributing to the increase in selling, general and
administrative expenses were $478,000 of expenses related to certain service
contracts and termination costs. Selling, general and administrative expenses
may be subject to further increases.
In fiscal 1994, due to continuing losses from operations, negative cash
flows and incompatibility with Alliance's long-term growth strategy, Alliance's
Board of Directors resolved to (i) exit the downtown Las Vegas gaming market and
(ii) dispose of the currently operated small independent tavern operations.
Based on these decisions, Alliance recognized total expenses of approximately
$5,884,000 in fiscal 1994. As a result of the decision to exit the downtown Las
Vegas gaming market, in September 1994, Alliance substantially reduced
operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall &
Saloon. Included in the fiscal 1994 statements of operations are total expenses
of approximately $3,246,000 related to these actions. The total charge included
approximately $488,000 related to the write-down of assets and approximately
$2,758,000 representing primarily the present value of the future lease payments
net of estimated future sublease income. The decision to withdraw from the
tavern business resulted in expenses of approximately $2,638,000 being
recognized in fiscal 1994. Approximately $1,813,000 of the total amount was
related to the write-down of assets while approximately $825,000 represented
primarily the present value of the future lease payments net of estimated future
sublease income.
On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race
Course in New Orleans, Louisiana where Alliance operated 199 electronic gaming
machines prior to the fire (of which 193 were destroyed by the fire) through its
controlled subsidiary, VSI. Alliance was fully insured for all equipment,
leasehold improvements, other assets and business income with the exception of
approximately $46,000 in deductibles. During fiscal 1995, Alliance recorded
approximately $247,000 of income from business interruption insurance proceeds
compared to $241,000 of such proceeds in fiscal 1994. Alliance is discussing
settlement of additional business interruption claims with the insurance
carrier. Alliance has also received insurance proceeds based on the replacement
value of the assets destroyed in the fire and, therefore, recognized a gain of
approximately $156,000 which is included in other income in fiscal 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
REVENUES
Total revenues for the fiscal year ended June 30, 1994 were approximately
$123,054,000 for fiscal 1994, an increase of $9,963,000 (8.8%) over those for
fiscal 1993. Revenues from all gaming machine management operations increased
$6,548,000 (6.8%) to approximately $102,830,000 in fiscal 1994. Gaming machine
management operations in the State of Louisiana contributed $5,222,000 (an
increase of 42.9%) to the overall increase in gaming machine management revenues
as Alliance continued to experience increasing demand in that relatively young
market. Revenue from Nevada gaming machine management operations increased
approximately $1,326,000 (1.6%) over those for fiscal 1993. The increase in the
Nevada gaming machine management revenues was attributable to a $1.30 increase
in the average net win per gaming machine per day in fiscal 1994 over that of
fiscal 1993 (accounting for an increase of approximately $2,608,000) which was
partially offset by a decrease in the weighted average number of gaming machines
on location during fiscal 1994 as compared to fiscal 1993 (accounting for a
decrease of approximately $1,282,000). Revenues from casino and taverns
increased approximately $3,449,000 (20.6%) during fiscal 1994 as compared to
those for fiscal 1993 due to the continued expansion of casino operations and
operating additional troubled tavern locations.
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
68
<PAGE>
Louisiana contributed $2,854,000 (an increase of 33.8%) 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 arrangement with revenue-sharing arrangements.
Cost of gaming machine management revenues includes rents under both space lease
and revenue-sharing arrangements, gaming taxes and direct labor, including
related taxes and benefits. The cost of casino and tavern revenues for fiscal
1994 increased $3,412,000 (29.6%) over that for fiscal 1993 primarily due to the
first full year of operations of two small casinos and the first full year of
operating the hotel and food and beverage operations at the Mizpah Hotel and
Casino (the "Mizpah"). Previously, Alliance had operated only the casino at the
Mizpah, but in January, 1993 began operating the entire facility including food
and beverage operations to insure its availability for the casino. Cost of
casino and tavern revenues includes cost of goods sold, gaming taxes, rent and
direct labor expenses, including taxes and benefits. Although the gross margin
percentage from Nevada operations declined during fiscal 1994, the decline was
offset by increases in the Louisiana operating margin percentage. As a result,
the combined cost of gaming revenues as a percentage of gaming revenues remained
relatively constant from fiscal 1993 to fiscal 1994.
EXPENSES. In August 1994, due to continuing losses from operations,
negative cash flows and incompatibility with Alliance's long-term growth
strategy, Alliance's Board of Directors resolved to (i) exit the downtown Las
Vegas gaming market and (ii) dispose of the currently operated small independent
tavern operations. Based on these decisions, Alliance recognized total expenses
of approximately $5,883,500 in fiscal 1994. As a result of the decision to exit
the downtown Las Vegas gaming market, in September 1994, Alliance substantially
reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall
& Saloon. Included in the fiscal 1994 statements of operations are total
expenses of approximately $3,246,000 related to these actions. The total charge
included approximately $488,000 related to the write-down of assets and
approximately $2,758,000 representing primarily the present value of the future
lease payments net of estimated future sublease income. The decision to withdraw
from the tavern business resulted in expenses of approximately $2,638,000 being
recognized in fiscal 1994. Approximately $1,813,000 of the total amount was
related to the write-down of assets while approximately $825,000 represented
primarily the present value of the future lease payments net of estimated future
sublease income.
Alliance's lease at the Mizpah has a remaining lease term of approximately
8.5 years with an option on Alliance's behalf to terminate the lease arrangement
at any time after December 31, 1995 with 120 days notice. In September 1994,
Alliance notified the landlord of the Mizpah of its intent to exercise the
termination clause of its lease at the earliest possible date of January 1, 1996
and give 120 days notice at that time. As a result of this decision, Alliance
recognized additional charges of $467,500 in fiscal 1994.
Also included in selling, general and administrative expenses for fiscal
1994 are development costs associated with pursuing Alliance's long term growth
strategy of approximately $1,192,000. These developmental costs include
approximately $4,792,000 in legal fees, travel expenses and other expenses
associated with supporting Alliance's long-term growth strategy, which expenses
are partially offset by the $3,600,000 recovered under the Capital Gaming
termination agreement. Fiscal 1994 was the first year in which significant funds
were expended in pursuit of this strategy.
Exclusive of the reserves, write-downs and development expenses noted above,
selling, general and administrative expenses for fiscal 1994 increased
$1,679,000 (8.5%) over those in fiscal 1993. The primary causes for the increase
include a $400,000 fiscal 1994 bonus granted to Shannon L. Bybee as part of the
restructuring of his employment with Alliance, $350,000 in fees incurred under
the one year consulting contract with Carole A. Carter, the former President and
Chief Operating Officer of Alliance, continued expansion of the Louisiana
machine management operations which contributed approximately $546,000 to the
overall increase and $274,000 of overall increases in Nevada machine management
operations. The 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.
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<PAGE>
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 Automaten and
Vertriebs, 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.
70
<PAGE>
The following tables set forth, for the periods indicated, the percentage of
revenues represented by items reflected in BGII's consolidated statements of
operations.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED
REVENUES:
Sales............................ 97.5% 97.9% 98.1% 99.1% 98.1%
Other............................ 2.5 2.1 1.9 0.9 1.9
-------- -------- --------- -------- ---------
Total Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
COSTS AND EXPENSES:
Cost of Sales.................... 72.1% 66.5% 65.4% 63.7% 64.5%
Selling, General and
Administrative.................. 34.0 25.4 26.2 24.9 28.2
Provision for Doubtful
Receivables..................... 4.9 2.4 2.7 1.7 1.7
Unusual Charges.................. -- -- 2.3 -- 1.7
-------- -------- --------- -------- ---------
Total Costs and Expenses....... 111.0 94.3 96.6 90.3 96.1
-------- -------- --------- -------- ---------
Operating Income (Loss)............ (11.0) 5.7 3.4 9.7 3.9
Interest Expense................... 2.6 2.9 2.8 2.5 2.9
-------- -------- --------- -------- ---------
Income (Loss) before Income Taxes
and Extraordinary Gain............ (13.6) 2.8 0.6 7.2 1.0
Provision for Income Taxes......... 2.5 1.2 2.0 3.0 1.9
-------- -------- --------- -------- ---------
Income (Loss) before Extraordinary
Gain.............................. (16.1) 1.6 (1.4) 4.2 (0.9)
Extraordinary Gain on Early
Extinguishment of Debt............ 2.2 -- -- -- --
-------- -------- --------- -------- ---------
Net Income (Loss).................. (13.9)% 1.6% (1.4)% 4.2% (0.9)%
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
WULFF
REVENUES:
Sales............................ 96.6% 96.3% 97.1% 98.5% 97.5%
Other............................ 3.4 3.7 2.9 1.5 2.5
-------- -------- --------- -------- ---------
Total Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
COSTS AND EXPENSES:
Cost of Sales.................... 65.4% 64.9% 67.4% 65.4% 66.3%
Selling, General and
Administrative.................. 25.5 25.1 24.1 23.8 26.8
Provision for Doubtful
Receivables..................... 0.5 1.7 1.3 0.4 1.2
Unusual Charges.................. -- -- 2.9 -- 1.6
-------- -------- --------- -------- ---------
Total Costs and Expenses....... 91.4 91.7 95.7 89.6 95.9
-------- -------- --------- -------- ---------
Operating Income................... 8.6 8.3 4.3 10.4 4.1
Interest Expense................... 1.3 1.3 1.0 1.0 0.8
-------- -------- --------- -------- ---------
Income before Income Taxes......... 7.3 7.0 3.3 9.4 3.3
Provision for Income Taxes......... 3.7 2.3 3.5 5.5 3.4
-------- -------- --------- -------- ---------
Net Income (Loss).................. 3.6% 4.7% (0.2)% 3.9% (0.1)%
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
ADDITIONAL INFORMATION (APPROXIMATE
UNITS):
New Wall Machines Sold by
Wulff........................... 12,552 13,100 12,000 2,900 2,400
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- --------- -------- ---------
GAMING
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales............................ 98.3% 99.3% 98.9% 99.5% 98.6%
Other............................ 1.7 0.7 1.1 0.5 1.4
-------- -------- --------- -------- ---------
Total Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
COSTS AND EXPENSES:
Cost of Sales.................... 100.0% 73.7% 71.9% 69.6% 71.3%
Selling, General and
Administrative.................. 48.4 21.9 24.6 24.7 26.4
Provision for Doubtful
Receivables..................... 16.9 3.0 3.6 2.4 2.6
Unusual Charges.................. -- -- 1.9 -- 2.1
-------- -------- --------- -------- ---------
Total Costs and Expenses....... 165.3 98.6 102.0 96.7 102.4
-------- -------- --------- -------- ---------
Operating Income (Loss)............ (65.3) 1.4 (2.0) 3.3 (2.4)
Interest Expense................... 7.1 4.6 5.2 5.0 6.0
-------- -------- --------- -------- ---------
Loss before Income Taxes and
Extraordinary Gain................ (72.4) (3.2) (7.2) (1.7) (8.4)
Provision for Income Taxes......... -- 0.2 0.3 0.2 0.2
-------- -------- --------- -------- ---------
Loss before Extraordinary Gain..... (72.4) (3.4) (7.5) (1.9) (8.6)
-------- -------- --------- -------- ---------
Extraordinary Gain on Early
Extinguishment of Debt, Net of
Income Taxes...................... 7.7 -- -- -- --
-------- -------- --------- -------- ---------
Net Loss........................... (64.7)% (3.4)% (7.5)% (1.9)% (8.6)%
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
ADDITIONAL INFORMATION (UNITS):
New Slot Machines Sold........... 7,749 17,655 11,948 3,668 2,921
New Video Gaming Machines Sold... 2,205 3,807 6,080 1,194 1,120
Other............................ 202 163 56 -- --
-------- -------- --------- -------- ---------
Total.......................... 10,156 21,625 18,084 4,862 4,041
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
SYSTEMS
REVENUES:
Sales............................ 100.0% 100.0% 100.0% 100.0% 99.9%
Other............................ -- -- -- -- 0.1
-------- -------- --------- -------- ---------
Total Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
COSTS AND EXPENSES:
Cost of Sales.................... 28.2% 32.0% 35.3% 36.3% 31.8%
Selling, General and
Administrative.................. 42.8 46.5 34.3 25.5 37.0
Provision for Doubtful
Receivables..................... (4.4) 2.1 5.3 5.5 --
-------- -------- --------- -------- ---------
Total Costs and Expenses....... 66.6 80.6 74.9 67.3 68.8
-------- -------- --------- -------- ---------
Operating Income................... 33.4 19.4 25.1 32.7 31.2
Interest Expense................... -- 0.2 -- 0.1 0.1
-------- -------- --------- -------- ---------
Income before Income Taxes......... 33.4 19.2 25.1 32.6 31.1
Provision for Income Taxes......... -- -- -- -- --
-------- -------- --------- -------- ---------
Net Income......................... 33.4% 19.2% 25.1% 32.6% 31.1%
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
ADDITIONAL INFORMATION:
New Installations Implemented.... 6 11 9 3 6
-------- -------- --------- -------- ---------
-------- -------- --------- -------- ---------
</TABLE>
72
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
WULFF
Wulff's revenues for the three months ended March 31, 1996 were $31.4
million compared to $35.9 million in the comparable 1995 quarter, a decrease of
13%. Revenues from new wall machines decreased approximately 17% due to an
approximate 14% decrease in units sold in the first quarter 1996 and an
approximate 3% decrease in the average selling price of new wall machines.
Revenues from the distribution of recreational and amusement machines, used wall
machines and new wall machines manufactured by third parties decreased
approximately 11% during the first quarter of 1996 compared to the 1995 period.
The currency translation impact of the fluctuation of the German mark versus the
U.S. dollar increased revenues by $0.2 million during the 1996 period.
Operating income for the three months ended March 31, 1996 was $1.3 million
compared to $3.7 million for the three months ended March 31, 1995. The $2.4
million decrease was principally due to the aforementioned decrease in revenues,
a $0.2 million increase in the provision for doubtful receivables, unusual
charges of $0.5 million in 1996 representing an allocation of Merger costs,
partially offset by slightly lower selling, general and administrative expenses.
Gross margin as a percentage of revenues remained unchanged during the first
quarter of 1996 and 1995.
GAMING
Gaming reported revenues of $23.6 million in the first quarter of 1996
compared to $28.0 million in the comparable 1995 period, a 16% decrease. Gaming
reported unit sales of approximately 4,000 new gaming machines in the three
months ended March 31, 1996, compared to approximately 4,900 in the comparable
1995 quarter. This decrease was primarily a result of the continuing trend of
lower demand due to a reduced number of new casino openings. First quarter 1996
included sales of approximately 1,900 units to the Nevada and Atlantic City
markets, 1,600 units to international markets and 500 units to riverboat, other
domestic casinos and casinos on Native American lands. The average sale price
for new gaming machines was unchanged during the first quarters of 1996 and
1995. In total, revenues from the sale of new gaming machines were $19.9 million
in the 1996 quarter versus $23.8 million in the 1995 period. Revenues from other
sources decreased approximately $0.5 million to $3.7 million in the 1996 period
due principally to decreased accessory and used equipment sales offset in part
by a 43% increase in part sales.
Gaming reported an operating loss for the 1996 period of $0.6 million
compared to operating income of $0.9 million in the first quarter of 1995. The
$1.5 million decline in Gaming's operating results was primarily due to the
aforementioned decline in Gaming's revenues, a 1% decline in gross profit
margins as a percentage of total revenues and $0.5 million in unusual charges,
offset, in part, by a decrease in selling, general, and administrative expenses.
Gross profit margins as a percentage of revenues decreased due to the impact of
decreased demand for new machines and a $0.4 million increase in the provision
for inventory valuation, partially offset by the changing mix in products to
higher margin products. Unusual charges of $0.5 million in 1996 represent an
allocation of Merger costs. Selling, general, and administrative expenses
decreased approximately $0.7 million principally due to lower legal expenses.
SYSTEMS
Systems' revenues for the three months ended March 31, 1995 and 1996 were
$6.1 million and $5.0 million respectively. While this represents an 18%
decrease from the prior year quarter, the 1995 quarter was a record quarter due
to significant sales in the Louisiana market.
Operating income for the three months ended March 31, 1996 was $1.6 million
compared to operating income of $2.0 million for the three months ended March
31, 1995. The $0.4 million decrease in operating results was primarily a result
of lower revenues and increased selling, general and administrative expenses
offset, in part, by higher gross margin as a percentage of total revenues and a
lower provision for doubtful receivables. Gross margins as a percentage of total
revenues increased due primarily to product mix. Selling, general, and
administrative expenses increased approximately $0.3 million due to increased
staffing levels. The provision for doubtful receivables decreased approximately
$0.3 million due principally to better collection experience during the 1996
quarter.
73
<PAGE>
CONSOLIDATED
Revenues for the first quarter of 1996 were $58.5 million compared to $68.3
million in the first quarter of 1995, a decrease of $9.8 million (14%)
principally due to the aforementioned decreases in revenues at Wulff, Gaming and
Systems.
BGII had operating income of $2.3 million in the 1996 quarter compared to
$6.6 million in the comparable 1995 quarter, a decrease of $4.3 million. The
decline in operating results was attributable to the aforementioned decreases in
Wulff's, Gaming's and Systems' operating results, and reflects $1.0 million of
Merger transaction expenses in the first quarter of 1996.
Interest expense was $1.7 million in both periods.
BGII's effective tax rate in both periods differs from the United States
statutory rate of 35% principally due to a higher tax rate on income earned in
Germany and the lack of current tax benefits available for operating losses in
the United States.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
WULFF
Wulff's revenues for the year ended December 31, 1995 were $130.7 million
compared to $111.1 million in 1994, an increase of $19.6 million (18%). This
improvement resulted from the favorable effect of currency translation rates in
the 1995 period, an increase in slot and video gaming machines sold by
Vertriebs' wholly-owned subsidiary, GmbH, and an increase in used equipment and
recreation and amusement machine sales offset in part by a decrease in new wall
machine units sold by 8% and a decrease in the average selling price for new
wall machines by 8.4% as a result of increased price competition. Revenues from
GmbH increased by 99% due to increased new casino openings and greater market
penetration in Western and Central Europe and in Africa. The overall decline in
the value of the U.S. dollar against the Deutsche Mark increased revenues by
$15.0 million in 1995. New and used wall machine sales for the last six months
of 1995 were impacted by regulations, which became effective January 1, 1996,
limiting the number of wall machines per square meter in arcade locations,
thereby reducing new sales opportunities. Industry-wide demand for new machines
was adversely affected by this new regulation while demand for used machines
increased dramatically. The decrease in demand for new wall machines resulted in
increased competition based on sales price resulting in the reduction in average
selling price for new units during the year. Management expects the demand for
new wall machines to continue to be lower than prior year levels during the
first half of 1996. See "Risk Factors--Operating History--Recent Losses."
Revenues from the distribution of recreational and amusement machines increased
by approximately 8.7% during 1995.
Operating income was $5.6 million for 1995 compared to $9.2 million in 1994,
a decrease of $3.6 million or 40%. This decrease resulted from lower gross
margins, higher selling, general and administrative expenses, and unusual
charges, offset in part by a lower provision for doubtful receivables. Gross
margins for 1995 were 33% compared to 35% in the prior year. Gross margin was
unfavorably impacted by higher unit costs associated with lower production
levels, a change in product mix to lower priced used machines and a decrease in
average selling price of new wall machines sold. Selling, general and
administrative expenses increased by $3.5 million resulting from the effect of
currency translation rates between years and costs associated with the increased
revenues in GmbH. Wulff recorded unusual charges in 1995 of $0.8 million to
writedown to net realizable value the carrying value of a building to be sold
and $1.0 million to increase its tax reserves primarily for 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%.
74
<PAGE>
GAMING
Gaming's revenues for the year ended December 31, 1995 were $108.4 million
compared to $117.8 million in 1994, a decrease of $9.4 million or 8%. New gaming
machines sold decreased to 18,084 units in 1995 from 21,625 units in 1994, a
decrease of 16%. This decline in new unit sales was caused principally by a
reduced number of new casino openings, especially in the riverboat markets,
partially offset by increased sales in the Nevada market. Management believes
that the increase in sales into the Nevada market occurred principally due to
the popularity of Gaming's new V7000 Game Maker-Registered Trademark- machine
(the "Game Maker-Registered Trademark-"), a multi-game, touch screen video
device which accounted for 26% of Gaming's unit sales in 1995. The average price
of new gaming machines sold increased approximately 3% in 1995 principally due
to proportionately greater sales of the higher priced Game
Maker-Registered Trademark- machine. Revenues from new machines decreased to
$90.9 million in 1995 from $106.6 million in 1994. Revenues from sales of used
equipment increased by 121% to $9.2 million in 1995. In addition, revenues from
sales of service parts and interest income from financing customer receivables
increased by $2.2 million in 1995.
Gaming incurred an operating loss of $2.2 million for 1995 compared to
operating income of $1.6 million in the 1994 period, a decline of $3.8 million.
The decline in operating results was principally due to the impact of the
aforementioned decrease in revenues, higher selling, general and administrative
costs and higher bad debt provisions and unusual charges offset, in part, by an
increase in gross margin.
Gross margin as a percentage of total revenues was 28% for 1995 compared to
26% in 1994. Lower costs of materials in 1995 were offset, in part, by decreased
absorption of manufacturing overhead expenses attributable to the decline in new
sales units for 1995.
Selling, general and administrative expenses increased to $26.7 million in
1995 compared to $25.8 million in 1994, an increase of 3%. The $0.9 million
increase resulted principally from an increase in legal expenses primarily
related to Louisiana. Despite the decrease in unit sales in 1995, the provision
for doubtful accounts increased $0.3 million resulting from the closure of
certain riverboat casinos. Gaming incurred $2.0 million of unusual charges in
1995 representing an allocation of merger transaction costs and litigation
expenses related to the proposed merger with WMS, which has since been
terminated, and to a tender offer by Alliance which was subsequently terminated
in connection with the execution of the Merger Agreement.
SYSTEMS
Systems' revenues for the year ended December 31, 1995 were $20.7 million, a
55% increase compared to 1994. This increase is directly attributable to the
increased number of GMUs sold to both new casinos and to existing customers
which expanded their casinos, upgraded their current systems due to new
products, or replaced existing systems. In 1995 Systems sold approximately
22,000 GMUs compared to 13,000 in 1994. During 1995, Systems products were
installed in 9 new locations and as of December 31, 1995, Systems had 50
installations on-line. The average price of a GMU sold during 1995 decreased by
1.5% from the 1994 average price.
Systems' operating income was $5.2 million in 1995 compared to $2.6 million
in 1994, a 100% increase. This increase resulted from increased GMUs sold,
partially offset by lower gross margins, higher selling, general and
administrative expenses and a higher provision for doubtful receivables. Gross
margin was 65% in 1995 compared to 68% in 1994. This decrease results from the
decrease in the average selling price of a GMU during 1995, higher product costs
and a provision for product upgrades. Selling, general and administrative
expenses increased by $0.9 million in 1995 principally as a result of higher
compensation costs to support the business and higher facility costs for the
1995 year as 1994 was only impacted for six months by the higher costs resulting
from Systems occupying its new facility in July 1994. The provision for doubtful
accounts of $1.1 million in 1995 was primarily attributable to one riverboat
customer.
CONSOLIDATED
Revenues for the year ended December 31, 1995 were $249.3 million, net of
eliminations, compared to $236.2 million in 1994, an increase of 6%. This
increase is due to the aforementioned increase at Wulff and Systems partially
offset by the aforementioned decrease in Gaming's revenues.
75
<PAGE>
BGII had operating income of $8.4 million for 1995 compared to $13.4 million
in the 1994 period. The decrease in operating results of $5.0 million was caused
principally by the unusual charges recorded in 1995 along with the
aforementioned decrease in Wulff and Gaming's operating results partially offset
by the aforementioned increase in operating income at Systems.
Interest expense was $6.9 million in 1995 compared to $6.8 million in 1994.
The net loss for 1995 was $3.4 million or $0.31 per share compared to net
income of $3.8 million or $0.35 per share in 1994. This decline in net income
resulted from the after tax effect of $5.3 million in unusual charges and an
increase in the effective income tax rate primarily due to the aforementioned
higher effective tax rate in Germany in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
WULFF
Wulff's revenues for the year ended December 31, 1994 were $111.1 million
compared to $112.6 million in 1993, a decrease of $1.5 million (1%). New wall
machine unit sales of Wulff's products increased approximately 4% in 1994.
Additionally, the average selling price for new wall machine units sold
increased approximately 10% due principally to popular models introduced by
Wulff in the latter part of 1994. Revenues from the distribution of recreational
and amusement machines, new wall machines manufactured by third parties, used
wall machines and other revenues decreased approximately 17% in the 1994 period
due in part to depressed economic conditions in Germany and increased
competition in the lower margin recreational and amusement sales markets.
Currency translation rate adjustments of Wulff's revenues into U.S. dollars
increased revenues by $2.3 million in the 1994 period due to fluctuations in the
German mark versus the U.S. dollar.
Wulff's operating income was $9.2 million for 1994 compared to operating
income of $9.7 million in the 1993 period. The $0.5 million decrease in 1994 as
compared to 1993 was caused principally by the aforementioned decrease in
revenues and a $1.4 million increase in the provision for bad debts, offset, in
part, by a slight improvement in Wulff's gross margin as a percentage of total
revenues and a decrease in selling, general and administrative expenses of
approximately 3%. The increase in Wulff's provision for bad debts was caused by
an increase in Wulff's accounts and notes receivable balances in the 1994 period
as well as the general impact of depressed economic conditions on some of
Wulff's customers.
GAMING
Gaming's revenues for the year ended December 31, 1994 were $117.8 million
compared to $48.5 million in 1993, an increase of $69.3 million (143%). New
gaming machines sold increased to 21,625 units in 1994 from 10,156 units in
1993, an increase of 112%. The introduction of Gaming's S5500 ProSeries-TM- line
of slot machines and its new Game Maker-Registered Trademark-, a multi-game
touch screen machine, in the second half of 1993 and 1994, respectively, as well
as the proliferation of legalized gaming in riverboat markets, contributed to
this increase of units sold. The average price of gaming machines sold increased
18% in 1994 due to additional features, such as the embedded bill acceptor, in
the new machines and fewer sales through distributors in 1994. Aggregate
revenues from new machines increased to $106.6 million in 1994 from $41.7
million in 1993. Revenues from other sources, including interest income,
increased $4.4 million from $6.8 million in 1993 to $11.2 million in 1994,
primarily due to increased sales of used units and machine accessories.
Gaming's operating income was $1.6 million for 1994 compared to an operating
loss of $31.7 million in the 1993 period, an improvement of $33.3 million. The
1993 operating loss includes $12.5 million of unusual charges principally
relating to the writedown of inventories originally intended for the Louisiana
VLT market and provisions for bad debts relating to Gaming's former distributor
in Louisiana. The improvement in operating results was principally due to the
aforementioned increase in revenues, higher gross margins realized from
increased absorption of manufacturing overhead costs coupled with lower costs of
materials, offset, in part, by higher selling, general and administrative costs
as well as higher bad debt provisions and interest costs.
Cost of sales as a percentage of Gaming's total revenues, was 73% in 1994
compared to 87% in 1993, excluding an inventory valuation adjustment in 1993 of
$6.2 million (13% of 1993 total revenues). The lower
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cost of sales is due to increased absorption of overhead manufacturing expenses
attributable to increased production in 1994 as compared to 1993 and lower costs
of materials attributed to ongoing redesign of products and volume discounts
from suppliers.
Selling, general and administrative expenses increased to $25.9 million in
1994 compared to $23.4 million in 1993, an increase of 11%. The $2.5 million
increase was caused principally by increased staffing levels in the sales
departments and sales related costs associated with the aforementioned sales
volume increase in 1994 compared to 1993. Bad debt expense provisions increased
to $3.6 million in 1994 from $3.2 million in 1993, excluding a $5.1 million
increase in the provision in 1993 primarily relating to Gaming's former
distributor of VLT devices in Louisiana. This $0.4 million increase (13%)
resulted from increased sales volume in the 1994 period.
SYSTEMS
Systems' revenues for the year ended December 31, 1994 were $13.4 million
compared to $12.0 million in the comparable 1993 period, an increase of $1.4
million (12%). Continued growth in casino emerging markets, particularly with
casinos on Indian lands and on riverboats, contributed to an increase in the
demand for gaming monitoring systems and the increase in Systems' revenues.
Systems' operating income was $2.6 million for the year ended December 31,
1994 compared to $4.0 million during the twelve months ended December 31, 1993.
This decrease in operating income of $1.4 million was caused primarily by
slightly lower gross profit margins as a percentage of revenues, higher selling,
general and administrative costs and a higher provision for bad debts offset, in
part, by the aforementioned increase in revenues. Selling, general and
administrative expenses increased $1.1 million due to higher sales levels,
increased staffing levels and increased facility costs. The provision for bad
debts increased $0.8 million due to the increase in revenues and higher accounts
receivable balances outstanding during the period.
CONSOLIDATED
Revenues for the year ended December 31, 1994 were $236.2 million, net of
eliminations, compared to $168.7 million in 1993, an increase of 40%. This
increase is due to the aforementioned increase at Gaming and Systems partially
offset by the aforementioned decrease in Wulff's revenues.
BGII had operating income of $13.4 million for 1994 compared to an operating
loss of $18.5 million in the 1993 period. The improvement in operating results
of $31.9 million was caused principally by the aforementioned improvement in
Gaming's operating results partially offset by the aforementioned decline in
operating income at Systems and Wulff.
Interest expense was $6.8 million in 1994 compared to $4.4 million in 1993.
This increase was caused by higher borrowings outstanding and higher interest
rates in 1994.
BGII's effective tax rate in 1994 and 1993 differs from the U.S. statutory
rate of 34% principally due to the lack of tax benefits available for operating
losses generated in the U.S.
IMPACT OF INFLATION AND FOREIGN CURRENCY TRANSLATION
Inflation has not had a significant effect on Alliance's operations for the
three years ended June 30, 1995 or the nine-month period ended March 31, 1996,
or BGII's operations during the three years ended December 31, 1995 or the
three-month period ended March 31, 1996.
Substantially all of Wulff's transactions are denominated in Deutsche Marks.
The Deutsche Mark is the functional currency used by BGII to translate Wulff's
financial statements. Therefore, BGII is exposed to foreign exchange rate risk.
BGII does not generally enter into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations.
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BUSINESS
OVERVIEW
Alliance is a diversified gaming company that currently operates
approximately 6,000 electronic gaming machines (primarily video poker devices
and slot machines) and also owns and operates a small casino in each of
Vicksburg, Mississippi and Sparks/Reno, Nevada. Alliance is the largest gaming
machine management operator in Nevada and is the exclusive operator of video
poker devices at the only racetrack and ten associated OTBs in the greater New
Orleans area.
As part of its long-term growth strategy, Alliance entered into the Merger
Agreement on October 18, 1995 with BGII pursuant to which BGII will become a
wholly-owned subsidiary of Alliance. BGII, through subsidiaries in the United
States and Germany, is a leading designer, manufacturer and distributor of
electronic gaming machines. BGII also designs, assembles and sells computerized
monitoring systems for slot and video gaming machines which provide casino
operators with on-line real time player tracking, security and maintenance
capabilities.
BGII is currently the second largest manufacturer of casino-style electronic
gaming machines in North America and since 1993 has made significant inroads in
recapturing a portion of its once dominant market share of the late 1970s.
Although BGII sells gaming devices to most of the major participants in the
United States casino industry, the Company hopes to continue to increase its
penetration in such casinos by capitalizing on Alliance's and BGII's
management's relationships within the gaming industry to enable the Company to
demonstrate the performance capabilities of its current products.
Alliance believes that the Merger represents an opportunity to acquire an
established company with a well-recognized presence in the gaming industry and a
significant base of assets and experience. Management estimates that the
installed base of casino-style electronic gaming machines (for these purposes,
primarily slot and video machines) is approximately 650,000 units, of which
approximately 50% are located in North America, and that annual sales in North
America have grown from approximately 30,000 units in 1991 to approximately
89,000 units in 1995, reflecting a period of exceptional growth in the number
and size of casinos in North America. Historically, growth in the gaming machine
market has been principally fueled by sales to new casinos and to a lesser
degree by replacement of machines (which have an average replacement cycle of
three to seven years) and the application of new technology. In the future,
management believes that annual sales growth resulting from replacement
requirements and the application of new technology should outpace growth in
demand generated by new casino openings, which growth rate is expected to
decline. Management believes that the Merger provides Alliance with an avenue
for entering a business historically characterized by effective barriers to
entry in that the BGII assets being acquired are difficult to replicate and
require significant time and investment to develop successfully.
BUSINESS STRATEGY
The Company's strategic objective is to build a pre-eminent gaming
entertainment company to capitalize on what management believes to be gaming's
continuing growth within the entertainment industry. In addition to continuing
the development of the Company's existing business units, the Company's
strategic focus will be on the Gaming and Systems business unit, key elements of
which include:
CAPITALIZE ON BGII'S CURRENT SALES MOMENTUM. Since 1993, BGII's management
has initiated steps to increase its share of gaming machine sales in traditional
markets and capture increased gaming machine market share in new and emerging
jurisdictions. In the mid-1980s, BGII 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
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quarter of 1993 and its multi-game touch screen machine, the Game
Maker-Registered Trademark- during the third quarter of 1994, which have
contributed significantly to an increase in unit sales which have approximately
doubled the level of unit sales in 1993. See "Gaming Machine Manufacturing and
Systems--Gaming--Products."
DEVELOP AND MARKET PREMIER GAMING ENTERTAINMENT PRODUCTS EMPLOYING NEW
TECHNOLOGY. The Company intends to continue to develop, market and sell premier
gaming entertainment products and systems that employ available information
technology currently in common use in other segments of the entertainment
industry, but not yet prevalent in the gaming industry. The Company believes
that technological enhancements are the key to improving the appeal of its games
and locations. To implement this strategy, the Company will draw upon the
resources of Dr. Craig Fields, Vice Chairman of the Board, who has over 20 years
of experience with advanced information technology from his work with several
leading companies and government agencies. Alliance has developed and is
currently marketing a next-generation computerized product called "Gambler's
Bonus," a cardless slot players' club and player tracking system for use in its
gaming machine management operations which will allow multiple locations to be
linked together into a distributed gaming environment. Management believes that
"Gambler's Bonus" offers a wider variety of gaming choices to players than any
other gaming device currently available for use in route locations.
Additionally, BGII is in the process of developing an innovative form of
cashless wagering that uses bar-coded coupons which can be read by bill
validators in slot machines with the resulting information being transmitted to
a computerized monitoring system, subject to testing and regulatory approval. In
addition, both BGII and Alliance have developed electronic gaming machines with
bill acceptor and ticket printer features, as well as touch screen and
multi-game capabilities.
ENHANCE OPERATING EFFICIENCIES AND IMPROVE THE QUALITY OF THE COMPANY'S
PRODUCTS AND SERVICES. The Company is taking a number of steps in different
business units to improve its operating efficiencies while at the same time
improving the quality of its products and services, including (i) engineering
improvements in its gaming machine manufacturing operations and reducing per
unit costs by increasing production throughput and negotiating decreases in
materials costs; (ii) continuing to improve Wulff's manufacturing efficiency and
productivity through the use of computer-aided design systems, automated
production equipment and devotion of substantial resources to product quality
control in its wall machine operations; (iii) expanding the installed base of
electronic gaming machines equipped with Gambler's Bonus, and updated
bill-acceptor devices throughout its Nevada gaming machine management
operations, which is expected to improve Alliance's revenues and operating
efficiencies; (iv) initiating improved customer service programs and increasing
employee responsiveness to customers' needs for after-sale services; and (v)
eliminating duplicative executive, insurance, rent, outside professional
services and other administrative costs. 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) gaming machine management operations, (ii) casino operations, (iii) German
operations (consisting of the manufacture and distribution of wall-mounted
gaming machines and distribution of other recreational and amusement machines)
and (iv) casino-style electronic gaming machine manufacturing and systems
operations.
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GAMING MACHINE MANUFACTURING AND SYSTEMS OPERATIONS
INDUSTRY OVERVIEW
Gaming's primary markets for its gaming machine products are the United
States and Europe and, to a lesser extent, Canada, the Far East, Latin America
and the Caribbean. The following table sets forth the percentage of Gaming's new
unit sales by market segment during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF NEW UNITS SOLD
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
NEW UNIT SALES BY MARKET SEGMENT 1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Nevada and Atlantic City............................................... 27% 34% 42%
International.......................................................... 27 21 30
Riverboats............................................................. 31 31 12
Indian Gaming.......................................................... 12 13 14
Other (principally VLTs)............................................... 3 1 2
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
UNITED STATES MARKETS. Within the United States, Nevada represents the
largest installed base of gaming machines with an installed base of
approximately 185,000 machines as of December 31, 1995. Atlantic City is the
second largest market which management estimates had an installed base of
approximately 30,000 machines as of December 31, 1995. Product sales in these
markets are primarily to established casino customers to either replace existing
machines or as part of an expansion or refurbishment of the casino. Also,
because gaming machine revenues have increased at a higher rate than table game
revenues over the past decade, casino operators have frequently increased floor
space dedicated to gaming machines. In addition, major casino openings in
Nevada, expansions of existing casinos and the proliferation of casinos in
emerging markets have created additional floor space available for new machines
and are anticipated to further increase competitive pressures on casino
operators to replace existing equipment with new machines on an accelerated
basis.
Riverboat casinos began operating in 1991 and, as of December 31, 1995,
riverboat casinos were operating in Indiana, Iowa, Illinois, Mississippi,
Missouri and Louisiana. The estimated installed base of gaming machines on
riverboats is approximately 61,000 machines as of December 31, 1995.
Casino-style gaming continues to expand on North American Indian lands.
Indian gaming is regulated under the Indian Gaming Regulatory Act of 1988 which
permits specific types of gaming. Gaming's machines are placed only with Indian
gaming operators who have negotiated a compact with the state and received
approval by the U.S. Department of the Interior. Gaming has, either directly or
through its distributors, sold machines for casinos on Indian lands in Arizona,
Connecticut, Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico, North
Dakota, South Dakota and Wisconsin. Compacts have also been approved in Oregon,
Colorado and Louisiana, although Gaming made no deliveries in these
jurisdictions during 1995. In addition to the approved states, compacts are
under consideration in several states, including Alabama, California, Maine,
Massachusetts, Rhode Island, Texas and Washington. The installed base of all
Indian gaming machines as of December 31, 1995 was approximately 52,000 units.
In addition, there are currently casinos in Colorado and South Dakota. The
estimated installed base of machines in these markets as of December 31, 1995
was approximately 13,000 machines.
The continued growth of domestic emerging markets for gaming machines is
contingent upon the public's acceptance of these markets and an ongoing
regulatory approval process by Federal, state and local governmental
authorities. Management cannot predict which new jurisdictions or markets, if
any, will approve the operation of gaming machines, the timing of any such
approval or the level of Gaming's participation in any such new markets.
INTERNATIONAL MARKETS. In addition to the domestic markets, the gaming
industry is also expanding in international markets. Gaming's primary
international market is Europe, and to a lesser extent, Canada, the
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Far East, Latin America and the Caribbean. Gaming has begun, and plans to
continue, expansion into the Australian market, and in 1995, BGII established an
office in Sydney, Australia. No new machines have yet been sold into Australia.
The percentage of Gaming's international revenues by geographic area for the
periods indicated are set forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Europe (including sales to GmbH)......................................... 69.2% 55.6% 51.4%
Canada................................................................... 12.7 16.6 21.6
Latin America............................................................ 16.3 20.5 19.7
Far East................................................................. 1.8 4.4 4.0
Other.................................................................... -- 2.9 3.3
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
MARKETS FOR SYSTEMS. Systems' primary markets for its computerized
monitoring systems are the United States and, to a lesser extent, Canada, New
Zealand, Latin America, Europe, and the Caribbean. Markets for Systems within
the United States include traditional land-based casinos predominately in Nevada
and Atlantic City, New Jersey, Indian gaming and riverboats. Domestically, the
market for monitoring systems is divided equally between selling to new
installations and to existing customers who are either expanding their casino
floors or are upgrading their hardware to a new product release. Unlike the
United States, where most jurisdictions require the implementation of systems,
there have been few international markets to do so. Management believes,
however, that the international market for such systems is increasing, and that
Systems' sales to such markets will increase accordingly.
GAMING
PRODUCTS. Gaming designs, manufactures and distributes a variety of
electronic slot and video gaming machines. Machines are differentiated from one
another by graphic design and theme, cabinet style and size, payout, reel-type
design and minimum/maximum betting amount. Slot machines are normally produced
to specific order, with design and configuration customized to a customer's
particular requirements. Customers may also change from one gaming model to
another gaming model by ordering a "conversion kit" which consists of artwork,
reel strips and a computer chip. Gaming's video gaming machines are designed to
simulate various live card games and keno through a video display. New games and
themes are introduced periodically in order to satisfy customer demand and to
compete with product designs introduced by competitors. Gaming introduced its
"ProSeries-TM-" reel-type slot machines during the third quarter of 1993 and its
multi-game touch screen machine, the Game Maker-Registered Trademark-, during
the third quarter of 1994.
The Game Maker-Registered Trademark- can offer up to 10 different video
games within one gaming device. Various games can be selected from a game
library that has over 200 games. The games simulate various card games, keno and
popular reel-spinning games. The Game Maker-Registered Trademark- machines
contain bill acceptors and many other features believed to be popular with
casinos and their customers. The Game Maker-Registered Trademark- machines are
available in upright, bar top and slant top cabinets. Based on Gaming's sales of
this product to date, management believes that Gaming is currently more
competitive than in the past in the video gaming device market. Revenues from
sales of Game Maker-Registered Trademark- machines were approximately $0.1
million, $6.7 million and $27.4 million during 1993, 1994 and 1995,
respectively.
The ProSeries-TM- was the result of a comprehensive product development
effort which began in 1991. The development process included extensive testing
of the new products in-house and on casino floors for reliability and player
appeal. Based on Gaming's sales of the ProSeries-TM- products to date,
management believes that the ProSeries-TM- has been the catalyst to allow Gaming
to increase market share in traditional and emerging markets for gaming machines
as the product becomes accepted by casino customers. Revenues from sales of
ProSeries-TM- machines were approximately $19.3 million, $86.2 million and $57.1
million during 1993, 1994 and 1995, respectively.
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Gaming typically offers a 90-day labor and up to a one-year parts warranty
for new gaming machines sold and is actively involved in customer service after
the original installation. Gaming provides several after-sale, value-added
services to its customers including customer education programs, a 24-hour
customer service hot-line, and field service support programs and spare parts
programs.
In addition, Gaming sells and services used gaming machines and sells parts
for existing machines. Sales of used gaming machines increased for 1995 as
management implemented a policy to reduce inventory levels. Sales of used
equipment were $2.7 million, $4.2 million and $9.2 million for the years ended
December 31, 1993, 1994 and 1995, respectively.
The following table sets forth the percentages of Gaming's revenues provided
by each of its major product lines during the periods shown:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Slot machines..................................................... 67.0% 74.2% 52.8%
Video gaming machines............................................. 18.9 16.3 31.0
Other (primarily used machines, parts and services)............... 14.1 9.5 16.2
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
Gaming machines have a mechanical life that can exceed 10 years. However, in
the established markets, Gaming's experience is that casino operators usually
replace gaming machines after three to seven years. The factors which result in
replacement of gaming machines sooner than their mechanical life include
technological advances, development of new games, new sound and visual features
and changing preferences of casino patrons. Casinos typically recoup the
purchase cost of their electronic gaming machines in a few months, which allows
casinos to replace machines with new models that are popular with casino
patrons.
Gaming often accepts used machines as trade-ins toward the purchase of new
gaming equipment. While a small secondary market exists in the United States,
used machines are typically resold into the international market. While some
used equipment is reconditioned for direct sale, much is sold in container lots
on an "as is" condition through independent brokers.
In the past, Gaming had designed, manufactured and distributed 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 new or modified hardware
and software is designed to satisfy all applicable testing standards and must
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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.
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
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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 physically integrated. Software development results in (1) periodic
product releases that include new
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features which extend and enhance the SDS 6000 product, (2) periodic maintenance
releases which enable casino operators to correct problems or improve the
usability of the system and (3) documentation needed to install and use the
system.
In 1995, the hardware and software groups from Systems, as well as engineers
from Gaming, coordinated efforts to develop a form of cashless wagering that
uses bar-coded coupons which can be read by the bill validators in Gaming's slot
machines which are connected to an SDS 6000 system. Testing and regulatory
approval is being pursued by Systems in anticipation of a 1996 release to casino
operators. In 1996, Systems and Gaming development groups will continue to
direct development efforts towards other forms of cashless wagering for use on
Gaming's slot machines and the SDS 6000 system.
During 1993, 1994 and 1995, Systems spent $1.4 million, $1.7 million and
$1.9 million, respectively on product research and development.
SALES AND MARKETING. Systems has a direct sales force which produces the
majority of its sales. Gaming's sales force and Gaming's independent distributor
network produce the balance of Systems' sales, primarily in situations where
customers are making slot machine and computerized slot monitoring system
purchase decisions at the same time. Worldwide, Systems has approximately 60,000
GMUs installed, or in the process of being installed, of which approximately
53,000 are in the United States. Over the past three years, Systems' own sales
force has generated approximately 78% of its sales.
Systems offers its customers the option of signing separate hardware and
software maintenance agreements at the time of sale. These agreements are for
periods of one year and automatically renew unless otherwise canceled in writing
by the customer or Systems. After an initial warranty period, typically 90 days,
the customer is invoiced a monthly hardware and software maintenance fee which
provides essentially for repair and/or replacement of malfunctioning hardware
and software, software version upgrades, and on-call support for software.
Systems offers limited financing terms, normally less than one year, for
sales to new installations. Most sales, however, are invoiced on a net 30 day
basis.
CUSTOMERS. The demand for computerized slot monitoring systems is driven
either by regulatory requirements in a given jurisdiction and/or by a casino
operator's competitive need to properly track their players' activity and
establish and compile individual player profitability and other demographic
information, all of which is of particular importance to casinos in developing
marketing strategies. Systems' revenues are derived equally from selling to new
installations as well as to existing customers who are either expanding their
casino floors or are upgrading their hardware to a new product release. For the
year ended December 31, 1995, Systems' ten largest customers (which includes
certain multi-site casino operators that have corporate agreements with Systems)
accounted for approximately 92% of Systems' revenues. Due to the high initial
costs of installing a computerized monitoring system, customers for such systems
generally have tended not to change suppliers once they have installed such a
system. Future growth will be based on further expansion in the established and
emerging markets as well as continued development efforts by Systems to provide
customers with new and innovative hardware and software product offerings.
COMPETITION. Although there are numerous companies providing computerized
slot monitoring systems to casino operators, the competition currently consists
of IGT, CDS, and to a lesser extent, Gaming Systems International and Acres
Gaming. Competition is keen in this market due to the number of providers and
the limited number of casinos and the jurisdictions in which they operate.
Pricing, product feature and function, accuracy, and reliability are all main
factors in determining a provider's success in selling its system. Systems
believes the future success of its operations will be determined by its ability
to bring new and innovative products to the market place and at the same time
maintain a base of loyal existing customers.
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
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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," "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 $1.00=DM 1.43 as of December 31, 1995 hereinafter) to play,
although the player may deposit larger amounts to provide continuous play but
not to increase payoffs. German regulations limit the maximum payout to ten
times the player's stake (DM 4.00 or approximately $2.80 per game). Current
models of wall 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
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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.
During 1993, 1994 and 1995, Wulff spent approximately $3.3 million, $3.5
million, and $3.6 million, respectively, on product research and development.
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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 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 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
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own arcades. Further, 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.
Increased foreign competition in Germany may have an adverse impact on the
Company's future wall machine revenues. 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 MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Number of electronic gaming machines
owned...................................... 5,240 5,505 5,121 5,148 5,208 5,357
Number of locations......................... 527 552 508 496 516 528
</TABLE>
Alliance enters into gaming machine management agreements with local
establishments through either revenue-sharing arrangements or space lease
arrangements. In revenue-sharing arrangements, most common with taverns,
restaurants and convenience stores, Alliance does not pay rent, but rather
receives a percentage of the revenues from the electronic gaming machines. In
such arrangements, both the owner of the local establishment and Alliance must
have a gaming license. In space lease arrangements, most common with
supermarkets and drug stores, Alliance pays a fixed rental to the owner of the
local establishment and Alliance receives all of the revenues derived from the
gaming machines. In such arrangements, only Alliance (and not the establishment
owner) is required to hold a gaming license. Most of the local establishments
serviced by Alliance are restricted by law to operating no more than 15 gaming
machines.
Revenue-sharing arrangements accounted for approximately 80%, 86%, 86% and
86% of the Nevada gaming machine management revenues and 77%, 80%, 78% and 77%
of its operating Nevada gaming machines in 1993, 1994 and fiscal 1995 and the
nine-month period ended March 31, 1996, respectively. At March 31, 1996, the
weighted average remaining term of Alliance's revenue-sharing arrangements was
approximately 3.6 years. Space lease arrangements accounted for approximately
20%, 14%, 14% and 14% of the Nevada gaming machine management revenues and 23%,
20%, 22% and 23% of its operating Nevada gaming machines in 1993, 1994 and
fiscal 1995 and the nine-month period ended March 31, 1996. At March 31, 1996,
the weighted average remaining term of Alliance's space lease arrangements was
2.8 years.
Alliance has historically been able to renew or replace revenues from
expiring agreements with revenues generated by renewal or replacement contracts.
However, during the past few years, greater competitive pressures in the gaming
machine management business have increased the portion of gaming machine
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 31, 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. 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 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 OTBs in the greater New
Orleans area. Alliance
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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 OTBs 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 OTBs
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 $40.0 million, 11% on the next $10.0
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 $2.0 million each) to be used, among other things
for the completion of certain incomplete elements of the project which survived
the opening of the casino (for which RCC was to have been responsible, but
failed to satisfy) and for a $500,000 payment paid to HFS as a waiver fee, a
commitment by Alliance to fund any additional capital necessary for the
completion, upgrading or working capital of the project, the following occurred:
(i) a subsidiary of Alliance became the general partner and RCC became the
limited partner and (ii) the respective partnership interests were adjusted. As
of March 31, 1996, amounts outstanding under the HFS facility and the related
financings aggregated $9.4 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 $35.0 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 $1.0 million in cash or shares of
Common Stock 180 days after the occurrence. The casino has achieved the required
earnings as adjusted, and Alliance is obligated to make the required payment or
issue the Common Stock (with the issuance being its expected course of action)
by September 30, 1996. Also, Alliance's 5.2% royalty on gross revenues was
terminated on the date it became the general partner.
PLANTATION STATION. In April 1990, Alliance purchased, for an aggregate
purchase price of $9.5 million, 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
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 and other
Assets." On November 20, 1995, Alliance, the Merger Subsidiary and BGII
commenced an action against BEC in Federal District Court in Delaware seeking a
declaratory judgment, among other things, that the surviving company in the
Merger will be permitted to use the "Bally" trade name in accordance with the
terms of the License Agreement, and seeking injunctive relief (the "Alliance
Action"). On November 28, 1995, BEC commenced an action against BGII, Bally
Gaming Inc., Alliance and the Merger Subsidiary in Federal District Court in New
Jersey to enjoin the defendants from
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using the "Bally" trade name (the "BEC Action"). Alliance and BEC have settled
the Alliance Action and the BEC Action by entering into an amendment to the
License Agreement. Under the terms of the settlement, BEC will withdraw its
objection to the continued use by BGII of the "Bally" name following the Merger.
The amendment also provides that for five years beginning with the Effective
Time, Bally Gaming, Inc. will pay BEC a royalty of $35 for each gaming machine
sold or leased which is an increase from the $25 royalty currently paid pursuant
to the License Agreement. The minimum royalty under the License Agreement for
each of the first five twelve-month periods beginning with the Effective Time
will increase to $1.0 million (from the current $0.5 million), and for each such
period thereafter will return to $0.5 million. In addition, the amendment
clarifies that sales and pledges of the stock and/or assets of Bally Gaming,
Inc. or a parent company, other than those to competitors of BEC, will generally
not be treated as assignments requiring BEC's consent under the License
Agreement.
In July 1992, BGII reached an agreement for an exclusive license until
December 31, 2005, subject to extension, of a patent relating to the use of
credit cards in gaming machines and acquired 1% of the stock of Scotch Twist,
Inc., the private company which granted this license in exchange for the
issuance of 100,001 shares of BGII's common stock. The licensing agreement
requires BGII to commit $1.2 million in research and development costs related
to the patent, plus any costs related to obtaining required regulatory approvals
and licenses. As of March 31, 1996, approximately $1.0 million had been spent
relating to this commitment.
In connection with a settlement agreement entered between BEC, Gaming, BGI
Enterprises, BGII and IGT on December 16, 1992, BGII sold its interest in the
Casino Interlink Multiple Location Progressive System (the "Progressive System")
to IGT. BGII reserved certain rights in the sale, including the rights to
continue to sell the Progressive System (i) within Europe, (ii) for use in
single locations, and (iii) worldwide in lottery applications. BGII agreed to
discontinue general sales of the Progressive System or any similar system
outside of Europe for a period of five years. This agreement is binding on all
successors and assigns of BGII, including the Company from the date of the
settlement agreement.
The Company has registered the trademark "CEI" and its design and the logos
of United Gaming, Inc. and United Coin Machine Co. with the U.S. Patent and
Trademark Office.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1995, Alliance employed approximately 683 persons in the
State of Nevada and approximately 8 persons in various states related to its
business development activities, VSI employed approximately 73 persons in the
State of Louisiana, RCVP employed 374 persons in the State of Mississippi, and
BGII and its subsidiaries employed approximately 500 persons in various states
and 440 persons in Germany. None of such employees is covered by a collective
bargaining agreement. Wulff's employees, however, are covered by German
regulations which apply industry-wide and are developed, to some extent, through
negotiations between representatives of the metal working industry employers and
the trade union representing the employees. These regulations are in the nature
of collective bargaining agreements and cover the general terms and conditions
of such items as wages, vacations and work hours. The regulations codify what
are considered the common standards of employment in the German metal working
industry. The Company believes its relationships with its employees are
satisfactory.
LITIGATION RELATING TO THE MERGER
On or about June 19, 1995, three purported class actions were filed in the
Chancery Court of Delaware by BGII stockholders against BGII and its directors
(the "Fiorella, Cignetti and Neuman Actions") in 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
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with WMS (the "WMS Agreement"); added a claim relating to BGII's alleged failure
to hold an annual meeting as required; and added WMS as defendant. The amended
complaint also alleged that BGII intended, in violation of Delaware law, to sell
Wulff without first seeking stockholder approval of the sale. The action sought
an order enjoining defendants from proceeding with, consummating or closing the
WMS Merger, or rescinding it if it closed; preventing the sale of Wulff without
prior stockholder approval; declaring invalid BGII's agreement to pay WMS a fee
if the WMS Agreement is terminated by BGII in certain circumstances; compelling
an auction of BGII and the provision of due diligence to Alliance; scheduling an
immediate meeting of BGII stockholders; and awarding compensatory damages.
Management believes these claims to be without merit and intends to vigorously
defend these actions.
On October 23, 1995, WMS instituted a suit in New York State Court against
BGII for BGII's failure to pay $4.8 million upon termination of the WMS
Agreement. Management intends to vigorously defend this action. On November 22,
1995, BGII answered the complaint and brought counterclaims against WMS alleging
that WMS repudiated and breached the WMS Agreement by, among other things,
failing to act in good faith toward the consummation of the WMS Merger, advising
BGII that it would not perform as agreed but would impose new conditions on the
WMS Merger, acting in excess of its authority and undermining the ability of
BGII to perform the WMS Agreement. On February 8, 1996 WMS moved for summary
judgment. On April 2, 1996, BGII opposed WMS's motion and cross-moved for
summary judgment. Pursuant to the Merger Agreement, Alliance has agreed to
indemnify BGII against such a claim under certain circumstances.
On September 14, 1995, a stockholders' class and derivative action was
commenced by Richard Iannone, an Alliance stockholder, against Alliance, the
members of its current Board of Directors and certain of its former directors in
Federal District Court in Nevada asserting, among other matters, that Alliance
has wasted corporate assets in its efforts to acquire BGII by, among other
things, agreeing to onerous and burdensome financing arrangements that threaten
Alliance's ability to continue as a going concern and that Alliance had made
false and misleading statements and omissions in connection with that effort by
failing to disclose the need to refinance an additional $53.0 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. On
May 16, 1996, the magistrate judge, on motion of defendants, stayed discovery in
this case pending a ruling by the court on the defendants' motion to dismiss the
amended complaint.
OTHER LITIGATION
In 1994, after an intensive Federal investigation of Gaming's former
Louisiana distributor, eighteen individuals were indicted on charges of
racketeering and fraud against Gaming and the Louisiana regulatory system. Among
those indicted were the former distributor's stockholders, directors, employees
and others alleged to be associated with organized crime. Fifteen entered pleas
of guilty before trial and the remaining three were convicted in October 1995.
In addition, Alan Maiss, a former director and president of BGII, pled guilty to
misprision of a felony in connection with such investigation. BGII, its
subsidiaries and its current employees were not subject to such investigation.
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Prior to the conclusion of the Federal criminal case, BGII's activities with
regard to its former VLT distributor in Louisiana were the subject of inquiries
by gaming regulators and a report by the New Jersey Division of Gaming
Enforcement dated August 24, 1995. The New Jersey Commission has indicated that
it will hold a hearing on the matter, but no date has been set at this time. The
New Jersey report made no specific recommendations for action by the New Jersey
Commission. The Gaming Authorities in Ontario, Canada, who have investigated the
matter, issued a gaming registration to Gaming on February 8, 1996.
On September 25, 1995, BGII was named as a defendant in a class action
lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf
of himself and all others similarly situated (the "plaintiffs"). The plaintiffs
filed suit against BGII and approximately 45 other defendants (each a
"defendant," and collectively the "defendants"). Each defendant is involved in
the gaming business as either a gaming machine manufacturer, distributor, or
casino operator. The class action lawsuit arises out of alleged fraudulent
marketing and operation of casino video poker machines and electronic slot
machines. The plaintiffs allege that the defendants have engaged in a course of
fraudulent and misleading conduct intended to induce people into playing their
gaming machines based on a false belief concerning how those machines actually
operate as well as the extent to which there is actually an opportunity to win
on any given play. The plaintiffs allege that the defendants' actions constitute
violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and
give rise to claims of common law fraud and unjust enrichment. The plaintiffs
are seeking monetary damages in excess of one billion dollars, and are asking
that any damage awards be trebled under applicable Federal law. Management
believes the plaintiffs' lawsuit to be without merit. The Company intends to
vigorously pursue all legal defenses available to it.
ENVIRONMENTAL MATTERS
The Company is subject to Federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances (together, "Environmental
Laws"). The Company uses certain substances and generates certain wastes that
are regulated or may be deemed hazardous under applicable Environmental Laws.
From time to time, the Company's operations may result in certain noncompliance
with applicable requirements under Environmental Laws. Any past noncompliance
with applicable requirements under Environmental Laws has not had a material
adverse effect on the Company's results of operations or financial condition.
Further, the Company believes that any noncompliance or cleanup liability under
current Environmental Laws would not have a material adverse effect on the
Company's results of operations or financial condition.
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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 Alliance Nevada Subsidiaries and Gaming, respectively,
each of which is a corporate licensee (individually, a "Corporate Licensee" and
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collectively, "Corporate Licensees") under the terms of the Nevada Act. As
Registered Corporations, Alliance and BGII are required periodically to submit
detailed financial and operating reports to the Nevada Commission and furnish
any other information which the Nevada Commission may require. No person may
become a stockholder of, or receive any percentage of the profits from, the
Corporate Licensees without first obtaining licenses and approvals from the
Nevada Gaming Authorities. Alliance, BGII and the Corporate Licensees have
obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required in order to engage in gaming
activities, gaming machine management operations, and in the manufacture and
distribution of gaming machines for use or play in Nevada or for distribution
outside of Nevada, as the case may be.
On May 23, 1996, the Merger and related transactions were approved by the
Nevada Commission upon the recommendation of the Nevada Board.
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,
earnings generated during the supervisor's appointment (except for reasonable
rental of the casino) could be
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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.
The Gaming Authorities may, at their discretion, require the holder of any
security of the Company, such as the Senior Secured Notes or the Preferred
Stock, to file applications, be investigated, and be found suitable to own such
security of the Company 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 any class 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 any class 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. In the event
that there is a default in the payment of dividends for six consecutive dividend
payment dates, the Preferred Stock will qualify as a voting security under the
terms of the Nevada Act and will be considered as a separate class of voting
securities for purposes of determining beneficial ownership. Under certain
circumstances, an "institutional investor" as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of a class of a Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor holds the
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock beyond such period
of time as may be prescribed by the Nevada Commission may be guilty of a
criminal offense. The Company is subject to disciplinary action if, after it
receives notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or the Corporate Licensees, the Company (i)
pays that person any dividend or interest upon voting securities of the Company,
(ii) allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays remuneration in any
form to that person for services rendered or otherwise, or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities, including, if necessary, the immediate purchase of said voting
securities for cash at fair market value. Additionally, the Clark County Board
has the authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any debt
securities of a Registered Corporation, such as the Senior Secured 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
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be inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if, without the prior approval of the
Nevada Commission, it (i) pays the unsuitable person any dividend, interest or
any distribution whatsoever, (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation or similar
transaction.
The Company is required to maintain current stock ledgers in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to impose a requirement that a Registered Corporation's
stock certificates bear a legend indicating that the securities are subject to
the Nevada Act. The Nevada Commission has imposed this requirement on the
Company.
The Company may not make a public offering of its securities such as the
Senior Secured Notes and the Preferred Stock, without the prior approval of the
Nevada Commission if the securities or proceeds therefrom are intended to be
used to construct, acquire or finance gaming facilities in Nevada, or to retire
or extend obligations incurred for such purposes. On May 23, 1996, the Nevada
Commission approved the Offerings and related transactions, including stock
pledges, negative pledges, security interests and guarantees in connection with
the Note Offering. Such approval does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities offered.
Any representation to the contrary is unlawful. The Nevada Commission has also
imposed a requirement on Alliance and BGII that it must receive the prior
administrative approval of the Nevada Board Chairman for any offer for the sale
of an equity security in a private transaction such as the Private Placement.
The Company filed a request for administrative approval of the Private Placement
and the Nevada Board Chairman has approved the Private Placement.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control to be investigated and
licensed as a part of the approval process relating to the transaction. The
Merger and certain related transactions require the prior approval of the Nevada
Commission.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices on
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before a Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
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License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada, and to the
counties and cities in which the Licensees' respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based upon either (i) a
percentage of the gross revenues received, (ii) the number of gaming machines
operated, or (iii) the number of games operated. A casino entertainment tax is
also paid by casino operations where entertainment is furnished in connection
with the selling of food or refreshments. The Corporate Licensees that hold a
license as an operator of a gaming device route or a manufacturer's or
distributor's license also pay certain fees to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of its participation in such foreign gaming. The revolving fund
is subject to increase or decrease in the discretion of the Nevada Commission.
Thereafter, Licensees are required to comply with certain reporting requirements
imposed by the Nevada Act. Licensees are also subject to disciplinary action by
the Nevada Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to conduct the
foreign gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees
or employ a person in the foreign operations who has been denied a license or
finding of suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at establishments operated by a Corporate
Licensee are subject to licensing, control and regulation by applicable local
regulatory agencies. All licenses are revocable and are not transferable. The
agencies involved have full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action could (and revocation would) have
a material adverse affect upon the operations of the Corporate Licensees.
LOUISIANA
The manufacture, distribution, servicing and operation of video draw poker
devices ("Devices") in Louisiana is subject to the Louisiana Video Draw Poker
Devices Control Law and the Rules and Regulations promulgated thereunder (the
"Louisiana Act"). Licensing and regulatory control was provided by the Video
Gaming Division of the Gaming Enforcement Section of the Office of State Police
within the Department of Public Safety and Corrections (the "Division"). The
Louisiana legislature recently passed a bill which creates a single gaming
control board for the regulation of gaming in Louisiana. This Board is called
the Louisiana Gaming Control Board (the "Louisiana Board") who will issue all
licensing after May 1, 1996 for video draw poker devices. The Division will
continue to perform investigatory functions for the Louisiana Board. The laws
and regulations of Louisiana are based upon a primary consideration of
maintaining the health, welfare and safety of the general public and upon a
policy which is concerned with protecting the video gaming industry from
elements of organized crime, illegal gambling activities and other harmful
elements as well as protecting the public from illegal and unscrupulous gaming
to ensure the fair play of Devices. The Louisiana legislature recently passed a
bill which would allow each parish to decide whether to disallow video poker
devices, riverboat casinos and, in Orleans Parish, land-based casinos. If any
parish in which the Company operates elects to disallow video poker devices, the
Company would have to cease its video poker operations there by June 30, 1999.
The Company cannot predict which parishes will so elect; however, if all of the
parishes in which the Company operates so elect, the cessation of the Company's
video poker operations would have a material adverse effect on the operations of
the Company. See "Risk Factors--Strict Regulation by Gaming Authorities."
Each of the indirect operating subsidiaries for the Company's gaming
operations in Louisiana, VSI and SVS, has been granted a license as a Device
owner by the Division. Another indirect subsidiary of the Company, VDSI, has
been granted a license as a distributor by the Division. Gaming has been granted
a license as a manufacturer by the Division. These gaming subsidiaries are
"Louisiana Licensees" under the
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terms of the Louisiana Act. The licenses held by such Louisiana Licensees expire
at midnight on June 30 of each year and must be renewed annually through payment
of fees. All license fees must be paid on or before May 15 in each year licenses
are renewable.
The Louisiana Board may deny, impose a condition on or suspend or revoke a
license, renewal or application for a license for violations of any rules and
regulations of the Louisiana Board or any violations of the Louisiana Act. In
addition, fines for violations of gaming laws or regulations may be levied
against the Louisiana Licensees and the persons involved for each violation of
the gaming laws. The issuance, condition, denial, suspension or revocation is a
pure and absolute privilege and is at the discretion of the Louisiana Board in
accordance with the provisions of the Louisiana Act. A license is not property
or a protected interest under the constitution of either the United States or
the State of Louisiana.
The Division has the authority to conduct overt and covert investigations of
any person involved directly or indirectly in the video gaming industry in
Louisiana. This investigation may extend to information regarding a person's
immediate family and relatives and their affiliations with certain organizations
or other business entities. The investigation may also extend to any person who
has or controls more than a 5% ownership, income or profits interest in an
applicant for or holder of a license or who is a key employee, or who has the
ability to exercise significant influence over the licensee. All persons or
entities investigated must meet all suitability requirements and qualifications
for a licensee. The Louisiana Board may deny an application for licensing for
any cause which it may deem reasonable. The applicant for licensing must pay a
filing fee which also covers the cost of the investigation.
In order for a corporation to be licensed as an operator or a distributor by
the Louisiana Board, a majority of the stock of the corporation must be owned by
persons who have been domiciled in Louisiana for a period of at least two years
prior to the date of the application.
In addition to licensure as a manufacturer of Devices under the Louisiana
Act, Gaming has been licensed by the Division as a manufacturer under the
Louisiana Riverboat Economic Development and Gaming Control Act (the "Louisiana
Riverboat Act"). Gaming's application for a permanent manufacturer's license as
it relates to the land-based casino was pending before LEDGC at the time the
operator of the land-based casino filed for bankruptcy reorganization and ceased
operations, resulting in the termination of funding for the LEDGC regulatory
operations and the effective closure of the LEDGC's operations. See "Risk
Factors--Ongoing BGII Regulatory Investigations" and "Business--Other
Litigation."
The Division notified Alliance that it would be necessary to obtain approval
from it prior to the Effective Time which approval will now have to be issued by
the Louisiana Board. To that effect, the Company has made all requests necessary
to obtain any such licenses, permits or approvals required to be obtained prior
to the Effective Time.
MISSISSIPPI
The manufacture, distribution, ownership and operation of gaming machines in
Mississippi is subject to extensive state and local laws and regulations,
including the Mississippi Gaming Control Act (the "Mississippi Act") and the
regulations (the "Mississippi Regulations") promulgated thereunder. The
Mississippi Gaming Commission (the "Mississippi Commission") oversees licensing
and regulatory compliance. Gaming in Mississippi can be legally conducted only
on vessels of a certain minimum size in navigable waters of the Mississippi
River or in waters of the State of Mississippi which lie adjacent and to the
south (principally in the Gulf of Mexico) of the counties of Hancock, Harrison
and Jackson, and only in counties in Mississippi in which the registered voters
have not voted to prohibit such activities. The voters in Jackson County, the
southeastern-most county of Mississippi, have voted to prohibit gaming in that
county. However, gaming could be authorized in Jackson County should the voters
fail to disapprove of gaming in that county in any referendum, which could be
held annually. The underlying policy of the Mississippi Act is to ensure that
gaming operations in Mississippi are conducted (i) honestly and competitively,
(ii) free of criminal and corruptive influences and (iii) in a manner which
protects the rights of the creditors of gaming operations.
The Mississippi Act requires that a person (including any corporation or
other entity) must be licensed to conduct gaming activities in Mississippi. A
license to own and operate gaming machines will be issued only for a
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specified location which has been approved as a gaming site by the Mississippi
Commission. Alliance through its interest in RCVP must apply for renewal of such
licenses every two years, which renewal cannot be assured. Gaming holds a
license to manufacture and distribute gaming machines. The current license at
the Rainbow Casino will expire on June 1, 1996 unless renewed in advance of that
date. Alliance knows of no reason why such license will not be renewed. The
Mississippi Act also requires that each officer or director of a gaming
licensee, or other person who exercises a significant influence over the
licensee, either directly or indirectly, must be found suitable by the
Mississippi Commission. In addition, any employee of the licensee who is
directly involved in gaming must obtain a work permit from the Mississippi
Commission. The Mississippi Commission will not issue a license or make a
finding of suitability unless it is satisfied, only after an extensive
investigation paid for by the applicant, that the persons associated with the
gaming licensee or applicant for a license are of good character, honesty and
integrity, with no relevant or material criminal record. In addition, the
Mississippi Commission will not issue a license unless it is satisfied that the
licensee is adequately financed or has a reasonable plan to finance its proposed
operations from acceptable sources, and that persons associated with the
applicant have sufficient business probity, competence and experience to engage
in the proposed gaming enterprise. The Mississippi Commission may refuse to
issue a work permit to a gaming employee (i) if the employee has committed
larceny, embezzlement or any crime of moral turpitude, or knowingly violated the
Mississippi Act or Mississippi Regulations, or (ii) for any other reasonable
cause. If an employee is denied a license, the Company must terminate his or her
employment.
On May 16, 1996, the Merger and related transactions were approved by the
Mississippi Commission.
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
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Commission has reason to believe that the acquisition of such ownership would be
inconsistent with the declared policy of Mississippi. Any person who is required
to be found suitable must apply for a finding of suitability from the
Mississippi Commission within 30 days after being requested to do so, and must
deposit with the State Tax Commission a sum of money which is adequate to pay
the anticipated investigatory costs associated with such finding. Any person who
is found not to be suitable by the Mississippi Commission will not be permitted
to have any direct or indirect ownership in the licensee. Any person who is
required to apply for a finding of suitability and fails to do so, or who fails
to dispose of his or her interest in the licensee if found unsuitable, is guilty
of a misdemeanor. If a finding of suitability with respect to any person is not
applied for where required, or if it is denied a revoked by the Mississippi
Commission, the licensee is not permitted to pay such person of services
rendered, or to employ or enter into any contract with such person.
Dockside casinos may be required to be moved to a "safe harbor" in the event
of a threatened hurricane. The appropriate county civil defense director will
determine when such movement is required. In general, it is anticipated that
casino vessels will have to be moved in the event of a Class III or more severe
hurricane warning, where there is the possibility of 125 miles per hour wind
speeds. The movement of a casino barge will not necessarily insure protection
against damage or destruction by a hurricane. Furthermore, the removal of a
casino barge will generally require several days, and as a consequence, the
casino barge will be out of business during that movement, even if no hurricane
strikes the casino site.
Any permanently moored vessel used for casino operations must meet the fire
safety standard of the Mississippi Fire Prevention Code, the Life Safety Code
and the Standards for the Construction and Fire Protection of Marine Terminals,
Piers and Wharfs of the National Fire Protection Association. Additionally, any
establishment to be constructed for dockside gaming must meet the Southern
Standard Building Code or the local building code, if such a local building code
has been implemented at the casino's site.
While unpowered and permanently moored vessels do not require certification
by the United States Coast Guard, the Mississippi Commission has engaged the
American Bureau of Shipping, an independent consulting agency, which will
inspect and certify all casino barges with respect to stability and single
compartment flooding integrity, in accordance with the Mississippi Regulations.
The law and regulations permitting and governing Mississippi casino gaming
were adopted during 1990 and 1991, and the first casinos opened in August 1992.
Consequently, the interpretation and application of Mississippi law and
regulations may evolve over time, and any such changes may have an adverse
effect on Mississippi licensees.
NEW JERSEY
BGII's subsidiary, Gaming, is licensed by the New Jersey Commission as a
gaming-related casino service industry ("CSI") in accordance with the New Jersey
Casino Control Act (the "Casino Control Act").
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.
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Although the laws and regulations of the various jurisdictions in which the
Company operates or into which the Company may expand its gaming operations vary
in their technical requirements and are subject to amendment from time to time,
virtually all of those jurisdictions require licenses, permits, documentation of
qualification, including evidence of financial stability, and other forms of
approval for companies engaged in the manufacture and distribution of gaming
machines as well as for the officers, directors, major stockholders and key
personnel of such companies.
Alliance and BGII and their key personnel have obtained, or applied for, all
government licenses, registrations, findings of suitability, permits and
approvals necessary for the manufacture and distribution, and operation where
permitted, of their gaming machines in the jurisdictions in which Alliance and
BGII currently do business. The Company and the holders of its securities may be
subject to the provisions of the gaming laws of each jurisdiction where BGII or
its subsidiaries are licensed and/or conduct business, including, without
limitation, the States of Arizona, Colorado, Connecticut, Illinois, Indiana,
Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada,
New Jersey, New Mexico, South Dakota, Wisconsin, and the local regulatory
authority within each such state as well as Australian, Canadian and other
foreign gaming jurisdictions in which BGII and its subsidiaries are licensed or
conduct business. Following the consummation of the Merger, the Company and its
officers and directors will be required to apply for any government licenses,
permits and approvals necessary or required by each of these jurisdictions.
Holders of common stock of an entity licensed to manufacture and sell gaming
machines, and in particular those with holdings in excess of 5%, should note
that local laws and regulations may affect their rights regarding the purchase
of such common stock and may require such persons or entities to make certain
regulatory filings, or seek licensure, findings of qualification or other
approvals. In some cases this process may require the holder or prospective
holder to disclose and/or provide consents to disclose personal and financial
data in connection with necessary investigations, the costs of which are
typically borne by the applicant. The investigatory and approval process can
take three to six months to complete under normal circumstances. See "Risk
Factors--Strict Regulation by Gaming Authorities."
FEDERAL REGISTRATION. The operating subsidiaries of the Company that are
involved in gaming activities are required to file annually with the Attorney
General of the United States in connection with the sale, distribution or
operation of gaming machines. All currently required filings have been made.
GERMANY
German legislative authorities regulate and monitor the wall machine
industry so as to ensure certain manufacturing standards and the fairness of
each machine to users. The most significant legislation presently 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
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apply to local regulatory authorities for a license, which will not be granted
by the authorities if facts justify the assumption that the applicant does not
possess the requisite reliability. In this proceeding, the applicant must
furnish a police certificate of conduct.
German legislation prohibits the public play of wall machines by individuals
under age 18. Voluntary agreements among manufacturers and certain amusement
game trade associations, among other things, restrict wall machine advertising
and the ability of a player to play more than two machines at once, require all
machines to carry visible warning notices and provide that every wall machine is
automatically switched off for three minutes after one hour of continuous play.
In April 1993, the German government increased the maximum coin drop per
game effective May 7, 1993 from 30 pfennigs (approximately $0.21) to 40 pfennigs
(approximately $0.28) although 30-pfennig machines are still permitted to be
manufactured and sold.
The Spielverordnung (gaming ordinance) specifically governs wall machines.
These regulations limit game payouts to DM 4.00 (approximately $2.80 per game),
require a minimum payout percentage, detail where the machines may be installed,
how many may be installed and by whom, which games are prohibited, the technical
requirements of the machines and technical review and approval. Operators must
comply with regulations which stipulate how many machines may operate within
defined square foot areas (15 square 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 Overview." In accordance with the ruling,
for all cases arising on or after, or that were pending on, July 5, 1994, the
basis for taxation has been the cash remaining in the machines. The rule
requiring a minimum payout percentage is applied to the amount remaining in the
cash box net of such V.A.T. Depending on the municipality in which a machine is
located, operators may also have to pay a monthly leisure tax on each machine of
up to DM 600 (approximately $419).
The business conducted by Wulff had benefitted from the Berlin Promotion
Act, a special tax statute which was intended to support the economy of West
Berlin in various ways. With the reunification of Germany, the need for benefits
provided by the law is perceived to have decreased. Consequently, the German
government has enacted amendments to the Berlin Promotion Act which are designed
to phase out,
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over a number of years, most of the tax benefits and incentives provided by the
law. These tax benefits and incentives have been changed in five ways: (i) the
V.A.T. rebates of up to 10% to enterprises located in West Berlin for sales to
German customers outside West Berlin were eliminated by January 1, 1994, which
began with an initial 30% decrease on January 1, 1992, and continued with
further decreases of 20% on July 1, 1992, 25% on January 1, 1993 and 25% on
January 1, 1994; (ii) the V.A.T. rebates of 4.2% for German (other than West
Berlin) enterprises which purchase goods from West Berlin taxpayers' enterprises
were abolished effective July 1, 1991; (iii) special accelerated depreciation
allowances which permitted West Berlin taxpayers to pay to write off 75% of the
cost of qualifying fixed assets at any time during the first three years after
acquisition have been modified to limit the write off to 50%; (iv) certain
special investment subsidies have been restricted and were completely eliminated
by the end of 1994; and (v) tax credits on German federal income taxes were
reduced from 22.5% in 1990 to 20% in 1991, 13.5% in 1992, 9.0% in 1993 and 4.5%
in 1994, and were phased out completely by December 31, 1994.
During 1995, Wulff increased the amount of V.A.T. reserves by $1.0 million
as a result of developments to date in an ongoing quadrennial audit of Wulff's
tax returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million.
MANAGEMENT
The name, age, present principal occupation or employment and five-year
employment history of each of the directors and executive officers of Alliance
as of May 24, 1996 is set forth below. No director or executive officer is
related by blood, marriage or adoption to any other director or executive
officer.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Steve Greathouse 45 Chairman of the Board, President and Chief Executive Officer
Anthony DiCesare 33 Director and Executive Vice President--Development
Craig Fields 49 Vice Chairman of the Board
Joel Kirschbaum 45 Director and Consultant
David Robbins 36 Director
Alfred H. Wilms 51 Director
Shannon L. Bybee 56 Executive Vice President--Government Affairs and Special Advisor to the
Board of Directors
John W. Alderfer 51 Senior Vice President--Finance and Administration; Chief Financial
Officer and Treasurer
David D. Johnson 44 Senior Vice President, General Counsel and Secretary
Robert L. Miodunski 45 Senior Vice President--Nevada Route Group
Robert M. Hester 40 Vice President--Human Resources and Administration
Johnann F. McIlwain 49 Vice President--Marketing
Robert L. Saxton 42 Vice President--Casino Group
Robert A. Woodson 46 Vice President--Regulatory Compliance
</TABLE>
Steve Greathouse joined Alliance as President and Chief Executive Officer in
August 1994, was appointed a director in October 1994, and became Chairman of
the Board in March 1995. Mr. Greathouse, who has held various positions in the
gaming industry since 1974, most recently served as the President of the
Harrah's Casino Hotels Division of The Promus Companies Incorporated from
September 1993 to July 1994. In this position, Mr. Greathouse had responsibility
for Harrah's resorts in Las Vegas, Laughlin, Reno, Lake Tahoe and Atlantic City.
From July 1991 to September 1993, Mr. Greathouse served as President and (from
1990) Chief Operating Officer of Harrah's Southern Nevada, overseeing the
operations of Harrah's Las Vegas and Harrah's Laughlin. From 1990 to July 1991,
Mr. Greathouse served as Executive Vice President of Harrah's Southern Nevada.
Mr. Greathouse is an active member and has served as the
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Chairman of the Board of the Nevada Resort Association and is on the Executive
Committee of United Way of Southern Nevada. He has also served as a member of
the Board of Directors of the Las Vegas Convention and Visitors Authority and on
the Executive Committee of the Nevada Development Authority.
Anthony L. DiCesare was employed by KIC from April 1991 to July 1994 and
joined Alliance as Executive Vice President--Development and as a director in
July 1994. Prior to that time and following his graduation from business school
in 1989 he was employed as an associate at Wasserstein, Perella & Co., Inc. from
September 1989 to April 1991, where he worked in the Mergers and Acquisitions
group.
Dr. Craig Fields was appointed a director in October 1994 and became Vice
Chairman of the Board in March 1995. Dr. Fields was employed by the U.S.
Department of Defense Advanced Research Projects Agency ("ARPA") from 1974 to
1990. He joined the Microelectronics and Computer Technology Corporation ("MCC")
in 1990 as President and later became Chairman and CEO. He left MCC in 1994, and
serves as director of two publicly-traded corporations in addition to 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 Gaming Systems
Advisors, L.P. ("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 Alliance since November 1983. He
served as Chief Executive Officer of Alliance from December 1984 to July 1994
and as Chairman of the Board of Alliance from August 1986 to July 1994. From
1976 through 1989, Mr. Wilms served as President of Wilms Distributing Company,
Inc. and Wilms Export Company, N.V., a Belgian company engaged in the
distribution of amusement and gaming equipment. From 1971 through 1976, Mr.
Wilms held various positions with Bally Continental, including positions in
research and development, marketing, sales, gaming operation and management,
and, from 1974 through 1979, he served as a director of Bally Manufacturing
Corp. Mr. Wilms is currently President and a director of Aqualandia, the largest
waterpark in Europe; President and a director of Gibsa, a real estate company
located in Spain; and a director of Jardin Parks, a real estate company located
in Spain. Mr. Wilms is a citizen and resident of Belgium.
Shannon L. Bybee joined Alliance in July 1993 and served as President and
Chief Operating Officer until July 1994. In July 1994, Mr. Bybee assumed the
roles of Executive Vice President--Government Affairs and Special Advisor to the
Board of Directors and also took a position as Associate Professor with the
William F. Harrah College of Hotel Administration and the UNLV International
Gaming Institute at the University of Nevada, Las Vegas. Mr. Bybee currently
serves as a member of the board of directors of The Claridge Hotel and Casino
Corporation, a position he has held since August 1988. Prior to his association
with Alliance, Mr. Bybee had served as Chief Executive Officer of The Claridge
Hotel and Casino Corporation from August 1989 to July 1993. From 1983 to 1987
Mr. Bybee served as Senior Vice President and from 1978 to 1981 as Vice
President of Golden Nugget, Inc. (now Mirage Resorts, Inc.).
John W. Alderfer joined Alliance in September 1990 as Vice President, Chief
Financial Officer and Treasurer. Mr. Alderfer was subsequently promoted to
Senior Vice President--Finance and Administration, in December 1993. Prior to
joining Alliance, Mr. Alderfer was the Chief Financial Officer of The Bicycle
Club, a Los Angeles-based card casino, from February 1989 to September 1990.
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David D. Johnson joined Alliance as Senior Vice President, General Counsel
and Secretary in March 1995. Previously, Mr. Johnson developed extensive gaming
industry experience representing a diverse group of casino clients as a Senior
Partner at Schreck, Jones, Bernhard, Woloson & Godfrey, a Nevada law firm where
he was employed from January 1987 to April 1995. Prior to joining Schreck,
Jones, Bernhard, Woloson & Godfrey, Mr. Johnson served as Chief Deputy Attorney
General for the gaming division of the Nevada Attorney General's Office. Mr.
Johnson serves as Vice Chairman of the Executive Committee of the Nevada State
Bar's Gaming Law Section and is an officer and founding member of the Nevada
Gaming Attorneys Association.
Robert L. Miodunski joined Alliance as Senior Vice President--Nevada Route
Group in March 1994. From January 1991 to March 1994, Mr. Miondunski was
President of Mulholland-Harper Company, a sign manufacturing and service
company. From 1984 through 1990, Mr. Miodunski held various positions with
Federal Signal Company, the most recent being Vice President and General Manager
of the Midwest Region of the Sign Group.
Robert M. Hester joined Alliance in October 1993 as Director of Human
Resources and was promoted to Vice President--Human Resources and Administration
in December 1993. From 1989 to 1993, Mr. Hester was Director of Human Resources
for Sam's Town Hotel and Casino in Las Vegas.
Johnann F. McIlwain joined Alliance in June 1994 as Vice
President--Marketing. From 1991 to 1992, Ms. McIlwain was Vice President of
Marketing of Greenwood, Inc. a Philadelphia-based gaming and entertainment
company. From 1989 to 1991, she was Director of Marketing Services for
Hospitality Franchise Systems, Inc. in Parsippany, New Jersey. Prior to joining
Hospitality Franchise Systems, Inc. Ms. McIlwain served as Director of
Advertising for the Resorts International Casino Hotel and the Trump Taj Mahal
Casino Hotel.
Robert L. Saxton joined Alliance in 1982 as Corporate Controller and was
elected Vice President-- Casino Group in December 1993. Since joining Alliance,
Mr. Saxton has held various management positions with the Nevada Route Group and
is currently responsible for casino operations. He also serves as President of
Alliance's Louisiana subsidiaries.
Robert A. Woodson joined Alliance in 1988 as Director of Gaming Compliance
and was promoted to Vice President--Regulatory Compliance in September 1993.
Prior to joining Alliance, Mr. Woodson was with the Investigation Division of
the State of Nevada Gaming Control Board for 10 years.
Following consummation of the Merger, the Company intends to evaluate the
composition of its Board of Directors to insure that the Board includes
individuals having appropriate skills and experience in light of the expanded
scope of the Company's operations following the Merger. With the exception of
Hans Kloss, who, subject to regulatory approval, will continue as President of
BGII and Managing Director of Wulff, and Robert Conover, who will continue as
President of Systems, and Richard Gillman and Neil Jenkins, who will not
continue with the Company, the current executive officers of BGII, if any, who
will be employed by the Company after the Merger have not yet been determined.
The Company expects that a substantial number of BGII officers will remain
employed by the Company following consummation of the Merger.
Hans Kloss has been a Director of BGII since August 1991 and President and
Chief Operating Officer of BGII since May 1993. Mr. Kloss has been the Managing
Director of BGII's German subsidiaries, Bally Wulff Automaten GmbH and Bally
Wulff Vertriebs GmbH, since 1981 and has been employed by those companies since
1970.
Robert Conover is the President of Systems and has held that position since
November 1990. Mr. Conover also serves as Vice-President and Chief Information
Officer of BEC and has served as such since December 1992. Mr. Conover is also
Senior Vice-President in charge of Management Information Systems Operations at
the BEC subsidiaries that operate casino hotels, and has held that position
since 1983.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
HOLDERS AND MANAGEMENT
The following table sets forth certain information as of May 24, 1996 with
respect to the beneficial ownership of the Common Stock, which constitutes the
Alliance's only outstanding class of voting securities, by (i) each person who,
to the knowledge of Alliance, beneficially owned more than 5% of the Common
Stock, (ii) each director of the Company, (iii) the named executive officers of
Alliance (as defined in the Exchange Act) and (iv) all executive officers and
directors of Alliance as a group:
<TABLE>
<CAPTION>
POST-TRANSACTION
AMOUNT OF PRE-TRANSACTION PERCENT OF
SHARES PERCENT OF CLASS(1) CLASS(1)(2)(3)
--------------- --------------------- --------------------
<S> <C> <C> <C>
Alfred H. Wilms.............................. 7,034,082(4) 46.9% 24.4%
Donaldson, Lufkin & Jenrette Securities 1,695,500(5) 11.6% 5.9%
Corporation ................................
277 Park Avenue
New York, New York 10172
Joel Kirschbaum ............................. 1,333,333(6) 10.3% 5.0%
Kirkland Investment Corporation
Kirkland-Ft. Worth Corporation
Investment Partners, L.P.
535 Madison Avenue
New York, New York 10022
Gaming Systems Advisors, L.P. ............... --(7) -- --
535 Madison Avenue
New York, New York 10022
Steve Greathouse............................. 333,333(8) 1.9% 1.3%
Anthony L. DiCesare.......................... --(9) -- --
Craig Fields................................. 125,000(10) * *
David Robbins................................ 20,000(11) * *
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% 27.5%
</TABLE>
- ------------------------
* Less than 1%.
(1) Excludes the effect of (a) the issuance of (i) 2,750,000 shares subject to
warrants to Kirkland in connection with the Kirkland Investment, (ii)
1,250,000 shares subject to warrants to GSA pursuant to the GSA Advisory
Agreement on September 21, 1993 and 2,500,000 shares subject to additional
warrants issuable to GSA upon consummation of the Merger, both of which
become exercisable in equal amounts only when the stock price reaches $11,
$13 and $15, and (iii) 750,000, 250,000 and 30,000 shares subject to
warrants issued to Donaldson, Lufkin & Jenrette Securities Corporation,
Oppenheimer & Co. Inc. ("Oppenheimer") and L.H. Friend ("Friend"),
respectively, in connection with the issuance of the Old Convertible
Debentures, and (iv) 250,000 shares subject to warrants issued to Cerberus
Partners L.P. and certain affiliates of Canyon Partners, Inc., in September
1995, and (b) shares covered by employee stock options other than those
deemed beneficially owned by executive officers and directors.
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(2) Assumes the issuance of approximately 735,000 shares to BGII stockholders
in the Merger, approximately 1,250,000 shares in the Private Placement,
approximately 933,000 shares in partial satisfaction of BGII employee
contract termination costs and performance unit awards, and approximately
10,950,000 shares in the 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 become exercisable in equal amounts
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 Alliance, KIC, GSA, Kirkland and Mr. Wilms (as
amended, the "Stockholders Agreement"), the Alliance Board of Directors was
reconfigured to consist of four persons designated by KIC (Messrs. Kirschbaum,
DiCesare, David Robbins and Jay R. Gottlieb) and three persons designated by Mr.
Wilms (Messrs. Wilms, David A. Scheinman and Sidney Sosin). The Stockholders
Agreement and related transactions are more fully described in the Alliance
Forms 8-K dated June 25, 1993, September 21, 1993 and July 14, 1994 and in its
Information Statement dated June 29, 1994. On October 20, 1994, the Stockholders
Agreement was amended to reconfigure the Board of Directors of Alliance to
consist of four persons designated by KIC (Messrs. Kirschbaum, DiCesare, Robbins
and Gottlieb), one person designated by Mr. Wilms (Mr. Wilms) and two new
directors designated by a majority of the Board of Directors of Alliance. The
Stockholders Agreement obligates Mr. Wilms to vote his shares for such persons
nominated by KIC. On October 20, 1994 Mr. Greathouse and Dr. Fields were
appointed to the Board to fill vacancies created upon the resignation of Messrs.
Scheinman and Sosin. As amended, the Stockholders Agreement also provides that
Mr. Wilms may designate two persons (currently Messrs. Scheinman and Sosin) (the
"Advisors") who will be observers of, and advisors to, the Board of Directors
and who will be entitled to attend all of the Alliance Board of Directors'
meetings and receive all information furnished to members of the Board. Mr.
Wilms and/or at least one Advisor will be entitled to attend all meetings of the
committees of Alliance's and its subsidiaries' Boards of Directors. In addition,
Mr. Wilms is contractually obligated until September 21, 1997 to vote his shares
of Common Stock in favor of four nominees of KIC to the Alliance Board of
Directors. See "Certain Relationships and Related Transactions."
OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES
Immediately following the Transaction (and assuming that $50.0 million
principal amount of New Convertible Debentures are exchanged pursuant to the
Exchange Offer and converted into Common Stock and none into Series E Preferred
Stock pursuant to the Automatic Conversion and that $35.0 million in Old
Convertible Debentures remain outstanding), the Company will have outstanding
options, warrants and convertible securities which will be exercisable in the
aggregate for approximately 15,900,000 shares of Common Stock, as described
below. The following description does not purport to be complete and is
qualified in its entirety by reference to the documents and agreements related
to the items described which are incorporated by reference as exhibits to the
Registration Statement of which this prospectus is a part.
ALLIANCE
OPTIONS. Alliance has two stock option plans currently in effect: the United
Gaming, Inc. 1991 Long-Term Incentive Plan and the Gaming and Technology, Inc.
1984 Employee Stock Option Plan. Pursuant to these two plans, an aggregate of
5,000,000 shares of Common Stock are issuable, as to which options covering
2,162,834 shares were outstanding and options covering 1,088,644 shares were
exercisable as of March 31, 1996. In addition, Alliance has agreed to issue to
Dr. Fields options exercisable for 150,000 shares within 30 days of the
consummation of the Merger.
WARRANTS. Alliance has issued warrants to purchase shares of Common Stock to
the following persons in the amounts set forth below:
(1) Mr. Wilms: warrants to purchase 2,000,000 shares at a purchase price of
$2.50 per share (and in certain circumstances in a "cashless" transaction), and
which expire on September 1, 1998, issued in connection with the VSI Loan;
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(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;
(3) GSA: warrants to purchase 1,250,000 shares at a purchase price of $1.50
per share, divided equally among warrants which become exercisable when the
price of the Common Stock reaches $11, $13 and $15 per share and which expire on
September 21, 1999 issued pursuant to the GSA Advisory Agreement, and additional
warrants to purchase 2,500,000 shares issuable on the same terms (other than
their respective expiration dates) upon consummation of the Merger;
(4) Donaldson, Lufkin & Jenrette Securities Corporation: warrants to
purchase 500,000 shares at a purchase price of $8.25 per share, issued in
connection with the issuance of the Old Convertible Debentures, and additional
warrants to purchase 250,000 shares at a purchase price of $8.25 per share which
will vest when the price of the Common Stock reaches $13 per share following
consummation of the Merger or any similar transaction, all of which expire on
September 21, 1999;
(5) Oppenheimer: warrants to purchase 250,000 shares of Common Stock at a
purchase price of $8.25 per share and which expire on September 21, 1999, issued
in connection with the issuance of the Old Convertible Debentures;
(6) Cerberus Partners, L.P. and Canyon Partners, Inc.: warrants expiring in
2002 to purchase 250,000 shares of Common Stock at a purchase price of $3.75 per
share, issued in connection with a firm commitment by Cerberus Partners, L.P.
and affiliates of Canyon Partners, Inc. to Alliance in September 1995 relating
to financing for Alliance's tender offer and consent solicitation;
(7) Mr. Greathouse: warrants to purchase 250,000 shares on terms
substantially the same as the warrants issued to GSA described in clause (3)
above and which expire on August 15, 2000, issued in connection with his
employment;
(8) Dr. Fields: warrants to purchase 250,000 shares on terms substantially
the same as the warrants issued to GSA described in clause (3) above and which
expire on September 21, 2000, issued in connection with an agreement between Dr.
Fields and Alliance upon his becoming a director; and
(9) Friend: warrants to purchase 30,000 shares at a purchase price of $1.50
per share divided equally among warrants which become exercisable when the price
of 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 Old
Convertible Debentures.
BGII
OPTIONS. BGII has three stock option plans currently in effect: the 1991
Incentive Plan (the "BGII 1991 Incentive Plan"), the 1991 Non-employee
Directors' Option Plan (the "BGII 1991 Directors' Plan") and the 1994 Stock
Option Plan for Non-Employee Directors (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
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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.
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 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 and amendment of
the Wilms Warrants. CTC assumed Mr. Wilms' rights and obligations under the VSI
Loan. The 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 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 VSI Loan and Alliance has issued to Mr. Wilms
the warrant to purchase 1.8 million shares of Common Stock. Pursuant to the 1993
amendments to the 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 March 31, 1996 the aggregate amount of the
VSI Loan outstanding was approximately $3.7 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
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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.
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 issued warrants (which percentage may increase in certain
circumstances) to be distributed to GSI by GSA.
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 currently has outstanding $85.0 million aggregate
principal amount of 7 1/2% Convertible Subordinated Debentures due 2003,
although the information appearing elsewhere in this Prospectus, unless stated
otherwise, assumes the exchange of $50.0 million of the Old Convertible
Debentures into New Convertible Debentures, and the subsequent Automatic
Conversion into Common Stock or Series E Preferred Stock in lieu thereof. The
Old Convertible Debentures pay 7 1/2% interest per annum payable on a
semi-annual basis. The Old 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 Old Convertible Debentures at a redemption price equal to
the principal amount of such Old Convertible Debentures, together with accrued
interest, plus a specified redemption premium. The Old Convertible Debentures
also contain certain required redemption obligations at the option of the
holders of the Old Convertible Debentures. The following description of the Old
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 Old Convertible Debentures), each holder of Old Convertible Debentures
will have the right to require the Company to
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purchase all or any of such holder's Old 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 Old Convertible
Debentures.
SUBORDINATION. The Old 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 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, each 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, 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 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 March 31, 1996, there was an outstanding
balance of $3.7 million on this loan. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "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
$40.0 million, 11% on the next $10.0 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 March 31, 1996, amounts outstanding under the HFS facility
and the related financings aggregated $9.7 million. As adjusted, RCC is entitled
to receive 10% of the net available cash flows (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 $1.0 million in cash or shares of Common Stock 180 days after
the occurrence. The casino has achieved the required earnings as adjusted, and
Alliance is obligated to make the required payment or issue the Common Stock
(with the issuance being its expected course of action) by September 30, 1996.
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DESCRIPTION OF THE SENIOR SECURED NOTES
Set forth below is a summary of certain provisions of the Senior Secured
Notes. The Senior Secured Notes will be issued pursuant to an indenture (the
"Indenture") to be dated as of June , 1996 by and among Alliance Gaming
Corporation, the Guarantors and United States Trust Company of New York, as
trustee (the "Trustee"), a copy of which is filed as an exhibit to each
Registration Statement of which this Prospectus is a part. The Senior Secured
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, exclusive of its subsidiaries,
following the Transaction and "Wulff" refers collectively to the Wulff Entities,
in which BGII's German operations are to be conducted following the Wulff
Realignment (as described in "The Merger and Related Financings").
GENERAL
The Senior Secured 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 Senior Secured Notes" below. The Senior
Secured Notes will be jointly and severally irrevocably and unconditionally
guaranteed on a senior basis by each of the Company's present and future
Subsidiaries, except RCVP, VSI, SVS, VDSI and Wulff (the "Guarantors"). The term
"Subsidiaries" as used herein, however, does not include Unrestricted
Subsidiaries. The Senior Secured Notes will be issued only in fully registered
form, without coupons, in denominations of $1,000 and integral multiples
thereof.
The Senior Secured Notes will mature on , 2003. The Senior
Secured 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 Senior Secured 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 Senior Secured Notes will
be payable, and the Senior Secured 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 Senior Secured 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 Senior Secured 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 114 West 47th Street, New York, New York.
SECURITY FOR THE SENIOR SECURED NOTES
Subject to certain limited exceptions, the obligations of the Company with
respect to the Senior Secured Notes will be secured by an exclusive pledge of
all Equity Interests directly or indirectly held by the Company or its
Subsidiaries, whether currently owned or acquired in the future, except for its
Equity Interests in BGII and its Subsidiaries, but including its Equity
Interests in Alliance Holding Company, which has been formed to hold the equity
interests in BGII and, indirectly, its subsidiaries (collectively, the
"Collateral"). The Collateral will not include any other property or assets. The
Company and certain Guarantors will enter into one or more pledge agreements
(collectively, the "Collateral Agreements") that will provide for the pledge of
the Collateral to the Trustee, as collateral agent, for the benefit of the
holders of the Senior Secured Notes. Such pledges will secure the payment and
performance when due of all of the obligations of the
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Company and the Guarantors under the Indenture and the Senior Secured Notes. The
Equity Interests of Subsidiaries that are not pledged as Collateral are not
permitted to be pledged to any other person, except the Equity Interests in
Wulff may be pledged to secure working capital facilities at Wulff. See the
covenant "LIMITATION ON LIENS."
The Indenture will contain certain covenants limiting the ability of the
Company and its Subsidiaries to incur Indebtedness. However, subject to certain
limitations, the Indenture permits the inventory and accounts receivable and
certain other assets of Bally Gaming, Inc., Wulff and their Subsidiaries to be
used to secure up to $40.0 million principal amount permitted to be outstanding
under one or more working capital facilities. The Indenture also permits the
incurrence of up to $20.0 million of Purchase Money Indebtedness, Capitalized
Lease Obligations and other secured debt. See the covenant "LIMITATION ON
INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK." 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 Senior Secured 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
Senior Secured 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 Senior Secured 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 Senior Secured 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 or any Guarantor 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 or
any Guarantor, whether and for how long payments under the Senior Secured 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 Senior Secured 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."
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The Company is a holding company, conducting all of its business through
Subsidiaries, including the Guarantors. Holders of the Senior Secured Notes will
be direct creditors of each Guarantor by virtue of its guarantee. Nonetheless,
in the event of the bankruptcy or financial difficulty of a Guarantor, such
Guarantor's obligations under its guarantee may be subject to review and
avoidance under state and Federal fraudulent transfer laws. Among other things,
such obligations may be avoided if a court concludes that such obligations were
incurred for less than reasonably equivalent value or fair consideration at a
time when the Guarantor was insolvent, was rendered insolvent, or was left with
inadequate capital to conduct its business. A court would likely conclude that a
Guarantor did not receive reasonably equivalent value or fair consideration to
the extent that the aggregate amount of its liability on its guarantee exceeds
the economic benefits it receives in the Transaction. See "Risk Factors --
Fraudulent Transfer Considerations." The obligations of each Guarantor under its
guarantee will be limited in a manner intended to avoid it being deemed a
fraudulent conveyance under applicable law.
If the obligations of a Guarantor under its guarantee were avoided, Holders
of Senior Secured Notes would have to look to the assets of any remaining
Guarantors for payment. There can be no assurance in that event that such assets
would be sufficient to pay the outstanding principal and interest on the Senior
Secured Notes.
REDEMPTION
The Company will not have the right to redeem any Senior Secured Notes prior
to , 2000 (other than as described in the following paragraph). The
Senior Secured Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after , 2000, upon not less than 30
days nor more than 60 days notice to each holder of Senior Secured 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>
2000............................................................................. %
2001............................................................................. %
2002 and thereafter.............................................................. 100.000%
</TABLE>
The Senior Secured Notes of a holder 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 such 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 Senior Secured 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 Senior Secured 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 Senior
Secured Notes or portions thereof for redemption on a pro rata basis, by lot or
in such other manner it deems appropriate and fair. The Senior Secured Notes may
be redeemed in part in multiples of $1,000 only.
The Senior Secured 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 Senior Secured 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
Senior Secured 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
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such Senior Secured Note, a new Senior Secured Note or Senior Secured Notes in a
principal amount equal to the unredeemed portion thereof will be issued. On and
after the date fixed for redemption, interest will cease to accrue on the Senior
Secured Notes or portions thereof called for redemption, unless the Company
defaults in the payment thereof.
CERTAIN COVENANTS
REPURCHASE OF SENIOR SECURED 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 Senior Secured 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 Senior Secured Notes (PROVIDED, that the
principal amount of such Senior Secured 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
Senior Secured 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 has become the beneficial owner (as defined) 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, (iii) any person acquires all or
substantially all of the assets of the Company, in one transaction or a series
of related transactions, or (iv) during any period of 12 consecutive months
after the Issue Date, individuals who at the beginning of any such 12-month
period constituted the Board of Directors of the Company, together with any
Continuing Directors, cease for any reason to constitute a majority of the Board
of Directors of the Company then in office.
An "Exempt Person" is defined as (A) 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 Senior Secured 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 Senior Secured Notes so tendered and (iii) deliver
to the Trustee Senior Secured Notes so accepted together with an Officers'
Certificate listing the Senior Secured Notes or portions thereof being purchased
by the Company. The Paying Agent will promptly mail to the Holders of Senior
Secured 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 Senior Secured
Note equal in principal amount to any unpurchased portion of the Senior Secured
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Note surrendered. Any Senior Secured 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 Senior Secured 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 any Senior Secured Notes 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.
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 and the Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, issue, assume, guaranty, incur, become
directly or indirectly liable with respect to (including as a result of an
Acquisition), or otherwise become responsible for, contingently or otherwise
(individually and collectively, to "incur" or, as appropriate, an "incurrence"),
any Indebtedness (including Acquired 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 for incurrences on or prior to , 1997 and
at least 2.25 to 1 for incurrences thereafter (the "Debt Incurrence Ratio"),
then the Company may incur such Indebtedness or Disqualified Capital Stock,
PROVIDED, that except in the case of 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 Senior Secured
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 Senior
Secured Notes;
(b) the Company or any Guarantor may incur Indebtedness evidenced by the
Senior Secured Notes and the Guarantees and represented by the Indenture up to
the amounts specified therein as of the date thereof, and the Company or any
Subsidiary may incur other Indebtedness outstanding on the Issue Date (after
giving effect to the Transaction);
(c) the Company or any Subsidiary may incur Purchase Money Indebtedness,
Capitalized Lease Obligations and Indebtedness secured solely by the current
BGII headquarters and site ("BGII Site 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 $20.0 million, and (ii) such
Indebtedness other than BGII Site 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,
constructed or leased;
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(d) the Company or any Subsidiary, as applicable, may incur Refinancing
Indebtedness with respect to any Indebtedness or Disqualified Capital Stock, as
applicable, of such Person described in clauses (a) and (b) of this covenant so
long as such Refinancing Indebtedness is secured only by the assets (if any)
that secured the Indebtedness so refinanced;
(e) Bally Gaming, Inc., 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 up to $40.0 million, less any amounts outstanding pursuant
to clause (h) of the definition of "Permitted Indebtedness;"
(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 $7.5 million; and
(h) any Subsidiary may incur Acquired Indebtedness in an aggregate amount
outstanding at any time of up to $7.5 million, provided, however, that the
Consolidated Coverage Ratio of the Company for the Reference Period immediately
preceding the Incurrence Date thereof, after giving effect on a PRO FORMA basis
to such incurrence of Acquired Indebtedness and, to the extent set forth in the
definition of Consolidated Coverage Ratio, the use of proceeds thereof, would be
at least 2.25 to 1.
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 and the Guarantors will not, and
will not permit any of their 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 clause (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 such deficit), plus (b) 100% of the aggregate Net
Cash Proceeds received by the Company from the issuance of Qualified Capital
Stock of the Company after the Issue Date (whether upon the exercise of options,
warrants or other rights or otherwise), other than (i) to a Subsidiary and (ii)
to the extent applied in connection with a Qualified Exchange.
The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit (A) the redemption by the Company or any Subsidiary
of any Equity Interest 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) or is required to preserve a Gaming License
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, PROVIDED, that, after giving PRO FORMA effect to such Restricted
Investment, the aggregate amount of all such Restricted 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 Wholly-owned
Subsidiary, without restriction, in cash or property on or prior to the date of
any such calculation) at any time does not exceed $10.0 million, (C) the
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payment of scheduled dividends on the Preferred Stock to the extent such
dividends are not permitted to be paid in kind pursuant to the terms thereof as
in effect on the Issue Date (which cash dividends will be 7% per annum
compounding quarterly for the sixth and seventh years, and 15% per annum
compounding quarterly for the eighth year, following the Issue Date), (D) a
Qualified Exchange, (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 $1.0 million in any one 12-month period and $5.0 million in
the aggregate; (G) the payment of any dividend or distribution by RCVP, VSI, SVS
and VDSI to minority holders of their respective Equity Interests not in excess
of such holders' pro rata share of dividends or distributions in accordance with
the applicable terms of such entities' respective charters, bylaws or agreements
as in effect on the Issue Date; (H) prepayments made with respect to the VSI
Loan as in effect on the Issue Date; (I) 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 $1.0 million at any one time outstanding; and
(J) any redemption, retirement, repurchase or other acquisition of the Preferred
Stock (at a price of not more than the Liquidation Value) with the Net Cash
Proceeds received by the Company from the substantially concurrent sale of
Qualified Capital Stock, other than to a Subsidiary, or any exchange of
Qualified Capital Stock for Preferred Stock. The full amount of any Restricted
Payment made pursuant to the foregoing clauses (A), (B), (C), (E), (F), (G), (I)
and (J), of the immediately preceding sentence, however, will be deducted in the
calculation of the aggregate amount of other Restricted Payments available to be
made thereafter 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 and the Guarantors will not, and
will not permit any of their 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 otherwise to transfer assets or property 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 Senior Secured 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 any Refinancing Indebtedness
with respect thereto which is permitted by the covenant "LIMITATION ON
INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK," PROVIDED,
that any restriction imposed by such Refinancing Indebtedness is no more
restrictive than that imposed by such Indebtedness as of the Issue Date, (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 imposed by
Indebtedness incurred under clause (e) of the covenant "LIMITATION ON INCURRENCE
OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK," PROVIDED such
restriction is no more restrictive than that imposed by the Company's working
capital facilities as they existed immediately prior to the Issue Date, (f)
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 (g) 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.
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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 and the Guarantors will not, and
will not permit any of their 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, 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 Senior Secured Notes in accordance
with the terms of the Indenture or to the repurchase of the Senior Secured Notes
pursuant to an irrevocable, unconditional cash offer (the "Asset Sale Offer") to
repurchase Senior Secured 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, obligations and securities) which
in the good faith judgment of the Board 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 or (c) within 270 days
following such Asset Sale, the Asset Sale Offer Amount is applied to the
repayment of any Indebtedness of the Company or any Subsidiary which is secured
by the assets subject to such Asset Sale, as required by the terms thereof, (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.
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) or (c) 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 Senior Secured Notes properly
tendered (on a pro rata basis if the Asset Sale Offer Amount is insufficient to
purchase all Senior Secured Notes so tendered) at the Asset Sale Offer Price
(together with accrued interest). To the extent that the aggregate amount of
Senior Secured 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
secured by the assets sold and 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;
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(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; and
(iv) the Subsidiaries may convey, sell, lease, transfer, assign or
otherwise dispose of assets to the Company or any of its Subsidiaries.
All Net Cash Proceeds from an Event of Loss shall be invested or used to
repurchase Senior Secured 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."
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 Indenture will provide that 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
the Company or a Wholly-owned 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 aggregate consideration equal to or greater than $1.0
million, a committee of directors of the Company that are disinterested with
respect to such transaction shall approve by resolution certifying that such
transaction or series of transactions complies with clause (i) above; and (iii)
if such a transaction or series of transactions involves aggregate consideration
equal to or greater than $5.0 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.
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 (including indemnification) to directors of
the Company, (c) Exempted Affiliate Transactions, (d) Restricted Payments
permitted by the provisions of the Indenture described above in clauses (F),
(G), and (I) of the second paragraph under the covenant "LIMITATION ON
RESTRICTED PAYMENTS," or (e) 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.
In addition, the Company will not, and will not permit any of its
Subsidiaries to, pay any management, consulting or related fees to Kirkland, KIC
or their respective Affiliates pursuant to any agreement between any of such
entities and the Company or any of its Affiliates if a Default or Event of
Default has occurred and is continuing.
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 Senior
Secured Notes and the
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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; (iii)
immediately after giving effect to such transaction on a PRO FORMA basis, the
Consolidated Net Worth of the Consolidated 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 at least equal to 90% of the Consolidated Net
Worth of the Company immediately prior to such transaction; and (iv) 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
clause (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 (except in the case of a lease)
shall be released from the obligations under the Senior Secured Notes and the
Indenture except with respect to any obligations that arise from, or are related
to, such transaction.
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 Senior Secured Notes have been paid in full, the Company and the
Guarantors will, and will cause their 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. 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 and the Guarantors will not
sell, and will not permit any of their 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
not owned by Wholly-owned Subsidiaries; and (iii) the issuance and sale of all,
but not less than all, of the Equity Interests of any Subsidiary of the Company
held by the Company or any Subsidiary in compliance with the other provisions of
the Indenture.
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FUTURE SUBSIDIARY GUARANTORS
The Indenture will provide that all present and future Subsidiaries of the
Company (other than RCVP, VSI, SVS, VDSI and Wulff, until any such Subsidiary
(other than Wulff) becomes a Wholly-owned Subsidiary, at which time such
Subsidiary shall promptly become a Guarantor) jointly and severally will
guaranty irrevocably and unconditionally all principal, premium, if any, and
interest on the Senior Secured Notes on a senior basis. The term Subsidiary does
not include Unrestricted Subsidiaries.
RELEASE OF GUARANTORS
The Indenture will provide that no Guarantor shall consolidate or merge with
or into (whether or not such Guarantor is the surviving person) another person
(other than the Company or another Guarantor) unless (i) subject to the
provisions of the following paragraph, the person formed by or surviving any
such consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture and (if
required) additional Collateral Agreements in form reasonably satisfactory to
the Trustee, pursuant to which such person shall unconditionally guarantee, on a
senior basis, all of such Guarantor's obligations under such Guarantor's
Guarantee, the Indenture and the Senior Secured Notes on the terms set forth in
the Indenture; (ii) immediately before and immediately after giving effect to
such transaction on a PRO FORMA basis, no Default or Event of Default shall have
occurred or be continuing; and (iii) immediately after such transaction, the
surviving person holds all permits required for operation of the business of,
and such entity is controlled by a person or entity (or has retained a person or
entity which is) experienced in, or otherwise holds all permits (including those
required from Gaming Authorities) to operate its business.
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) of a Guarantor or all of its assets to an entity which is not a
Guarantor or the designation of a Subsidiary to become an Unrestricted
Subsidiary, which transaction is otherwise in compliance with the Indenture
(including, without limitation, the provisions of the covenant "LIMITATIONS ON
SALE OF ASSETS AND SUBSIDIARY STOCK"), such Guarantor will be deemed released
from its obligations under its Guarantee of the Senior Secured Notes; PROVIDED,
HOWEVER, that any such termination shall occur only to the extent that all
obligations of such Guarantor under all of its guarantees of, and under all of
its pledges of assets or other security interests which secure, any Indebtedness
of the Company or any other Subsidiary shall also terminate upon such release,
sale or transfer.
The Indenture will expressly permit the consummation of the Transaction
(including the Wulff Realignment).
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 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 Senior Secured 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
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premium, if any, on the Senior Secured 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 Senior Secured 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 Senior Secured
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 $10.0 million as a result of which the
maturity of such Indebtedness has been accelerated prior to its Stated Maturity,
(vi) final unsatisfied judgments not covered by insurance aggregating in excess
of $10.0 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 Senior Secured Notes shall have already become due and payable, either the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Senior Secured 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
Senior Secured 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
Senior Secured 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 Senior Secured Notes which have become due
solely by reason of 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 Senior
Secured Notes, the Holders of a majority in aggregate principal amount of the
Senior Secured 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 Senior Secured 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 Senior Secured 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 Senior Secured 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 Senior Secured Notes, elect
to have its obligations discharged with respect to the outstanding Senior
Secured Notes ("Legal Defeasance"). Such Legal Defeasance means that the Company
shall be deemed to have paid and discharged the entire Indebtedness represented
by the Senior Secured Notes, the Collateral shall be released from the Liens in
favor of the Senior Secured Notes and the Indenture shall cease to be of further
effect as to all outstanding Senior Secured Notes, except as to (i) rights of
Holders to receive payments in respect of the principal of, premium, if any, and
interest on such Senior Secured Notes when such payments are due from the trust
funds; (ii) the Company's obligations with respect to such
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Senior Secured Notes concerning issuing temporary Senior Secured Notes,
registration of Senior Secured 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 Senior Secured Notes. In the event Covenant
Defeasance occurs, the Collateral shall be released from the Liens in favor of
the Senior Secured 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 Senior Secured 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 Senior Secured 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
Senior Secured 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 Senior Secured Notes, and the holders of Senior Secured 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 Senior Secured 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
Senior Secured 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 Senior Secured 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 Senior Secured 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.
AMENDMENTS AND SUPPLEMENTS
The Indenture will contain provisions permitting the Company, the Guarantors
and the Trustee to enter into a supplemental indenture for certain limited
purposes without the consent of the Holders. With the
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consent of the Holders of not less than a majority in aggregate principal amount
of the Senior Secured Notes at the time outstanding, the Company, the Guarantors
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 Senior Secured Notes at the time outstanding
modify the provisions (including the defined terms used therein) of the covenant
"REPURCHASE OF SENIOR SECURED 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 Senior Secured 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 Senior Secured 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 Senior Secured Notes in a manner adverse to
the Holders, or make the Senior Secured Notes subordinated in right of payment
to any other Indebtedness of the Company or (ii) reduce the percentage in
principal amount of the outstanding Senior Secured 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 Senior Secured 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, the
Guarantors or any successor entity shall have any personal liability in respect
of the obligations of the Company or a Guarantor under the Indenture, the Senior
Secured Notes or the Guarantees by reason of such status as a stockholder,
employee, officer or director, except to the extent such is an issuer or a
Guarantor of any Senior Secured 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.
"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 ownership by 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.
"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.
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"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 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.
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"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 Disqualified
Capital Stock of RCVP, VSI, SVS or VDSI as in effect on the Issue Date, or
dividends payable by Subsidiaries of such person to such person or such person's
Wholly-owned Subsidiaries). For purposes of this definition, (x) interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
determined in good faith by the Company to be the rate of interest implicit in
such Capitalized Lease Obligation in accordance with GAAP and (y) interest
expense attributable to any Indebtedness represented by the guaranty by such
person or a Subsidiary of such person of an obligation of another person shall
be deemed to be the interest expense attributable to the Indebtedness
guaranteed.
"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) or are either unusual or
nonrecurring (including any gain from the sale or other disposition of assets
outside the ordinary course of business or from the issuance or sale of any
Capital Stock), (b) the net income, if positive, of any person, other than a
Consolidated 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, but in any case not
in excess of such person's PRO RATA share of such person's net income for 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 the declaration or payment of dividends or
similar distributions to the Company is 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; PROVIDED, that for the purposes of determining
Consolidated Net Income for any period which includes any fiscal quarter ending
on or prior to September 30, 1996, net income shall be adjusted to exclude (only
to the extent included in computing such net income (or loss) and without
duplication) Alliance's net charge for inducement for early conversion resulting
from the Exchange Offer, the direct Merger costs of Alliance and BGII and the
unusual or nonrecurring charges of Alliance and BGII, consisting of BGII costs
relating to a regulatory investigation and legal proceedings in Louisiana,
provision to write-down to net realizable value the carrying value of a building
to be sold and provision to increase Wulff's tax reserves, and Alliance costs
relating to an executive signing bonus paid in Common Stock, termination costs
for certain officers and directors, and provision for impaired assets of two
development projects (each in an amount not to exceed, and in the nature of, the
amounts disclosed in Alliance's and BGII's financial statements appearing
elsewhere in this Prospectus).
"CONSOLIDATED NET WORTH" of any person at any date means, in the cases of a
partnership, the partners' capital, and in the case of any other person, the
aggregate Consolidated stockholders' equity of such person (plus amounts of
equity attributable to preferred stock) and its Consolidated Subsidiaries, as
would be
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shown on the Consolidated balance sheet of such person prepared in accordance
with GAAP, adjusted to exclude (to the extent included in calculating such
equity), (a) the amount of any such stockholders' equity attributable to
Disqualifed Capital Stock or treasury stock of such person and its Consolidated
Subsidiaries, (b) all upward reevaluations and other write-ups in the book value
of any asset of such person or a Consolidated Subsidiary of such person
subsequent to the Issue Date, and (c) all investments in Subsidiaries that are
not Consolidated Subsidiaries and in person that are not Subsidiaries.
"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, (i) 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 and (ii) in the case of the Company or its Subsidiaries, that
portion of rental obligations in respect of revenue-sharing arrangements or
space lease arrangements used in the Company's gaming machine management
operations.
"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.
"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 either (i) was 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, (a) 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 (other than the disqualification of the holder thereof by a Gaming
Authority) 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 Senior Secured Notes and (b) with respect to any Subsidiary of such
person (including with respect to any Subsidiary of the Company), any Equity
Interests other than any common equity with no preference, privileges, or
redemption or repayment provisions.
"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) the continuation, extension or
renewal of any transaction entered into between the Company or any Subsidiary
and any Affiliate prior to the Issue Date, (ii) 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
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related expenses, (iii) 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, and (iv)
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 by their terms in cash, notes payable or property.
"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 Senior Secured
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 Senior Secured Notes
shall have traded on such trading day, or (b) if no such sales of such Senior
Secured Notes occurred on such trading day, the mean between the "bid" and
"asked" prices on such national securities exchange or as quoted on Nasdaq, as
the case may be, on such last trading day, or (c) if the Senior Secured 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 Senior Secured
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 Senior Secured 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 Senior Secured Notes as of the date of determination
as 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 Senior
Secured 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.
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"INDEBTEDNESS" of any person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of any such 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 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
or notes receivable, prepayments or deposits or other similar arrangements
arising in the ordinary course of business); (c) other than guarantees of
Indebtedness of the Company or any Subsidiary 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 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.
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"ISSUE DATE" means the date of first issuance of the Senior Secured 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 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 Senior
Secured Notes and the date of any event that causes such Subsidiary to no longer
be a Subsidiary shall be an Incurrence Date; (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; (c) Indebtedness in
connection with one or more commercial letters of credit or banker's acceptances
issued for the account of the Company or any Subsidiary for the purchase of
goods or services in the ordinary course of business; (d) Indebtedness in
respect of performance, completion, guarantee, surety or similar bonds, provided
by the Company or any Subsidiary in the ordinary course of business; (e)
Indebtedness in respect of any 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, provided, that the aggregate amount of Indebtedness incurred pursuant
to clauses (c), (d) and (e) outstanding at any one time shall not exceed $5.0
million in the aggregate; (f) reimbursement obligations with respect to letters
of credit in respect of workers' compensation claims consistent in character and
amount with customary industry practice; (g) Indebtedness consisting of
obligations, contingent or otherwise, in respect of incremental additions after
the Issue Date to off-balance sheet sales or financing of accounts receivable
("Receivables Financing") in existence on the Issue Date pursuant to the terms
of such factoring arrangements in existence on the Issue Date; and (h)
Indebtedness consisting of Receivables Financing incurred after the Issue Date,
PROVIDED, that any such Indebtedness will be deemed Indebtedness incurred
pursuant to clause (e) of the covenant "LIMITATION ON INCURRENCE OF ADDITIONAL
INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK," subject to the limitations on the
aggregate amount thereof contained therein.
"PERMITTED INVESTMENT" means (a) Investments in any of the Senior Secured
Notes; (b) Cash Equivalents; (c) intercompany notes to the extent permitted
under the definition of "Permitted Indebtedness;" (d)
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loans, advances or investments in existence on the Issue Date (after giving
effect to the Transaction); (e) any Investment consisting of the extension of
credit to 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 Wholly-owned Subsidiaries (including
Investments as a direct result of which a person becomes a Wholly-owned
Subsidiary); and (h) Investments consisting of non-cash proceeds from Asset
Sales permitted by the Indenture.
"PERMITTED LIEN" means (a) Liens existing on the Issue Date (after giving
effect to the Transaction); (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; (h) Liens securing the Senior Secured Notes and the
Guarantees; (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) of the
covenant "LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED
CAPITAL STOCK," PROVIDED, that such Liens relate only to the property which is
subject to such Indebtedness; (k) Liens on accounts receivable, inventory,
general intangibles and associated documents, instruments, lockbox accounts and
related bank accounts in respect thereof, BGII's current headquarters and site
and the Equity Interests in Wulff, in each case securing Indebtedness permitted
to be incurred under clause (e) of the covenant "LIMITATION ON INCURRENCE OF
ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK" or under clause (h) of
the definition of "Permitted Indebtedness" (but not in respect of inventory);
(l) 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 (m) 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 Senior
Secured 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 or property.
"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) or construction of any real
or personal tangible property which in the good faith judgment of the Company is
directly related to a Related Business of the Company and which is incurred
substantially concurrently with such acquisition, lease or construction and is
secured only by the assets so financed or other property acquired for use
therewith.
"QUALIFIED CAPITAL STOCK" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
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"QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Equity Interests or Indebtedness of the
Company issued after the Issue Date 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 after the Issue Date.
"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 Senior Secured 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 Senior Secured Notes than was the Indebtedness or
Disqualified Capital Stock to be refinanced and (C) such Refinancing
Indebtedness shall have no installment of principal (or redemption payment)
scheduled to come due earlier than the Stated Maturity of the corresponding
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 Senior Secured 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), 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 businesses, 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 Senior Secured 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 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 Senior
Secured 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 or any parent or Subsidiary 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 Subordinated Indebtedness and (d) any
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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; or (ii) any
dividend, distribution or other payment, directly or indirectly, to the Company,
or to any of its Wholly-owned Subsidiaries, by any of its Subsidiaries.
"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 Senior Secured 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 or a
Subsidiary that is subordinated in right of payment to the Senior Secured Notes
or such Subsidiary's Guarantee, as applicable, in any respect or, except in the
case of Indebtedness incurred under clause (e) of the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock," has a
Stated Maturity on or after the Stated Maturity of the Senior Secured Notes
(excluding the Senior Secured Notes).
"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 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 (a) such subsidiary shall not
engage, to any substantial extent, in any line or lines of business activity
other than a Related Business, (b) neither immediately prior thereto nor after
giving PRO FORMA effect to such designation would there exist a Default or Event
of Default and (c) either (x) such subsidiary, at the time of designation
thereof, has no assets, (y) such subsidiary is designated an "Unrestricted
Subsidiary" at the time of acquisition by the Company or a Subsidiary in the
case of subsidiaries acquired after the Issue Date or (z) 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 clause
(a) of the covenant "LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND
DISQUALIFIED CAPITAL STOCK." 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 clause (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.
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DESCRIPTION OF CAPITAL STOCK
The Company's Articles of Incorporation, as amended (the "Articles of
Incorporation"), authorize the issuance of 185,000,000 shares of capital stock,
of which 175,000,000 shares are designated as Common Stock, par value $0.10 per
share, and 10,000,000 shares are designated as Special Stock, par value $0.10
per share. As of March 31, 1996, approximately 12,988,000 shares of Common Stock
were issued and outstanding and no shares of Special Stock were issued and
outstanding. See "Security Ownership of Certain Beneficial Holders and
Management." The Company expects to issue approximately 735,000 shares of Common
Stock to BGII stockholders and 933,000 shares of Common Stock in partial
satisfaction of BGII employee contract termination costs and performance unit
awards, and 350,000 shares of Preferred Stock pursuant to the Merger Agreement
(in each case, based on 10,799,501 shares of BGII common stock outstanding, less
1,000,000 shares owned by Alliance and a Common Stock price of $4.00 per share)
and expects to issue approximately 9,450,000 shares of Common Stock and no
shares of Series E Preferred Stock upon Automatic Conversion of the New
Convertible Debentures and as a financial advisory fee assuming the exchange of
$50.0 million principal amount of New Convertible Debentures and no election by
the holders of New Convertible Debentures to receive Series E Preferred Stock in
the conversion and 1,250,000 shares of Common Stock in the Private Placement
(based on a Common Stock price of $4.00 per share) and 150,000 shares of
Preferred Stock in the Preferred Stock Offering.
COMMON STOCK
Holders of Common Stock are entitled to cast one vote per share on all
matters on which the Company's stockholders are entitled to vote. The number of
votes required to take any action by the Company's stockholders are as provided
in Title 7 of the Nevada Revised Statutes (the "Nevada Revised Statutes") or the
Articles of Incorporation. Holders of Common Stock are not entitled to cumulate
their votes. Holders of Common Stock are entitled to receive dividends when and
as declared by the Company's Board of Directors (the "Board") out of funds
legally available for the payment thereof. The Articles of Incorporation provide
that once the subscription price or par value of any share of Common Stock has
been paid in, such share shall be non-assessable and shall not be subject to
assessment to pay the debts of Alliance. Subject to any preferential rights
which may be granted to holders of certain series of Special Stock, holders of
Common Stock are entitled to share ratably in all assets of the Company that are
legally available for distribution to its stockholders in the event of its
liquidation or dissolution. Holders of Common Stock have no preemptive rights
nor are there any subscription, redemption or conversion privileges associated
with the Common Stock.
The Common Stock is quoted on Nasdaq under the symbol "ALLY."
SPECIAL STOCK
The Articles of Incorporation provide that the Special Stock may be issued
from time to time upon such terms and conditions and for such consideration as
may be provided by the Board. The Special Stock may be issued in one or more
series, each series having such designations, rights, preferences and privileges
as may be determined by the Board at the time of issuance. The Company has no
current intention to issue any series of Special Stock with the exception of the
Preferred Stock and the Series E Preferred Stock described herein.
15% NON-VOTING SENIOR PAY-IN-KIND SPECIAL STOCK, SERIES B
The Company's Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions thereof (the "Certificate of
Designations") of the 15% Non-Voting Senior Pay-in-Kind Special Stock, Series B
(previously defined as the "Preferred Stock") provides that holders of shares of
Preferred Stock are entitled to receive quarterly dividends, as and when
declared by the Board, in an amount per share equal to $3.75, or 15% per annum,
payable in cash, except that the Company may at its option pay any such dividend
accruing through and including the Dividend Payment Date (as defined below)
occurring next after the seventh anniversary of the Effective Time in whole or
in part in additional shares of Preferred Stock (or fractions thereof) in an
amount equal to such dividend, with each share of Preferred Stock valued at $100
(the "Liquidation Value"), provided that after the first Dividend Payment Date
(as defined below) occurring next
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after the fifth anniversary of the Effective Time the portion of any such
dividend that may be so paid is limited to $2.00 per share, or 8% per annum.
Dividends are payable on the first day in each year of the first, fourth,
seventh and tenth months of each year following the date of initial issuance
beginning on the first day of the fourth month following the date of initial
issuance or such other dates as set by the Board (each a "Dividend Payment
Date"). Dividends are cumulative and shall accrue from and after May 3, 1996 or,
in the case of Preferred Stock issued as dividends, from and after the date of
initial issuance. Dividends payable for any partial dividend period (including
the period from May 3, 1996 until the first day of the month next following the
month in which the date of initial issuance occurred) will be computed on the
basis of the actual days elapsed in such period over a year of 365 or 366 days.
Unless all dividends that have accrued are paid on the Preferred Stock, no
dividend or other distribution can be paid to holders of any equity security
ranking junior to or pari passu with the Preferred Stock (including the Series E
Preferred Stock) and no shares of such junior or pari passu security can be
purchased or redeemed by the Company. The Company currently expects that so long
as the Preferred Stock remains outstanding, it will, subject to the terms
thereof, pay dividends accruing through the first dividend payment date
occurring after the seventh anniversary of the Effective Time on the Preferred
Stock in additional shares of such stock.
Upon liquidation, the holders of shares of Preferred Stock are entitled
(subject to other rights of any senior equity securities) to be paid out of
assets of the Company in cash or property valued at its fair market value (as
determined in good faith by the Board) an amount equal to $100 plus an amount
equal to all accrued and unpaid dividends and distributions thereon. The Company
may not issue equity securities ranking senior in right of payment to the
Preferred Stock. Therefore, immediately following the Merger, no equity security
will be senior to or pari passu with the Preferred Stock and only the Common
Stock and Series E Preferred Stock will be junior to the Preferred Stock.
The Preferred Stock has no voting rights except as required by law and
except in the case where dividends payable on shares of the Preferred Stock have
been in arrears for six consecutive Dividend Payment Dates, at which time the
number of directors constituting the Board will be increased by two and the
holders of shares of Preferred Stock will have the right, voting separately as a
class, to elect two directors to the Board until all dividends accumulated on
such shares have been paid or set apart for payment in full.
The Company may at its option redeem all, or any number less than all, of
the outstanding shares of Preferred Stock at any time at a price per share equal
to $100 per share plus an amount equal to all accrued and unpaid dividends and
distributions thereon to the date of redemption. The Company is required to
redeem at the above mentioned price all of the outstanding shares of Preferred
Stock by the eighth anniversary of original issuance, 2004. If the
Company fails to redeem such shares on that date and the holders have not yet
elected two directors to the Board as provided in the previous paragraph, then
the number of directors constituting the Board will be increased by two and the
holders of the shares of Preferred Stock will have the right to elect two
directors to the Board. The total number of directors which the holders of
Preferred Stock shall have the right to elect may not exceed two. Holders of the
Preferred Stock have no other remedy than those described above if the Company
fails to redeem all the outstanding shares of Preferred Stock on such date. The
terms of the Senior Secured Notes will restrict the Company's ability to effect
any such redemption so long as any Senior Secured Notes remain outstanding.
Fractional shares of Preferred Stock will entitle the holder to receive
dividends and distributions and to exercise voting rights in proportion to the
fractional holding.
Alliance has applied to have the Preferred Stock quoted on Nasdaq under the
symbol "ALLYP."
11 1/2% NON-VOTING JUNIOR CONVERTIBLE PAY-IN-KIND SPECIAL STOCK, SERIES E
Alliance's Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions thereof (the "Series E Certificate
of Designations") of the 11 1/2% Non-Voting Junior Convertible Pay-in-Kind
Special Stock, Series E (previously defined as the "Series E Preferred Stock")
to be filed with the Secretary of State of Nevada provides that holders of
shares of Series E Preferred Stock are entitled to receive quarterly dividends,
as and when declared by the Board, in an amount per share equal to $2.50 payable
in cash,
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through and including the Series E Dividend Payment Date (as defined below)
occurring next after the third anniversary of the Effective Time, except that
the Company may at its option pay any such dividend in whole or in part in
additional shares of Series E Preferred Stock (or fractions thereof) in an
amount equal to such dividend, with each share of Series E Preferred Stock
valued at $100. Dividends are payable on the first day in each year of the
first, fourth, seventh and tenth months of each year following the date of
initial issuance beginning on the first day of the fourth month following the
date of initial issuance or such other dates as set by the Board (each a "Series
E Dividend Payment Date"). Dividends are cumulative and will accrue from and
after the date of initial issuance. Dividends payable for any partial dividend
period (including the period from the date of initial issuance until the first
day of the month next following the month in which the date of initial issuance
occurred) will be computed on the basis of the actual days elapsed in such
period over a year of 365 or 366 days. Unless all dividends that have accrued
are paid on the Series E Preferred Stock, no dividend or other distribution can
be paid to holders of any equity security ranking junior to or pari passu with
the Series E Preferred Stock and no shares of such junior security can be
purchased or redeemed by Alliance. Alliance currently expects that so long as
the Series E Preferred Stock remains outstanding, it will, subject to the terms
thereof, pay dividends on the Series E Preferred Stock in additional shares of
such stock.
Shares of Series E Preferred Stock are convertible into shares of Common
Stock at any time, initially at a conversion price of $5.88 per share, subject
to adjustment as provided below (the "Series E Conversion Price"). The right to
convert shares of Series E Preferred Stock called for redemption will expire at
the close of business on the fifth business day prior to the redemption date.
The Series E Conversion Price is subject to adjustment in certain events,
including (i) dividends (and other distributions) payable in shares of Common
Stock on any class of capital stock of the Company, (ii) the issuance to all
holders of shares of Common Stock or rights or warrants entitling them to
subscribe for or purchase shares of Common Stock at less than the current market
price (as defined in the Series E Certificate of Designations), (iii)
subdivisions, combinations and reclassifications of shares of Common Stock, (iv)
certain tender offers by the Company or any subsidiary of the Company for shares
of Common Stock and (v) distributions by the Company to all holders of shares of
Common Stock of evidences of indebtedness, securities other than shares of
Common Stock or other assets (including securities but excluding those
dividends, rights, warrants and distributions referred to above and excluding
dividends and distributions paid in cash or other property out of the retained
earnings of the Company), provided that, in the event that the fair market value
of the assets, evidences of indebtedness or other securities so distributed
applicable to one share of Common Stock equals or exceeds such current market
price per share of Common Stock or such current market price exceeds such fair
market value by less than $0.10 per share, the Series E Conversion Price will
not be adjusted until such time as the cumulative amount of all such
distributions exceed $0.10 per share.
In addition to the foregoing adjustments, the Company is permitted to make
such reductions in the Series E Conversion Price as it considers to be advisable
in order that any event treated for Federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of the shares of Common
Stock.
In case of certain reclassifications, consolidations or mergers to which the
Company is a party or the transfer of all or substantially all of the assets of
the Company, each share of Series E Preferred Stock then outstanding would,
without the consent of any holders of such shares, become convertible only into
the kind and amount of securities, cash and other property receivable upon the
reclassification, consolidation, merger or transfer by a holder of the number of
shares of Common Stock into which such shares might have been converted
immediately prior to such reclassification, consolidation, merger or transfer
(assuming such holder of shares of Common Stock failed to exercise any rights of
election and received per share the kind and amount received per share by a
plurality of non-electing shares).
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon market price
(as determined in accordance with the Series E Certificate of Designations).
Fractional shares of Series E Preferred Stock may be issued under certain
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circumstances (including in payment of dividends payable in shares of Series E
Preferred Stock) and will entitle the holder to receive dividends and
distributions and to exercise voting rights in proportion to the fractional
holding.
Upon liquidation, the holders of shares of Series E Preferred Stock are
entitled (subject to prior preferences and other rights of any senior equity
securities including the Preferred Stock and on a parity with other securities
ranking equally) to be paid out of assets of the Company in cash or property
valued at its fair market value (as determined in good faith by the Board) an
amount equal to $100 plus an amount equal to all accrued and unpaid dividends
and distributions thereon.
The Series E Preferred Stock has no voting rights except as required by law
and except in the case where dividends payable on shares of the Series E
Preferred Stock have been in arrears for six consecutive Series E Dividend
Payment Dates, at which time the number of directors constituting the Board will
be increased by two and the holders of shares of Series E Preferred Stock,
together with the holders of any other class of Special Stock ranking on a
parity with the Series E Preferred Stock as to the payment of dividends, will
have the right, voting separately as a class, to elect two directors to the
Board until all dividends accumulated on such shares have been paid or set apart
for payment in full.
The Company may at its option redeem all, or any number less than all, of
the outstanding shares of Series E Preferred Stock at any time at a price per
share equal to $100 per share plus an amount equal to all accrued and unpaid
dividends and distributions thereon to the date of redemption.
PROVISIONS APPLICABLE TO CERTAIN HOLDERS
The Nevada Revised Statutes contains a control share provision with respect
to the acquisition of more than 20% of the voting shares of a Nevada
corporation. Alliance, however, has opted out of this provision in accordance
with the Nevada Revised Statutes by adopting an amendment to its by-laws to such
effect.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF PREFERRED STOCK
The following is a description of the material Federal income tax
consequences to the original holders of Preferred Stock. The description is
based on currently existing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations thereunder, current administrative
rulings and court decisions, all of which are subject to change (possibly on a
retroactive basis) and any such change could affect the continuing validity of
this description. The Federal income tax description set forth below may not be
applicable to certain classes of taxpayers, including insurance companies,
securities dealers, financial institutions, foreign persons, and persons in
special situations. Holders of Preferred Stock are urged to consult their tax
advisors as to their respective personal tax situations including the
applicability and effect of state, local and other tax laws. The discussion
below assumes that the shares of Preferred Stock are capital assets in the hands
of any holder.
TAX TREATMENT OF CASH DISTRIBUTIONS AND DISTRIBUTIONS OF ADDITIONAL SHARES OF
PREFERRED STOCK
The Company believes the Preferred Stock will be deemed "participating"
preferred stock for purposes of Code section 305(b)(4). Consequently, the
Company believes that the quarterly distribution of additional shares of
Preferred Stock ("Distribution Shares") on the shares of Preferred Stock sold
pursuant to this Offering is a distribution of stock described in Code Section
305(a) and will not be subject to tax upon receipt by holders ("Non-taxable
Distribution Shares"). Generally, a holder must allocate a portion of the
holder's adjusted tax basis in its share of Preferred Stock to the basis of each
Non-taxable Distribution Share, or portion thereof, a holder receives tax free
under Code section 305(a). It is possible at some time in the future that
additional shares of Preferred Stock distributed on Distribution Shares will not
be "participating" in this sense and their receipt by holders will be subject to
tax as described in the immediately following paragraph ("Taxable Distribution
Shares"). In addition, in the event more than a DE MINIMIS amount of Old
Convertible Debentures remain outstanding after the Merger, under one possible
reading of the Treasury Regulations under Code Section 305(b)(2), the receipt of
Distribution Shares would be subject to tax as described in the immediately
following paragraph because such receipt would increase the proportionate
interest in Alliance's earnings and assets by holders of Preferred Stock while
the receipt of interest by holders of Old Convertible Debentures would be
treated as the receipt of property. Under Code section 306(a), if a holder sells
a Non-taxable Distribution Share (other than in a redemption by the Company) the
amount realized shall be treated as ordinary income except to the extent the
amount realized exceeds such share's ratable share of the amount which would
have been a dividend at the time of distribution if the Company had distributed
money in an amount equal to the fair market value of such share at the time of
distribution (the "Dividend Amount"). Any excess of the amount realized by the
holder over the sum of (i) the Dividend Amount and (ii) the holder's allocated
tax basis in the Non-taxable Distribution Share shall be treated as capital gain
from the sale of such stock. If the Company redeems such Non-taxable
Distribution Share, the redemption will be taxed as a distribution subject to
Code section 301(c) (as described immediately below), unless, generally, a
holder reduces his interest in the Company as described below in the section
titled "Redemption for Cash", in which case the amount realized shall be treated
as capital gain from the sale of such stock.
Pursuant to Code section 301(c)(1), holders of Preferred Stock will
recognize ordinary income upon the receipt of a dividend in cash or in Taxable
Distribution Shares, in both cases to the extent of the Company's current or
accumulated earnings and profits. The amount of the distribution for purposes of
Code section 301(c) will equal the amount of cash and the fair market value of
the Taxable Distribution Shares distributed. The fair market value of each
Taxable Distribution Share paid as a dividend will equal the mean between the
highest and lowest quoted selling prices of shares of the Preferred Stock on
Nasdaq on the date of payment. Pursuant to Code section 301(c)(2) and (3), a
distribution of cash or Taxable Distribution Shares in an amount in excess of
the Company's current and accumulated earnings and profits will be a tax free
return of capital to the extent of a holder's tax basis in the shares of
Preferred Stock, and thereafter, capital gain. Any capital gain will be
long-term if, as of the date of payment, the holder held the shares of the
Preferred Stock for more than one year, and will be short-term if, as of the
date of payment, the holder held the shares of Preferred Stock for one year or
less. Short-term capital gain is subject to a maximum marginal
144
<PAGE>
Federal income tax rate of 39.6%. For individuals, long-term capital gain is
currently subject to a maximum marginal Federal income tax rate of 28%. The
current maximum long-term capital gain rate for corporations is 35%.
Pursuant to Code section 305(c) and the Treasury Department regulations
recently promulgated thereunder, if the Liquidation Value of a Distribution
Share is greater than its issue price by more than a DE MINIMIS amount, the
difference between the Liquidation Value and the issue price will be treated as
a constructive distribution or series of constructive distributions of
additional shares of Preferred Stock to which Code section 301(c) applies (as
described in the immediately preceding paragraph) and will be taken into account
by the holder over the period from the issue date to the mandatory redemption
date of the Preferred Stock. The issue price of the Taxable Distribution Shares
will be the mean between the high and low trading prices of such shares on their
date of issue. The difference between the issue price and Liquidation Value of a
Taxable Distribution Share will be more than DE MINIMIS if it is at least 2% of
the Liquidation Value (.25% times the Liquidation Value times eight (the number
of complete years from the issue date until the mandatory redemption date of the
Preferred Stock)). Holders will take into account the constructive distributions
under "principles similar to the principles of Code section 1272(a)". While the
regulations under Code section 305(c) do not expressly provide how to apply the
principles of Code section 1272(a) to constructive distributions of Preferred
Stock, the Company believes the so-called "constant yield method" will apply to
accrue the difference between issue price and Liquidation Value of a Taxable
Distribution Share.
Generally, under the "constant yield method", the amount of the constructive
distribution to be taken into account in accord with Code section 301(c) will
equal the increase in the adjusted issue price of a Taxable Distribution Share
for each accrual period. For this purpose, the increase in the adjusted issue
price for any accrual period shall be an amount equal to the excess, if any, of
(a) the product of (i) the adjusted issue price of a Taxable Distribution Share
at the beginning of such accrual period and (ii) the yield to maturity
(determined on the basis of compounding at the close of each accrual period and
properly adjusted for the length of the accrual period) over (b) the sum of the
amounts actually distributed on a Taxable Distribution Share during such accrual
period. For this purpose, the adjusted issue price of a Taxable Distribution
Share at the beginning of any accrual period is the sum of the issue price of a
Taxable Distribution Share plus the adjustments made to such issue price for all
periods before the first day of such accrual. For this purpose, the accrual
period shall mean the three month period (or shorter period from the date of
original issue of the Taxable Distribution Share) which ends on a day in the
calendar year corresponding to the redemption date of the Taxable Distribution
Share or the date three, six or nine months before such redemption date.
In the event the redemption price of any Distribution Share exceeds its fair
market value at the time of the distribution by more than a DE MINIMIS amount,
the excess could be treated as a constructive distribution that must be taken
into account by the holders in a manner consistent with the constant yield
method of Code section 1272(a)(1) and Code section 301. The Company, however,
intends to take a position that there will be no constructive distribution to
holders prior to the redemption date of the Preferred Stock with respect to any
such excess in respect of additional shares of Preferred Stock. Pursuant to
Treasury Regulation section 1.305-5(b)(5), the Company's determination is
binding on all holders of Preferred Stock, other than a holder that explicitly
discloses on its timely filed federal income tax return for the taxable year
that includes the date of the holder's receipt of the relevant Preferred Stock
distribution that its determination as to whether there is a constructive
distribution differs from that of the Company. The Company will provide holders
the relevant information in a reasonable manner in order to make their own such
determination. There is no assurance that the IRS would not disagree with the
Company's position and assert that there has been a constructive distribution
with respect to the Preferred Stock prior to redemption.
REDEMPTION FOR CASH
If the Company redeems the holder's shares of Preferred Stock for cash, the
following would be applicable. Under the rules of Code section 302 a redemption
of shares of Preferred Stock by the Company for cash will be treated as a
distribution taxable as a dividend to redeeming stockholders to the extent of
the
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<PAGE>
Company's current or accumulated earnings and profits unless the redemption (i)
results in a "complete termination" of the stockholder's interest in the Company
(within the meaning of Code section 302(b)(3)), (ii) is "substantially
disproportionate" (within the meaning of Code section 302(b)(2)) with respect to
the holder or (iii) is "not essentially equivalent to a dividend" (within the
meaning of Code section 302(b)(1)). In determining whether any of the Code
section 302(b) tests have been met, shares of Common Stock and of any other
class of stock of the Company will be taken to account along with shares of
Convertible Preferred Stock. Moreover, shares considered to be owned by the
holder by reason of the constructive ownership rules set forth in Code section
318, as well as shares actually owned, will be taken into account. If any of the
foregoing tests are met, then, except with respect to declared and unpaid
dividends, if any, the redemption of shares of Preferred Stock for cash will
result in taxable gain or loss equal to the difference between the amount of
cash received and the holder's tax basis in the redeemed shares. Any such gain
or loss will be capital gain or loss and will be long-term capital gain or loss
if the shareholder's holding period exceeds one year. Based on a published IRS
ruling, the redemption of a shareholder's Preferred Stock for cash will be
treated as "not essentially equivalent to a dividend" if, taking into account
the constructive ownership rules, (a) the holder's relative stock interest in
the Company is minimal, (b) the holder exercises no control over the Company's
affairs and (c) there is a reduction in the holder's proportionate interest in
the Company.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO THE HOLDER OF THE PREFERRED
STOCK INCLUDING FEDERAL, STATE AND LOCAL TAX CONSEQUENCES.
146
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreements
relating to the Senior Secured Notes and the Preferred Stock, respectively
(copies of which have been filed as exhibits to the Registration Statements of
which this Prospectus forms a part), the Company has agreed to sell to Jefferies
& Company, Inc., Wasserstein Perella Securities, Inc. and Ladenburg, Thalmann &
Co. Inc. (the "Underwriters"), and the Underwriters have severally agreed to
purchase from the Company, the principal amount of the Senior Secured Notes and
the liquidation value of Preferred Stock as set forth opposite their respective
names in the table below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT LIQUIDATION VALUE
OF SENIOR OF PREFERRED
UNDERWRITER SECURED NOTES STOCK
<S> <C> <C>
Jefferies & Company, Inc.................................
Wasserstein Perella Securities, Inc......................
Ladenburg, Thalmann & Co. Inc............................
---------------- -----------------
Total................................................ $ 140,000,000
---------------- -----------------
---------------- -----------------
</TABLE>
Under the terms and conditions of the Underwriting Agreements, the
Underwriters are committed to purchase all the Securities offered hereby (other
than those covered by the over-allotment option for the Preferred Stock
described below) if any are purchased. The Underwriters propose to offer the
Securities directly to the public initially at the public offering prices set
forth on the cover page of this Prospectus and, in the case of the Preferred
Stock, to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a discount
not in excess of $ per share to certain other dealers. After the initial
public offering of the Securities, the respective public offering price of the
Senior Secured Notes and the Preferred Stock and the commission to selected
dealers and the reallowance to other dealers with the respect to the Preferred
Stock may be changed by the Underwriters.
Prior to the Offerings, there has been no public market for the Senior
Secured Notes or the Preferred Stock. The public offering prices were determined
by negotiations between the Company and the Underwriters. Among the principal
factors considered in such negotiations were the financial strength of the
Company in recent periods, prevailing economic prospects, debt offerings of
companies in related businesses, the prospects for the Company and its industry
and the general conditions prevailing in the securities markets. The
Underwriters do not intend to confirm sales of the Securities to any accounts
over which they exercise discretionary authority.
Alliance and its subsidiaries have agreed to indemnify the Underwriters
against certain liabilities that may be incurred in connection with the
Offerings, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
The Company does not intend to list any of the Senior Secured Notes on a
national securities exchange or to seek the admission thereof for trading on
Nasdaq. The Underwriters have advised the Company that they currently intend to
make a market in the Senior Secured Notes as permitted by applicable laws and
regulations; however, they are not obligated to do so, and such market-making,
if commenced may be discontinued at any time without notice. The Company has
applied to have the Preferred Stock quoted on Nasdaq, however, there can be no
assurance as to the liquidity of the trading market for either the Senior
Secured Notes or the Preferred Stock, or that an active trading market will
develop.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date hereof, to purchase up to an additional $ liquidation
value of Preferred Stock at the public offering price, less the underwriting
discount. The Underwriters may exercise such right of purchase only for the
purpose of covering over-allotments, if any, made in connection with the sale of
the shares of Preferred Stock offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase additional shares of Preferred Stock proportionate to
such Underwriter's initial commitment as indicated in the preceding table.
147
<PAGE>
The foregoing includes a summary of the principal terms of the Underwriting
Agreements and does not purport to be complete. Reference is made to the copy of
each Underwriting Agreement that is on file as an exhibit to the Registration
Statements of which this Prospectus is a part.
Jefferies & Company, Inc., on the one hand, and Ladenburg, Thalmann & Co.
Inc., on the other, are serving as financial advisors to Alliance and BGII,
respectively, for which they receive customary fees and reimbursement of certain
expenses, including in the case of Jefferies & Company, Inc., 450,000 shares of
Common Stock as an advisory fee. Jefferies & Company, Inc. and Ladenburg,
Thalmann & Co. Inc. are acting as dealer managers, together with a third dealer
manager, for the Exchange Offer, for which they expect to receive customary fees
and reimbursement of certain expenses.
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.
EXPERTS
The consolidated financial statements of Alliance Gaming Corporation and
subsidiaries as of June 30, 1994 and 1995, and for each of the years in the
three-year period ended June 30, 1995 included herein have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP
refers to a change in the method of accounting for income taxes, effective July
1, 1993. As noted under "Forecast of Operations," KPMG Peat Marwick LLP has not
examined the Forecast presented under "Forecast of Operations" and, accordingly,
does not express an opinion or any other form of assurance with respect thereto.
The consolidated balance sheets of BGII as of December 31, 1994 and 1995,
and the consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995 included
herein have been included herein in reliance upon the report of Coopers &
Lybrand L.L.P., independent accountants, appearing elsewhere herein, given on
the authority of that firm as experts in accounting and auditing. As noted under
"Forecast of Operations," Coopers & Lybrand L.L.P.
148
<PAGE>
neither examined nor compiled nor had any other involvement with the preparation
of the Forecast presented under "Forecast of Operations" and accordingly does
not express an opinion or any other form of assurance with respect thereto, nor
do they assume any responsibility for the Forecast.
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 Registration Statements on Form S-2
(together with any amendments and exhibits thereto, each, a "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus, which is a part of each such Registration Statement,
does not contain all the information set forth in each such 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 each such Registration Statement or such
other document, each such statement being qualified in all respects by such
reference.
FOR CALIFORNIA RESIDENTS ONLY
With respect to sales of the security being offered hereby to California
residents, such security may be sold only to: (1) "accredited investors" within
the meaning of Regulation D under the Securities Act of 1933, (2) banks, savings
and loan associations, trust companies, insurance companies, investment
companies registered under the Investment Company Act of 1940, pension or
profit-sharing trusts, corporations or other entities which, together with the
corporation's or other entity's affiliates which are under common control have a
net worth on a consolidated basis according to their most recent regularly
prepared financial statements (which shall have been reviewed, but not
necessarily audited, by outside accountants) of not less than $14,000,000, and
subsidiaries of the foregoing, or (3) any person (other than a person formed for
the sole purpose of purchasing the security being offered hereby) who purchases
at least $1,000,000 aggregate amount of the security offered hereby.
149
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[THIS PAGE INTENTIONALLY LEFT BLANK]
150
<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-34
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1995 (audited) and March 31, 1996
(unaudited)....................................................................................... F-35
Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 1995
and 1996.......................................................................................... F-36
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1995
and 1996.......................................................................................... F-37
Notes to Unaudited Condensed Consolidated Financial Statements..................................... F-38-F-48
BALLY GAMING INTERNATIONAL, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.................................................................. F-49
Consolidated Balance Sheets, December 31, 1994 and 1995............................................ F-50
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995......... F-51
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and
1995.............................................................................................. F-52
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995......... F-53
Notes to Consolidated Financial Statements......................................................... F-54-F-82
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 1995 (audited) and March 31, 1996
(unaudited)....................................................................................... F-83
Consolidated Statements of Operations (unaudited) -- for the Three Months Ended March 31, 1995 and
1996.............................................................................................. F-84
Consolidated Statement of Stockholders Equity for the Three Months Ended March 31, 1996............ F-85
Condensed Consolidated Statements of Cash Flows (unaudited) -- for the Three Months Ended March 31,
1995 and 1996..................................................................................... F-86
Notes to Condensed Consolidated Financial Statements (unaudited)................................... F-87-F-100
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Alliance Gaming Corporation
We have audited the consolidated balance sheets of Alliance Gaming
Corporation and subsidiaries as of June 30, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alliance
Gaming Corporation and subsidiaries as of June 30, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 6 to the consolidated financial statements, effective
July 1, 1993 Alliance Gaming Corporation adopted the provisions of Financial
Accounting Standards Board's Statement of Financial Accounting Standard No. 109,
ACCOUNTING FOR INCOME TAXES.
KPMG Peat Marwick LLP
Las Vegas, Nevada
September 1, 1995
F-2
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 37,085 $ 13,734
Securities available for sale........................................................... 12,489 23,680
Receivables, net........................................................................ 5,924 3,316
Inventories............................................................................. 661 714
Prepaid expenses........................................................................ 4,420 4,148
Refundable income taxes................................................................. 361 361
Other................................................................................... 30 156
---------- ----------
Total current assets.................................................................. 60,970 46,109
---------- ----------
Property and equipment:
Land and improvements................................................................... 3,229 17,296
Building and improvements............................................................... 4,286 8,822
Gaming equipment........................................................................ 30,395 36,396
Furniture, fixtures and equipment....................................................... 9,632 11,582
Leasehold improvements.................................................................. 5,222 5,372
Construction in progress................................................................ 212 30
---------- ----------
52,976 79,498
Less accumulated depreciation and amortization.......................................... 24,293 29,146
---------- ----------
Property and equipment, net........................................................... 28,683 50,352
---------- ----------
Other assets:
Receivables, net........................................................................ 4,609 5,309
Excess of costs over net assets of an acquired business, net of accumulated amortization
of $295 (1994) and $585 (1995)......................................................... 3,789 3,842
Intangible assets, net of accumulated amortization of $4,145 (1994) and $5,516 (1995)... 13,527 12,405
Deferred tax assets..................................................................... 1,081 1,399
Investment in minority owned subsidiary................................................. 2,000 1,585
Other................................................................................... 4,757 5,347
---------- ----------
Total other assets.................................................................... 29,763 29,887
---------- ----------
$ 119,416 $ 126,348
---------- ----------
---------- ----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
JUNE 30, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................... $ 1,504 $ 3,995
Accounts payable........................................................................ 1,661 1,758
Accrued expenses, including related parties of $312 (1994) and $931 (1995).............. 6,879 8,610
---------- ----------
Total current liabilities............................................................. 10,044 14,363
---------- ----------
Long-term debt, less current maturities................................................... 89,222 97,402
Deferred tax liabilities.................................................................. 1,218 1,205
Other liabilities......................................................................... 3,587 2,750
---------- ----------
Total liabilities..................................................................... 104,071 115,720
---------- ----------
Commitments and contingencies
Minority interest......................................................................... 246 643
Stockholders' equity:
Common stock, $.10 par value; authorized 175,000,000 shares; issued 10,505,928 shares
(1994) and 11,654,150 shares (1995).................................................... 1,051 1,165
Special stock, $.10 par value; authorized 10,000,000 shares; issued 1,333,333 (1994 and
1995).................................................................................. 133 133
Paid-in capital......................................................................... 26,716 32,134
Unrealized loss on securities available for sale, net................................... (421) (316)
Accumulated deficit..................................................................... (12,380) (23,131)
---------- ----------
Total stockholders' equity............................................................ 15,099 9,985
---------- ----------
$ 119,416 $ 126,348
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Gaming:
Routes................................................................... $ 96,282 $ 102,830 $ 106,827
Casinos and taverns...................................................... 12,526 15,679 21,287
Food and beverage sales.................................................... 4,184 4,480 3,847
Net equipment sales........................................................ 99 65 27
---------- ---------- ----------
113,091 123,054 131,988
---------- ---------- ----------
Costs and expenses:
Cost of gaming:
Routes................................................................... 72,614 76,332 79,875
Casinos and taverns...................................................... 8,667 11,871 11,436
Cost of food and beverage.................................................. 2,876 3,084 2,795
Cost of equipment sales.................................................... 49 20 12
Selling, general & administrative.......................................... 12,667 13,555 14,633
Business development expenses.............................................. 900 1,192 7,843
Corporate expenses......................................................... 6,191 7,882 9,735
Bad debt expense........................................................... 461 705 400
Loss on abandoned small casinos............................................ -- 3,713 --
Loss on abandoned taverns.................................................. -- 2,638 --
Depreciation and amortization.............................................. 8,718 9,530 9,520
---------- ---------- ----------
113,143 130,522 136,249
---------- ---------- ----------
Operating loss............................................................... (52) (7,468) (4,261)
Other income (expense):
Interest income............................................................ 998 2,084 2,798
Interest expense........................................................... (5,046) (6,830) (8,133)
Minority share of income................................................... -- (506) (397)
Equity in income of affiliate.............................................. -- -- 31
Other, net................................................................. 450 (167) (524)
---------- ---------- ----------
Loss before income taxes..................................................... (3,650) (12,887) (10,486)
Income tax expense........................................................... -- (241) (265)
---------- ---------- ----------
Net loss..................................................................... $ (3,650) $ (13,128) $ (10,751)
---------- ---------- ----------
---------- ---------- ----------
Net loss per common share.................................................... $(0.38) $(1.28) $(0.95)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding................................... 9,696 10,251 11,300
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
RETAINED LOSS ON
TOTAL COMMON STOCK SPECIAL STOCK EARNINGS SECURITIES
STOCKHOLDERS' --------------- ---------------- PAID-IN (ACCUMULATED AVAILABLE
EQUITY SHARES DOLLARS SHARES DOLLARS CAPITAL DEFICIT) FOR SALE
------------ ------ ------- ------ ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1992............ $23,661 9,409 $ 942 -- $ -- $18,321 $ 4,398 $--
Net loss......................... (3,650) -- -- -- -- -- (3,650) --
Common stock warrants issued..... 559 -- -- -- -- 559 -- --
Shares issued upon exercise of
options......................... 2,096 591 59 -- -- 2,037 -- --
------------ ------ ------- ------ ------- ------- ---------- -----
Balances, June 30, 1993............ 22,666 10,000 1,001 -- -- 20,917 748 --
Net loss......................... (13,128) -- -- -- -- -- (13,128) --
Shares issued for acquisitions... 249 112 11 -- -- 238 -- --
Common stock warrants issued..... 116 -- -- -- -- 116 -- --
Cost of private placement........ (201) -- -- -- -- (201) -- --
Net change in unrealized loss on
securities available for sale... (421) -- -- -- -- -- -- (421)
Shares issued for capital
infusion........................ 4,999 -- -- 1,333 133 4,866 -- --
Shares issued upon exercise of
options......................... 819 394 39 -- -- 780 -- --
------------ ------ ------- ------ ------- ------- ---------- -----
Balances, June 30, 1994............ 15,099 10,506 1,051 1,333 133 26,716 (12,380) (421)
Net loss......................... (10,751) -- -- -- -- -- (10,751) --
Shares issued for acquisitions... 3,754 712 71 -- -- 3,683 -- --
Compensatory stock issued........ 1,313 250 25 -- -- 1,288 -- --
Net change in unrealized loss on
securities available for sale... 105 -- -- -- -- -- -- 105
Shares issued upon exercise of
options......................... 465 186 18 -- -- 447 -- --
------------ ------ ------- ------ ------- ------- ---------- -----
Balances, June 30, 1995............ $ 9,985 11,654 $1,165 1,333 $133 $32,134 $(23,131) $(316)
------------ ------ ------- ------ ------- ------- ---------- -----
------------ ------ ------- ------ ------- ------- ---------- -----
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(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>
Building and improvements...................................... 31-39 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.
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.
F-14
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
6. INCOME TAXES (CONTINUED)
The 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.
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>
F-15
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
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.
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
F-16
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
9. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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.
F-17
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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
F-18
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
11. ACQUISITIONS (CONTINUED)
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
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. CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements are presented to provide
information regarding Alliance Gaming Corporation (the Parent) and its
wholly-owned "Guaranteeing Subsidiaries" and its non-wholly-owned "Pledging
Subsidiaries," VSI and Rainbow. The "Pledging Subsidiaries" are shown separately
because all of the Company's interest in these entities is pledged as collateral
for the Senior Secured Notes. The notes to consolidating financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto.
F-19
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEETS
JUNE 30, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 34,750 $ 2,335 $ -- $ 37,085
Securities available for sale............................. 12,489 -- -- 12,489
Receivables, net.......................................... 5,821 103 -- 5,924
Inventories............................................... 661 -- -- 661
Prepaid expenses.......................................... 3,715 705 -- 4,420
Refundable income taxes................................... -- 361 -- 361
Other..................................................... 29 1 -- 30
------------ ----------- ----------- -----------
Total current assets.................................... 57,465 3,505 -- 60,970
------------ ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Land and improvements..................................... 3,229 -- -- 3,229
Building and improvements................................. 4,286 -- -- 4,286
Gaming equipment.......................................... 28,547 4,267 (2,419) 30,395
Furniture, fixtures and equipment......................... 8,961 671 -- 9,632
Leasehold improvements.................................... 4,743 479 -- 5,222
Construction in progress.................................. 212 -- -- 212
------------ ----------- ----------- -----------
49,978 5,417 (2,419) 52,976
Less accumulated depreciation and amortization............ (25,198) (1,281) 2,186 (24,293)
------------ ----------- ----------- -----------
Property and equipment, net............................. 24,780 4,136 (233) 28,683
------------ ----------- ----------- -----------
OTHER ASSETS:
Receivables, net.......................................... 4,609 -- -- 4,609
Excess of costs over net assets of an acquired business,
net of accumulated amortization.......................... 3,789 -- -- 3,789
Intangible assets, net of accumulated amortization........ 13,145 382 -- 13,527
Deferred tax assets....................................... 797 284 -- 1,081
Investment in minority owned subsidiary................... 6,287 -- (4,287) 2,000
Other..................................................... 5,057 (113) (187) 4,757
------------ ----------- ----------- -----------
Total other assets...................................... 33,684 553 (4,474) 29,763
------------ ----------- ----------- -----------
$ 115,929 $ 8,194 $ (4,707) $ 119,416
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
(Continued)
See accompanying notes.
F-20
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEETS--(CONTINUED)
JUNE 30, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.................... $ 324 $ 1,180 $ -- $ 1,504
Accounts payable........................................ 1,508 153 -- 1,661
Accrued expenses........................................ 6,154 725 -- 6,879
------------ ----------- ----------- -----------
Total current liabilities............................. 7,986 2,058 -- 10,044
------------ ----------- ----------- -----------
Long-term debt, less current maturities................... 85,807 3,415 -- 89,222
Deferred tax liabilities.................................. 797 421 -- 1,218
Other liabilities......................................... 3,387 -- 200 3,587
------------ ----------- ----------- -----------
Total liabilities..................................... 97,977 5,894 200 104,071
------------ ----------- ----------- -----------
Commitments and contingencies
Minority interest......................................... -- 245 1 246
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock......................................... 3,084 -- (3,084) --
Common stock, $.10 par value; authorized 175,000,000
shares................................................. 1,169 2 (120) 1,051
Special stock, $.10 par value; authorized 10,000,000
shares................................................. 133 -- -- 133
Paid-in capital......................................... 26,966 1,454 (1,704) 26,716
Unrealized loss on securities available for sale, net... (421) -- -- (421)
Accumulated (deficit) earnings.......................... (12,979) 599 -- (12,380)
------------ ----------- ----------- -----------
Total stockholders' equity (deficiency)............... 17,952 2,055 (4,908) 15,099
------------ ----------- ----------- -----------
$ 115,929 $ 8,194 $ (4,707) $ 119,416
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-21
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEETS
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,234 $ 5,500 $ -- $ 13,734
Securities available for sale............................. 23,680 -- -- 23,680
Receivables, net.......................................... 4,322 50 (1,056) 3,316
Inventories............................................... 700 14 -- 714
Prepaid expenses.......................................... 3,345 803 -- 4,148
Refundable income taxes................................... -- 361 -- 361
Other..................................................... 150 6 -- 156
------------ ----------- ----------- -----------
Total current assets.................................... 40,431 6,734 (1,056) 46,109
------------ ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Land and improvements..................................... 3,230 14,066 -- 17,296
Building and improvements................................. 4,659 4,163 -- 8,822
Gaming equipment.......................................... 30,465 7,706 (1,775) 36,396
Furniture, fixtures and equipment......................... 9,351 2,231 -- 11,582
Leasehold improvements.................................... 4,889 483 -- 5,372
Construction in progress.................................. 17 13 -- 30
------------ ----------- ----------- -----------
52,611 28,662 (1,775) 79,498
Less accumulated depreciation and amortization............ (28,528) (2,393) 1,775 (29,146)
------------ ----------- ----------- -----------
Property and equipment, net............................. 24,083 26,269 -- 50,352
------------ ----------- ----------- -----------
OTHER ASSETS:
Receivables, net.......................................... 9,839 -- (4,530) 5,309
Excess of costs over net assets of an acquired business,
net of accumulated amortization.......................... 3,864 -- (22) 3,842
Intangible assets, net of accumulated amortization........ 12,153 230 22 12,405
Deferred tax assets....................................... 1,399 -- -- 1,399
Investment in minority owned subsidiary................... 10,235 -- (8,650) 1,585
Other..................................................... 5,485 282 (420) 5,347
------------ ----------- ----------- -----------
Total other assets...................................... 42,975 512 (13,600) 29,887
------------ ----------- ----------- -----------
$ 107,489 $ 33,515 $ (14,656) $ 126,348
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
(Continued)
See accompanying notes.
F-22
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEETS--(CONTINUED)
JUNE 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.................... $ 186 $ 4,419 $ (610) $ 3,995
Accounts payable........................................ 1,254 504 -- 1,758
Accrued expenses........................................ 6,683 2,373 (446) 8,610
------------ ----------- ----------- -----------
Total current liabilities............................. 8,123 7,296 (1,056) 14,363
------------ ----------- ----------- -----------
Long-term debt, less current maturities................... 85,219 16,438 (4,255) 97,402
Deferred tax liabilities.................................. 281 924 -- 1,205
Other liabilities......................................... 3,766 4,665 (5,681) 2,750
------------ ----------- ----------- -----------
Total liabilities..................................... 97,389 29,323 (10,992) 115,720
------------ ----------- ----------- -----------
Commitments and contingencies
Minority interest......................................... -- 642 1 643
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock......................................... 253 -- (253) --
Common stock, $.10 par value; authorized 175,000,000
shares................................................. 1,283 2 (120) 1,165
Special stock, $.10 par value; authorized 10,000,000
shares................................................. 133 -- -- 133
Paid-in capital......................................... 33,971 1,455 (3,292) 32,134
Unrealized loss on securities available for sale, net... (316) -- -- (316)
Accumulated (deficit) earnings.......................... (25,224) 2,093 -- (23,131)
------------ ----------- ----------- -----------
Total stockholders' equity (deficiency)............... 10,100 3,550 (3,665) 9,985
------------ ----------- ----------- -----------
$ 107,489 $ 33,515 $ (14,656) $ 126,348
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-23
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1993
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Gaming:
Routes................................................ $ 84,726 $ 12,168 $ (612) $ 96,282
Casinos and taverns................................... 12,887 -- (361) 12,526
Food and beverage sales................................. 5,756 -- (1,572) 4,184
Net equipment sales..................................... 99 -- -- 99
------------ ----------- ----------- -----------
103,468 12,168 (2,545) 113,091
------------ ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of gaming:
Routes................................................ 64,780 8,446 (612) 72,614
Casinos and taverns................................... 9,028 -- (361) 8,667
Cost of food and beverage............................... 2,876 -- -- 2,876
Cost of equipment sales................................. 49 -- -- 49
Selling, general & administrative....................... 11,634 2,337 (1,304) 12,667
Business development expenses........................... 900 -- -- 900
Corporate expenses...................................... 6,191 -- -- 6,191
Bad debt expense........................................ 461 -- -- 461
Depreciation and amortization........................... 8,000 718 -- 8,718
------------ ----------- ----------- -----------
103,919 11,501 (2,277) 113,143
------------ ----------- ----------- -----------
Operating (loss) income................................... (451) 667 (268) (52)
------------ ----------- ----------- -----------
Other income (expense):
Interest income......................................... 977 21 -- 998
Interest expense........................................ (4,315) (731) -- (5,046)
Other, net.............................................. 122 60 268 450
------------ ----------- ----------- -----------
(Loss) income before income taxes......................... (3,667) 17 -- (3,650)
Income tax expense........................................ -- -- -- --
------------ ----------- ----------- -----------
Net (loss) income......................................... $ (3,667) $ 17 $ -- $ (3,650)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-24
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Gaming:
Routes................................................ $ 86,268 $ 17,389 $ (827) $ 102,830
Casinos and taverns................................... 16,150 -- (471) 15,679
Food and beverage sales................................. 6,306 -- (1,826) 4,480
Net equipment sales..................................... 65 -- -- 65
------------ ----------- ----------- -----------
108,789 17,389 (3,124) 123,054
------------ ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of gaming:
Routes................................................ 65,971 11,214 (853) 76,332
Casinos and taverns................................... 12,316 -- (445) 11,871
Cost of food and beverage............................... 3,084 -- -- 3,084
Cost of equipment sales................................. 20 -- -- 20
Selling, general & administrative....................... 12,344 2,884 (1,673) 13,555
Business development expenses........................... 1,192 -- -- 1,192
Corporate expenses...................................... 7,882 -- -- 7,882
Bad debt expense........................................ 705 -- -- 705
Loss on abandoned small casinos......................... 3,713 -- -- 3,713
Loss on abandoned taverns............................... 2,638 -- -- 2,638
Depreciation and amortization........................... 8,652 878 -- 9,530
------------ ----------- ----------- -----------
118,517 14,976 (2,971) 130,522
------------ ----------- ----------- -----------
Operating (loss) income................................... (9,728) 2,413 (153) (7,468)
Other income (expense):
Interest income......................................... 2,049 35 -- 2,084
Interest expense........................................ (6,173) (657) -- (6,830)
Minority share of income................................ -- (506) -- (506)
Other, net.............................................. (498) 178 153 (167)
------------ ----------- ----------- -----------
(Loss) income before income taxes......................... (14,350) 1,463 -- (12,887)
Income tax expense........................................ -- (241) -- (241)
------------ ----------- ----------- -----------
Net (loss) income......................................... $ (14,350) $ 1,222 $ -- $ (13,128)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-25
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ --------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Gaming:
Routes............................................. $ 92,007 $ 15,592 $ (772) $ 106,827
Casinos and taverns................................ 14,997 6,759 (469) 21,287
Food and beverage sales.............................. 5,522 207 (1,882) 3,847
Net equipment sales.................................. 27 -- -- 27
------------ --------------- ----------- -----------
112,553 22,558 (3,123) 131,988
------------ --------------- ----------- -----------
COSTS AND EXPENSES:
Cost of gaming:
Routes............................................. 70,637 10,015 (777) 79,875
Casinos and taverns................................ 9,155 2,698 (417) 11,436
Cost of food and beverage............................ 2,712 83 -- 2,795
Cost of equipment sales.............................. 12 -- -- 12
Selling, general & administrative.................... 12,011 4,208 (1,586) 14,633
Business development expenses........................ 7,843 -- -- 7,843
Corporate expenses................................... 9,735 -- -- 9,735
Bad debt expense..................................... 387 13 -- 400
Depreciation and amortization........................ 8,175 1,345 -- 9,520
------------ --------------- ----------- -----------
120,667 18,362 (2,780) 136,249
------------ --------------- ----------- -----------
Operating (loss) income................................ (8,114) 4,196 (343) (4,261)
Other income (expense):
Interest income...................................... 2,786 115 (103) 2,798
Interest expense..................................... (7,131) (1,106) 104 (8,133)
Minority share of income............................. -- (397) -- (397)
Equity in income of affiliate........................ 31 -- -- 31
Other, net........................................... (251) (615) 342 (524)
------------ --------------- ----------- -----------
(Loss) income before income taxes...................... (12,679) 2,193 -- (10,486)
Income tax benefit (expense)........................... 434 (699) -- (265)
------------ --------------- ----------- -----------
Net (loss) income...................................... $ (12,245) $ 1,494 $ -- $ (10,751)
------------ --------------- ----------- -----------
------------ --------------- ----------- -----------
</TABLE>
See accompanying notes.
F-26
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1993
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................. $ (3,667) $ 17 $ -- $ (3,650)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................... 8,000 718 -- 8,718
Write-off of other assets................................... 149 -- -- 149
Provision for losses on receivables......................... 461 -- -- 461
Amortization of debt discounts.............................. 41 224 -- 265
Net change in operating assets and liabilities:
(Increase) decrease in:
Inventories................................................. (233) -- -- (233)
Prepaid expenses............................................ 1,375 100 -- 1,475
Refundable income taxes..................................... 766 -- -- 766
Other....................................................... 313 (8) -- 305
Increase (decrease) in:
Accounts and slot contracts payable......................... (753) (1,625) -- (2,378)
Other liabilities, including minority interest.............. (153) -- -- (153)
Accrued expenses............................................ (185) (38) 407 184
------------- ----------- ----- -----------
Net cash (used in) provided by operating activities....... 6,114 (612) 407 5,909
------------- ----------- ----- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........................... (4,583) (509) -- (5,092)
Proceeds from sale of property and equipment.................. 257 -- -- 257
Additions to receivables...................................... (8,749) (83) 117 (8,715)
Cash collections on receivables............................... 8,728 2 (805) 7,925
Additions to intangible assets................................ (77) -- -- (77)
Additions to other long-term assets........................... (3,853) (2) 559 (3,296)
------------- ----------- ----- -----------
Net cash (used in) provided by investing activities....... (8,277) (592) (129) (8,998)
------------- ----------- ----- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt, net of expenses................. 285 1,656 -- 1,941
Issuance of common stock warrants............................. -- 559 -- 559
Reduction of long-term debt................................... (1,377) (1,071) 281 (2,167)
Issuance of common stock...................................... 2,656 -- (559) 2,097
------------- ----------- ----- -----------
Net cash (used in) provided by financing activities....... 1,564 1,144 (278) 2,430
------------- ----------- ----- -----------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for year.................................. (599) (60) -- (659)
Balance, beginning of year.................................... 7,922 2,317 -- 10,239
------------- ----------- ----- -----------
Balance, end of year...................................... $ 7,323 $ 2,257 $ -- $ 9,580
------------- ----------- ----- -----------
------------- ----------- ----- -----------
</TABLE>
See accompanying notes.
F-27
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................. $ (14,350) $ 1,222 $ -- $ (13,128)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................... 8,652 878 -- 9,530
Loss on abandoned casinos................................... 3,713 -- -- 3,713
Loss on abandoned taverns................................... 2,638 -- -- 2,638
Write-off of other assets................................... 1,793 24 -- 1,817
Provision for losses on receivables......................... 705 -- -- 705
Amortization of debt discounts.............................. 46 246 -- 292
Net change in operating assets and liabilities:
(Increase) decrease in:
Inventories................................................. 78 -- -- 78
Prepaid expenses............................................ (211) (308) -- (519)
Refundable income taxes..................................... -- (361) -- (361)
Other....................................................... 246 8 -- 254
Increase (decrease) in:
Accounts and slot contracts payable......................... 548 (279) -- 269
Accrued and deferred income taxes........................... -- 137 -- 137
Other liabilities, including minority interest.............. 4 507 -- 511
Accrued expenses............................................ 2,996 130 -- 3,126
Intercompany accounts....................................... (122) 122 -- --
------------- ----------- ----------- -----------
Net cash (used in) provided by operating activities....... 6,736 2,326 -- 9,062
------------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........................... (4,061) (1,324) -- (5,385)
Proceeds from sale of property and equipment.................. 368 1,098 -- 1,466
Additions to receivables...................................... (15,933) (2,868) -- (18,801)
Cash collections on receivables............................... 22,746 2,860 (8,065) 17,541
Acquisition of securities available for sale.................. (12,910) -- -- (12,910)
Acquisition of partnership interests.......................... (2,000) -- -- (2,000)
Additions to intangible assets................................ (5,179) -- -- (5,179)
Additions to other long-term assets........................... (1,664) (325) (42) (2,031)
------------- ----------- ----------- -----------
Net cash (used in) investing activities................... (18,633) (559) (8,107) (27,299)
------------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt, net of expenses................. 81,484 500 -- 81,984
Issuance of common stock warrants............................. 116 -- -- 116
Reduction of long-term debt................................... (47,694) (2,189) 8,107 (41,776)
Issuance of special stock, net of costs....................... 4,799 -- -- 4,799
Issuance of common stock...................................... 619 -- -- 619
------------- ----------- ----------- -----------
Net cash (used in) provided by financing activities....... 39,324 (1,689) 8,107 45,742
------------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for year.................................. 27,427 78 -- 27,505
Balance, beginning of year.................................... 7,323 2,257 -- 9,580
------------- ----------- ----------- -----------
Balance, end of year...................................... $ 34,750 $ 2,335 $ -- $ 37,085
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................. $ (12,245) $ 1,494 $ -- $ (10,751)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................... 8,175 1,345 -- 9,520
Write-off of other assets................................... 2,892 (96) -- 2,796
Provision for losses on receivables......................... 387 13 -- 400
Amortization of debt discounts.............................. 62 235 -- 297
Undistributed earnings of affiliate......................... (31) -- -- (31)
Non-cash stock compensation expense......................... 1,313 -- -- 1,313
Net change in operating assets and liabilities:
(Increase) decrease in:
Inventories................................................. (40) -- -- (40)
Prepaid expenses............................................ 377 4 -- 381
Other....................................................... (126) -- -- (126)
Increase (decrease) in:
Accounts and slot contracts payable......................... (254) (193) -- (447)
Accrued and deferred income taxes........................... (227) 90 -- (137)
Other liabilities, including minority interest.............. -- 397 -- 397
Accrued expenses............................................ 722 (302) (3,035) (2,615)
Intercompany accounts....................................... 37 (37) -- --
------------- ----------- ----------- -----------
Net cash (used in) provided by operating activities....... 1,042 2,950 (3,035) 957
------------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........................... (7,643) (1,244) -- (8,887)
Proceeds from sale of property and equipment.................. 225 126 -- 351
Additions to receivables...................................... (8,765) (205) -- (8,970)
Cash collections on receivables............................... 10,295 271 (251) 10,315
Net cash provided by acquisition of business.................. -- 2,481 -- 2,481
Acquisition of securities available for sale.................. (11,086) -- -- (11,086)
Acquisition of partnership interests.......................... (1,585) -- -- (1,585)
Additions to intangible assets................................ (390) -- -- (390)
Additions to other long-term assets........................... (7,452) -- 3,575 (3,877)
------------- ----------- ----------- -----------
Net cash (used in) provided by investing activities....... (26,401) 1,429 3,324 (21,648)
------------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt, net of expenses................. -- 1,504 (1,504) --
Reduction of long-term debt................................... (579) (2,718) 172 (3,125)
Issuance of common stock...................................... (578) -- 1,043 465
------------- ----------- ----------- -----------
Net cash (used in) provided by financing activities....... (1,157) (1,214) (289) (2,660)
------------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for year.................................. (26,516) 3,165 -- (23,351)
Balance, beginning of year.................................... 34,750 2,335 -- 37,085
------------- ----------- ----------- -----------
Balance, end of year...................................... $ 8,234 $ 5,500 $ -- $ 13,734
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-29
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
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 current year presentation.
RECEIVABLES
Aggregate receivables at June 30, 1994 (in thousands) consist of the
following:
<TABLE>
<CAPTION>
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Notes receivable-location
operators......................... $ 8,319 $-- $-- $ 8,319
Other receivables.................. 2,111 103 -- 2,214
------------ ------------ ----------- -------
10,430 103 -- 10,533
Less current amounts............... (5,821) (103) -- (5,924)
------------ ------------ ----------- -------
Long-term receivables, excluding
current amounts................... $ 4,609 $-- $-- $ 4,609
------------ ------------ ----------- -------
------------ ------------ ----------- -------
</TABLE>
Aggregate receivables at June 30, 1995 (in thousands) consist of the
following:
<TABLE>
<CAPTION>
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Notes receivable-location
operators......................... $ 7,760 $-- $-- $ 7,760
Other receivables.................. 6,401 50 (5,586) 865
------------ ----- ----------- -------
14,161 50 (5,586) 8,625
Less current amounts............... (4,322) (50) 1,056 (3,316)
------------ ----- ----------- -------
Long-term receivables, excluding
current amounts................... $ 9,839 $-- $(4,530) $ 5,309
------------ ----- ----------- -------
------------ ----- ----------- -------
</TABLE>
LONG-TERM DEBT
Aggregate long-term debt at June 30, 1994 (in thousands) was as follows:
<TABLE>
<CAPTION>
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
7.5% Convertible subordinated
debentures due 2003, unsecured.... $85,000 $-- $-- $85,000
Due to stockholder, net of discount
of $983,709 secured by the assets
of VSI............................ -- 4,390 -- 4,390
Other, secured by related
equipment......................... 1,131 205 -- 1,336
------------ ------ ----------- -------
86,131 4,595 -- 90,726
Less current maturities............ (324) (1,180) -- (1,504)
------------ ------ ----------- -------
Long-term debt, less current
maturities........................ $85,807 $3,415 $-- $89,222
------------ ------ ----------- -------
------------ ------ ----------- -------
</TABLE>
F-30
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
Aggregate long-term debt at June 30, 1995 (in thousands) was as follows:
<TABLE>
<CAPTION>
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
7.5% Convertible subordinated
debentures due 2003, unsecured.... $85,000 $-- $-- $85,000
Due to stockholder, net of discount
of $747,619 secured by the assets
of VSI............................ -- 3,309 -- 3,309
Hospitality Franchise Systems,
secured by the assets of Rainbow
Vicksburg......................... -- 9,065 -- 9,065
Other, secured by related
equipment......................... 405 8,483 (4,865) 4,023
------------ ------------ ----------- -------
85,405 20,857 (4,865) 101,397
Less current maturities............ (186) (4,419) 610 (3,995)
------------ ------------ ----------- -------
Long-term debt, less current
maturities........................ $85,219 $16,438 $(4,255) $97,402
------------ ------------ ----------- -------
------------ ------------ ----------- -------
</TABLE>
Aggregate annual maturities of long-term debt for the five years subsequent
to June 30, 1995 (in thousands) are as follows:
<TABLE>
<CAPTION>
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
1996............................... $ 186 $ 4,419 (610) $ 3,995
1997............................... 98 4,493 (664) 3,927
1998............................... 70 3,475 (720) 2,825
1999............................... 51 2,401 (782) 1,670
2000............................... -- 2,572 (849) 1,723
Thereafter......................... 85,000 3,497 (1,240) 87,257
</TABLE>
F-31
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
INCOME TAXES
The federal and state income tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and liabilities for the
year ended June 30, 1994 are as follows:
<TABLE>
<CAPTION>
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
NOL Carryforwards................ $ 8,495 $-- $-- $ 8,495
Inventory Obsolescence Reserve... 578 -- -- 578
Receivables, Bad Debt
Allowance....................... 472 -- -- 472
Organization and Start-up
Costs........................... -- 267 -- 267
Reserves for abandoned
projects........................ 1,577 -- -- 1,577
Other............................ 307 17 (17) 307
------------ ------ ----------- -------
Total gross deferred tax assets.... 11,429 284 (17) 11,696
Less: Valuation allowance.......... (10,632) -- 17 (10,615)
------------ ------ ----------- -------
Net deferred tax assets............ 797 284 -- 1,081
------------ ------ ----------- -------
DEFERRED TAX LIABILITIES:
Property and equipment,
principally due to
depreciation.................... 797 421 -- 1,218
------------ ------ ----------- -------
Total gross deferred tax
liabilities....................... 797 421 -- 1,218
------------ ------ ----------- -------
Net deferred tax (liabilities)..... $ -- $ (137) $-- $ (137)
------------ ------ ----------- -------
------------ ------ ----------- -------
</TABLE>
The federal and state income tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and liabilities for the
year ended June 30, 1995 are as follows:
<TABLE>
<CAPTION>
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
NOL Carryforwards................ $ 12,470 $-- $-- $12,470
Inventory Obsolescence Reserve... 179 -- -- 179
Receivables, Bad Debt
Allowance....................... 550 14 -- 564
Organization and Start-up
Costs........................... -- 172 -- 172
Reserves for abandoned
projects........................ 1,356 -- -- 1,356
Other............................ 458 108 -- 566
------------ ----- ----------- -------
Total gross deferred tax assets.... 15,013 294 -- 15,307
Less: Valuation allowance.......... (13,908) -- -- (13,908)
------------ ----- ----------- -------
Net deferred tax assets............ 1,105 294 -- 1,399
------------ ----- ----------- -------
DEFERRED TAX LIABILITIES:
Property and equipment,
principally due to
depreciation.................... 475 924 -- 1,399
------------ ----- ----------- -------
Total gross deferred tax
liabilities ($194 is included in
other liabilities)................ 475 924 -- 1,399
------------ ----- ----------- -------
Net deferred tax assets
(liabilities)..................... $ 630 $(630) $-- $--
------------ ----- ----------- -------
------------ ----- ----------- -------
</TABLE>
The Rainbow Casino Vicksburg Partnership L.P. has been consolidated since
March 29, 1995, and as a partnership its earnings are passed through to the
partnership principals.
F-32
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES
Operating lease rental expense, including contingent lease rentals, for the
year ended June 30, 1993 was as follows:
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Minimum rentals.................... $11,626 $ 101 -- $11,727
Contingent rentals................. 46,151 3,470 -- 49,621
------------ ------ ----------- ------------
57,777 3,571 -- 61,348
Sublease rental income............. (850) -- -- (850)
------------ ------ ----------- ------------
$56,927 $3,571 -- $60,498
------------ ------ ----------- ------------
------------ ------ ----------- ------------
</TABLE>
Operating lease rental expense, including contingent lease rentals, for the
year ended June 30, 1994 was as follows:
<TABLE>
<CAPTION>
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Minimum rentals.................... $13,655 $ 88 -- $13,743
Contingent rentals................. 50,797 5,113 -- 55,910
------------ ------ ----------- -------
64,452 5,201 -- 69,653
Sublease rental income............. (1,004) -- -- (1,004)
------------ ------ ----------- -------
$63,448 $5,201 -- $68,649
------------ ------ ----------- -------
------------ ------ ----------- -------
</TABLE>
Operating lease rental expense, including contingent lease rentals, for the
year ended June 30, 1995 was as follows:
<TABLE>
<CAPTION>
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Minimum rentals.................... $ 9,611 $ 98 $ (5) $ 9,704
Contingent rentals................. 54,406 4,479 (772) 58,113
------------ ------ ----------- -------
64,017 4,577 (777) 67,817
Sublease rental income............. (1,192) -- -- (1,192)
------------ ------ ----------- -------
$62,825 $4,577 $ (777) $66,625
------------ ------ ----------- -------
------------ ------ ----------- -------
</TABLE>
F-33
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
Future minimum rentals under non-cancelable operating leases at June 30,
1995 (in thousands) are as follows:
<TABLE>
<CAPTION>
TOTAL MINIMUM RENTAL
------------------------------------------------------------
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30
1996............................... $ 8,733 $95 -- $ 8,828
1997............................... 6,369 93 -- 6,462
1998............................... 6,166 7 -- 6,173
1999............................... 5,623 -- -- 5,623
2000............................... 3,737 -- -- 3,737
Thereafter......................... 34,349 -- -- 34,349
--
------------ ----- -------
$64,977 $195 -- $65,172
--
--
------------ ----- -------
------------ ----- -------
<CAPTION>
SUBLEASE INCOME
------------------------------------------------------------
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30
1996............................... $ 921 -- -- $ 921
1997............................... 842 -- -- 842
1998............................... 809 -- -- 809
1999............................... 758 -- -- 758
2000............................... 598 -- -- 598
Thereafter......................... 2,757 -- -- 2,757
--
------------ ----- -------
$ 6,685 -- -- $ 6,685
--
--
------------ ----- -------
------------ ----- -------
<CAPTION>
NET MINIMUM RENTALS
------------------------------------------------------------
ALLIANCE
PARENT AND GAMING
GUARANTEEING PLEDGING CORPORATION
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS AND SUBSIDIARIES
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30
1996............................... $ 7,812 $95 -- $ 7,907
1997............................... 5,527 93 -- 5,620
1998............................... 5,357 7 -- 5,364
1999............................... 4,865 -- -- 4,865
2000............................... 3,139 -- -- 3,139
Thereafter......................... 31,592 -- -- 31,592
--
------------ ----- -------
$58,292 $195 -- $58,487
--
--
------------ ----- -------
------------ ----- -------
</TABLE>
F-34
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and securities available for sale............................... $ 37,414 $ 25,562
Receivables, net....................................................................... 3,316 2,060
Inventories............................................................................ 714 661
Prepaid expenses....................................................................... 4,148 3,289
Other.................................................................................. 517 486
---------- -----------
Total current assets................................................................. 46,109 32,058
---------- -----------
Property and equipment, net.............................................................. 50,352 52,065
Receivables, net......................................................................... 5,309 5,600
Excess of costs over net assets of an acquired business, net of accumulated
amortization............................................................................ 3,842 2,074
Intangible assets, net of accumulated amortization....................................... 12,405 11,273
Investment in minority owned subsidiary.................................................. 1,585 --
Other.................................................................................... 6,746 8,218
---------- -----------
Total assets....................................................................... $ 126,348 $ 111,288
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long-term debt................................................... $ 3,995 $ 4,041
Accounts payable....................................................................... 1,758 2,089
Accrued expenses, including due to related parties..................................... 8,610 10,345
---------- -----------
Total current liabilities............................................................ 14,363 16,475
Long-term debt, less current maturities.................................................. 97,402 95,048
Other liabilities........................................................................ 3,955 4,325
---------- -----------
Total liabilities.................................................................... 115,720 115,848
---------- -----------
Commitments and contingencies
Minority interest........................................................................ 643 1,035
Stockholders' equity (deficiency):
Common stock, $.10 par value; authorized 175,000,000 shares; issued and outstanding
11,654,150 and 12,987,483........................................................... 1,165 1,298
Special stock, $.10 par value; authorized 10,000,000 shares; issued and outstanding
1,333,333 and 0..................................................................... 133 --
Paid-in capital...................................................................... 32,134 32,134
Unrealized loss on securities available for sale, net................................ (316) (1,067)
Accumulated deficit.................................................................. (23,131) (37,960)
---------- -----------
Total stockholders' equity (deficiency).............................................. 9,985 (5,595)
---------- -----------
Total liabilities and stockholders' equity (deficiency)............................ $ 126,348 $ 111,288
---------- -----------
---------- -----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-35
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Revenues:
Gaming:
Routes................................................................................. $ 79,389 $ 81,111
Casinos and taverns.................................................................... 11,523 32,698
Food and beverage sales.................................................................. 2,842 2,976
Net equipment sales...................................................................... 22 11
--------- ----------
93,776 116,796
--------- ----------
Costs and expenses:
Cost of gaming:
Routes................................................................................. 59,411 62,293
Casinos and taverns.................................................................... 6,743 14,726
Cost of food and beverage................................................................ 2,038 1,992
Cost of equipment sales.................................................................. 10 3
Selling, general and administrative...................................................... 9,279 14,308
Business development expenses............................................................ 5,647 14,233
Corporate expenses....................................................................... 6,258 4,606
Provision for impaired assets............................................................ -- 3,179
Depreciation and amortization............................................................ 6,934 7,328
--------- ----------
96,320 122,668
--------- ----------
Operating loss........................................................................... (2,544) (5,872)
Other income (expense):
Interest income.......................................................................... 2,235 1,206
Interest expense......................................................................... (5,844) (6,341)
Minority share of income................................................................. (252) (708)
Royalty fee.............................................................................. (27) (2,931)
Other, net............................................................................... 33 398
--------- ----------
Loss before income taxes................................................................... (6,399) (14,248)
Income tax expense......................................................................... (394) (581)
--------- ----------
Net loss................................................................................... $ (6,793) $ (14,829)
--------- ----------
--------- ----------
Loss per share of common stock............................................................. $ (.61) $ (1.21)
--------- ----------
--------- ----------
Weighted average common shares outstanding................................................. 11,192 12,245
--------- ----------
--------- ----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-36
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................ $ (6,793) $ (14,829)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization......................................................... 6,934 7,328
Loss on sale of property and equipment................................................ 825 277
Write off of other assets............................................................. 1,620 396
Provision for losses on receivables................................................... 380 46
Amortization of debt discounts........................................................ 237 177
Equity in losses of affiliate......................................................... 386 --
Provision for impaired assets......................................................... -- 3,179
Deferred income tax provision......................................................... -- 388
Net change in operating assets and liabilities:
Decrease (increase) in:
Inventories........................................................................... (14) 23
Prepaid expenses...................................................................... 1,627 864
Refundable income taxes............................................................... -- 361
Other assets.......................................................................... (47) 201
Increase (decrease) in:
Accounts and slot contracts payable................................................... (271) 331
Accrued expenses...................................................................... (4,163) 735
Minority interests.................................................................... 251 392
Other liabilities..................................................................... (805) (402)
---------- ----------
Net cash (used in) provided by operating activities................................. 167 (533)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment..................................................... (7,816) (6,624)
Proceeds from sale of property and equipment............................................ 328 2,213
Additions to receivables................................................................ (10,251) (9,303)
Cash collections on receivables......................................................... 11,063 9,774
Net cash provided by acquisition of business............................................ 2,481 --
Investment in subsidiary................................................................ (1,585) --
Proceeds from sale (purchase) of securities available for sale.......................... (577) 12,950
Additions to intangible assets.......................................................... (282) (487)
Additions to other long-term assets..................................................... (3,152) (3,268)
---------- ----------
Net cash (used in) provided by investing activities................................... (9,791) 5,255
---------- ----------
Cash flows from financing activities:
Reduction of long-term debt............................................................. (1,975) (3,167)
Proceeds from long-term debt............................................................ -- 682
Issuance of stock....................................................................... 466 --
---------- ----------
Net cash (used in) financing activities............................................... (1,509) (2,485)
---------- ----------
Cash and cash equivalents:
Increase (decrease) for period.......................................................... (11,133) 2,237
Balance, beginning of period............................................................ 37,085 13,734
---------- ----------
Balance, end of period................................................................ $ 25,952 $ 15,971
---------- ----------
---------- ----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-37
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
1. ADJUSTMENTS FOR FAIR PRESENTATION
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments, including normal recurring adjustments,
necessary to present fairly the financial condition, results of operations and
cash flows of the Company for the respective periods presented. The results of
operations for an interim period are not necessarily indicative of the results
to be expected for a full year.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying condensed
consolidated financial statements be read in conjunction with the financial
statements and notes in the Company's annual report on Form 10-K. All
intercompany accounts and transactions have been eliminated in consolidation.
2. RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial
statements to conform with current period presentations.
3. CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE FOR SALE
For balance sheet presentation the following account balances have been
combined:
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1995 1996
--------- -----------
(In thousands)
<S> <C> <C>
Cash and cash equivalents............................................... $ 13,734 $ 15,971
Securities available for sale........................................... 23,680 9,591
--------- -----------
Total................................................................... $ 37,414 $ 25,562
--------- -----------
--------- -----------
</TABLE>
As of March 31, 1996 unrealized losses for securities available for sale was
$1,067,000 net of a tax effect of $550,000 and is included as a component of
stockholders' equity.
4. RECEIVABLES
The Company's gaming route operations from time to time involve making loans
to location operators in order to participate in revenues over extended periods
of time. These loans, generally made for buildouts, tenant improvements and
initial operating expenses, are generally guaranteed on a full recourse basis by
the location owner and are secured by the assets of the location. The majority
of the loans are interest bearing and are expected to be repaid over a period of
time not to exceed the life of the related revenue sharing agreement. The loans
have varying payment terms requiring either weekly or monthly payments. Annual
interest rates on the loans range from prime plus 1.5% to stated rates of 12%
with various maturity dates ranging through 2007. The loans are expected to be
repaid from the locations' cash flows or proceeds from the sale of the
leaseholds.
Receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1995 1996
--------- -----------
(In thousands)
<S> <C> <C>
Notes receivable--location operators.................................... $ 7,760 $ 6,160
Other receivables....................................................... 865 1,500
--------- -----------
8,625 7,660
Less current amounts.................................................... (3,316) (2,060)
--------- -----------
Long-term receivables, excluding current amounts........................ $ 5,309 $ 5,600
--------- -----------
--------- -----------
</TABLE>
F-38
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
4. RECEIVABLES (CONTINUED)
Receivables are presented net of an allowance for doubtful accounts of
approximately $1,659,000 and $1,363,000 as of June 30, 1995 and March 31, 1996,
respectively. The allowance is allocated between current and long-term
receivables on a pro rata basis related to notes receivable from location
operators.
5. DEBT
Long-term debt at June 30, 1995 and March 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1995 1996
---------- -----------
(In thousands)
<S> <C> <C>
Convertible subordinated debentures due 2003, 7.5%............................... $ 85,000 $ 85,000
Due to stockholder due 1998, 200 basis points over the London Inter Bank Offer
Rate (current rate 7.5%), net of discount of $747,619 and $570,551.............. 3,309 2,535
Hospitality Franchise Systems due 2001, 7.5%..................................... 9,065 8,173
National Gaming Mississippi due 2002, 10.0%...................................... 631 1,188
Other debt....................................................................... 3,392 2,193
---------- -----------
101,397 99,089
Less current maturities.......................................................... 3,995 4,041
---------- -----------
Long-term debt, less current maturities.......................................... $ 97,402 $ 95,048
---------- -----------
---------- -----------
</TABLE>
Accrued interest of approximately $1,991,000 (June 30) and $372,000 (March
31) is included in accrued expenses in the unaudited condensed consolidated
balance sheets. Amounts due to stockholder include amounts owed to affiliates of
Alfred H. Wilms, the Company's largest stockholder and a member of the Board of
Directors of the Company, relating to funding of the Company's
majority-controlled subsidiary, Video Services, Inc.'s ("VSI") gaming device
route operations.
6. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Financial Accounting Standard No. 109 Accounting for Income Taxes. Under the
asset and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Due to losses and the lack of available carrybacks, the Company recognized
no federal income tax expense or benefit for the nine-month periods ended March
31, 1996 and 1995 other than the tax effects of changes in the unrealized gains
(losses) on securities available for sale. At March 31, 1996, the Company had
estimated net operating loss carryforwards for federal income tax purposes of
approximately $46,000,000 which are available to offset future federal taxable
income, if any, expiring 2007 through 2009. The deferred tax asset related to
the net operating losses has been fully reserved.
7. IMPAIRED ASSETS
The Company and Casino Magic Corporation, through wholly owned subsidiaries,
are members in Kansas Gaming Partners, L.L.C. ("KGP") and Kansas Financial
Partners, L.L.C. ("KFP"), both Kansas limited liability companies. Under an
option agreement (the "option agreement") granted to KGP by Camptown Greyhound
Racing, Inc. ("Camptown") and The Racing Association of Kansas-Southeast
F-39
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
7. IMPAIRED ASSETS (CONTINUED)
("TRAK Southeast"), KGP has been granted the exclusive right, which right
expires on September 13, 2013, to operate gaming devices and/or casino-type
gaming at Camptown's racing facility in Frontenac, Kansas if and when such
gaming is permitted in Kansas. In December 1994, Camptown received a $3,205,000
loan from Boatmen's Bank which was guaranteed by KFP. The Company and Casino
Magic Corporation each invested $1,580,000 in KFP which was used to purchase a
certificate of deposit to collateralize its guaranty. Construction of Camptown's
racing facility has been completed and the facility opened for business in May
1995. The racing facility was temporarily closed on November 5, 1995 due to poor
financial results. Camptown filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in January 1996 and has stated an intention to reopen for
business following bankruptcy reorganization. Boatmen's Bank demanded payment of
the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan
and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed
Boatmen's Bank's position in the loan to Camptown which is secured by a second
mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK
Southeast and Camptown continue to be bound by the Option Agreement. KFP intends
to vigorously pursue all of its rights and remedies which may include, among
other things, seeking authority from the bankruptcy court to commence a
foreclosure action. In the case of a foreclosure action, KFP would be required
to assume or pay the existing first mortgage of approximately $2,000,000 if KFP
becomes the purchaser at any such sale. The Kansas legislature considered gaming
bills during the 1996 session although none passed. There can be no assurance
that gaming of any type will ever be legalized in Kansas. Management has
evaluated this investment and determined it to be impaired because it does not
appear to be recoverable. The Company fully reserved the net book value of
approximately $1,585,000 through a charge to operations which has been recorded
in the quarter ended March 31, 1996.
Native American Investments, Inc. ("NAI"), a wholly-owned subsidiary has a
contract to develop Class II and III gaming opportunities with an Indian tribe
in California. Class II gaming is subject to the concurrent jurisdiction of the
National Indian Gaming Commission ("NIGC") and the applicable Indian tribe.
Class III gaming is a residual category composed of all forms of gaming that are
not Class I gaming or Class II gaming, including casino style gaming. The
contract is subject to negotiations resulting in satisfactory compacts with the
state and approval of the contract by the NIGC. The Governor of California has
to date refused to negotiate a compact covering Class III electronic gaming
machines and house-banked games in California and is currently engaged in
related litigation over the scope of gaming issues with certain Indian tribes.
There can be no assurance as to the ultimate outcome of these litigation
activities or successful completion of any part of the Company's project. On
March 27, 1996, the United States Supreme Court ruled that a portion of the
Indian Gaming Regulatory Act was unconstitutional. As a result, Federal courts
cannot oversee negotiations between Indian tribes and state officials. The
Company believes that this ruling will have a materially adverse effect upon its
Native American casino development activities in California. Accordingly,
Management has evaluated this investment and determined it to be impaired
because it now appears to be unrecoverable. Management has fully reserved the
net book value of approximately $1,594,000 through a charge to operations which
has been recorded in the quarter ended March 31, 1996. Management will continue
to monitor the status of Class II and III gaming in California.
8. RAINBOW CASINO VICKSBURG PARTNERSHIP
On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi
permanently opened for business. In connection with the completion of the casino
and the acquisition of its 45% limited partnership interest, through a
wholly-owned subsidiary, the Company funded a $3,250,000 advance to Rainbow
Casino Corporation ("RCC") on the same terms as RCC's financing from Hospitality
Franchise Systems, Inc. ("HFS").
On March 29, 1995 the Company consummated certain transactions whereby the
Company acquired from RCC the controlling general partnership interest in
Rainbow Casino Vicksburg Partnership ("RCVP") and increased its partnership
interest and since that date the operations of RCVP have been consolidated. In
F-40
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
8. RAINBOW CASINO VICKSBURG PARTNERSHIP (CONTINUED)
exchange for commitments by the Company and National Gaming Mississippi, Inc.
("NGM"), a subsidiary of National Gaming Corporation, to provide additional
financing (up to a maximum of $2,000,000 each) to be used for the completion of
certain elements of the project which survived the opening of a casino (for
which RCC was to have been responsible for, but failed to satisfy), the
following occurred: (i) a subsidiary of the Company became the general partner
and RCC became the limited partner and (ii) the respective partnership interests
were adjusted. RCC is entitled to receive 10% of the net available cash flows
from gaming revenues, as defined (which amount shall increase to 20% of the
incremental cash flow generated from gaming revenues above $35,000,000 (i.e.
only on such incremental amount)), for a period of 15 years, such period being
subject to one year extensions for each year in which a minimum payment of
$50,000 is not made. In addition, if during any continuous 12-month period until
December 31, 1999 the casino achieved earnings from the project of at least
$10,500,000 before deducting depreciation, amortization, royalty and income
taxes, then the Company would be obligated to pay to certain principals of the
original partnership, as additional consideration for the purchase of the
general partnership interest, an amount aggregating $1,000,000 in cash or shares
of Common Stock (at the Company's option) 180 days after the occurrence. The
casino has achieved the required earnings as adjusted, and the Company is
obligated to make the required payment or issue the Common Stock by September
30, 1996.
9. PROPOSED BGII MERGER TRANSACTION
On October 18, 1995, the Company and Bally Gaming International, Inc.
("BGII") entered into a definitive merger agreement ("Merger") under which the
outstanding shares of BGII common stock would each be exchanged for $13 in cash
and shares of the Company's common stock.
On January 22, 1996, the parties reached an agreement to amend the terms of
the Merger. Under the amended agreement, each share of BGII common stock
outstanding (10,799,501 as of September 30, 1995 less the 1,000,000 shares
already owned by the Company) will receive $7.83 per share in cash, $3.57 per
share in the Company's Series B Special Stock which is a Pay-in-Kind (PIK)
preferred stock, and $0.30 per share of the Company's common stock totaling
$11.70 per share of BGII common stock. The PIK preferred stock has an eight-year
maturity and has a dividend rate of 15% as follows: PIK at 15% for the first
five years; 8% PIK and 7% cash for years six and seven; and 15% cash in the
eighth year of the term. All shares of Series B Special Stock are mandatorily
redeemable by the eighth anniversary of the date of initial issuance. If the
Company fails to redeem such shares by that date, then the number of directors
constituting the Company's Board will be increased by two and the holders of the
shares of Series B Special Stock will have the right to elect no more than two
directors total to the Company's Board. The holders of Series B Special Stock
will have no other remedies upon such failure to redeem the outstanding shares
of Series B Special Stock by such date. Other than as described herein, the
holders of shares of Series B Special Stock have no other voting rights except
as stated by law. The Company intends to seek to have the Series B Special Stock
quoted on NASDAQ. The aggregate amount of cash is unchanged from the previous
agreement.
On April 2, 1996, shareholders of both companies approved the pending
Merger. The Company has filed registration statements with the Securities and
Exchange Commission covering offerings of $140,000,000 senior secured notes and
$15,000,000 Series B Special Stock, the proceeds of which will be used to fund
the cash portion of the consideration of the merger agreement, to refinance
existing BGII debt, and for working capital purposes.
On April 17, 1996, both companies agreed to a Mutual Waiver of Agreement and
Plan of Merger extending the termination date of the Merger until June 18, 1996.
In addition the Company will pay interest at the rate of 5.5% on the cash
portion of the merger consideration to BGII shareholders from May 3, 1996
through the effective date of the transaction. Similarly, the dividend on the
PIK preferred stock portion of the merger consideration will begin accruing on
May 3, 1996. In addition, in order to facilitate completion of
F-41
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
9. PROPOSED BGII MERGER TRANSACTION (CONTINUED)
the offerings, the Company has filed a registration statement in respect of an
offer to exchange for its outstanding convertible subordinated debentures new
convertible subordinated debentures which would be senior to the outstanding
debentures. The new debentures would automatically convert on consummation of
the Merger into shares of the Company's common stock at a conversion price of
$5.56 per share (or, at the option of the holder, into a new series of junior
convertible pay-in-kind preferred stock). The transaction is subject to
obtaining customary regulatory approvals, the successful completion of the
offerings, and certain other conditions. The merger is expected to occur no
later than June 18, 1996.
10. LEGAL PROCEEDINGS
In June 1995, Bally Entertainment Corporation ("BEC") asserted that a
certain agreement between BEC and BGII (the "Noncompete Agreement") prohibits
the use of the trade name "Bally" if it is merged with a company that is in the
casino business within or without the United States and operates such business
prior to January 8, 1996. BGII believes such claim is entirely without merit
since the restriction referred to expires on January 8, 1996 and in any event
does not relate to the use of the "Bally" trade name, which is covered by the
License Agreement. The restriction in the Noncompete Agreement will not have any
impact on the combined company after the Merger since the effective time of the
Merger contemplates a closing of the Merger after the restriction in the
Noncompete Agreement lapses. BEC has not reasserted this position since it was
informed by BGII in July 1995 that the restriction lapses on January 8, 1996.
Consequently, BGII believes BEC has determined not to contest with BGII's
position.
BEC has also asserted that its permission is required for use of the "Bally"
trade name by any entity other than BGII and that a merger between BGII and
another company would violate the terms of the License Agreement. BGII has
denied these claims and believes that the surviving company in a merger will be
permitted to use the "Bally" trade name in accordance with the terms of such
License Agreement. BGII believes that no breach of such License Agreement is
caused by the Merger and the use of the "Bally" trade name by the surviving
corporation. In a letter dated November 9, 1995, BEC reasserted its position. On
November 20, 1995 the Company, the Company's Merger Subsidiary, and BGII
commenced an action against BEC in Federal District Court in Delaware seeking a
declaratory judgment, among other things, that the surviving company in the
Merger will be permitted to use the "Bally" trade name in accordance with the
terms of the License Agreement, and seeking injunctive relief (the "Alliance
Action"). On November 28, 1995, BEC commenced an action against BGII, Bally
Gaming (a BGII subsidiary), the Company, and the Company's Merger Subsidiary in
Federal District Court in New Jersey to enjoin the defendants from using the
"Bally" trade name (the "BEC Action"). The BEC Action alleges that BGII's
continued use of the trade name after the Merger will (1) constitute a
prohibited assignment of BGII's rights to use the trade name and (2) exceed the
scope of the license granted to BGII because BGII will be under control of the
Company. Also on November 28, 1995, BEC filed a motion to dismiss, transfer to
New Jersey, or stay the Alliance Action pending resolution of the BEC Action.
BGII, Bally Gaming, the Company, and the Company's Merger Subsidiary intend to
vigorously defend their position in these actions. However, there can be no
assurance that BEC will not be successful in its action to prohibit the
surviving corporation in the Merger from using the "Bally" trade name. The loss
of the "Bally" trade name may have a material adverse effect on the gaming
machine operations of the surviving corporation in the Merger.
11. INITIAL SERIES SPECIAL STOCK
In September 1993, Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland")
invested $5,000,000 in the Company in exchange for 1,333,333 shares of the
Company's Non-Voting Junior Convertible Special Stock, which are convertible on
a share for share basis into shares of the Company's Common Stock, and warrants
to purchase up to 2,750,000 shares of common stock subject to certain
conditions. In December 1995, Kirkland elected to convert the entire 1,333,333
shares of Special Stock into shares of the Company's Common Stock.
F-42
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
12. CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements are presented to provide
information regarding Alliance Gaming Corporation and its wholly-owned
"Guaranteeing Subsidiaries" and its non-wholly-owned "Pledging Subsidiaries",
VSI and Rainbow. The "Pledging Subsidiaries" shows separately because all of the
Company's interest in these entities is pledged as collateral for the Senior
Secured Notes. The notes to consolidating financial statements should be read in
conjunction with the consolidated financial statements and notes thereto.
F-43
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and securities available for sale.... $ 16,710 $ 8,852 $ -- $ 25,562
Receivables, net............................................ 2,935 134 (1,009) 2,060
Inventories................................................. 651 10 -- 661
Prepaid expenses............................................ 2,521 768 -- 3,289
Other....................................................... 480 6 -- 486
------------ ----------- ----------- -----------
Total current assets...................................... 23,297 9,770 (1,009) 32,058
------------ ----------- ----------- -----------
Property and equipment, net................................... 24,649 27,416 52,065
Receivables, net.............................................. 10,609 -- (5,009) 5,600
Excess of costs over net assets of an acquired business, net
of accumulated amortization.................................. 2,074 -- -- 2,074
Intangible assets, net of accumulated amortization............ 10,808 465 -- 11,273
Investment in minority owned subsidiary....................... 7,862 -- (7,862) --
Other......................................................... 10,965 842 (3,589) 8,218
------------ ----------- ----------- -----------
Total assets.............................................. $ 90,264 $ 38,493 $ (17,469) $ 111,288
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................ $ 134 $ 4,635 $ (728) $ 4,041
Accounts payable............................................ 1,732 357 -- 2,089
Accrued expenses............................................ 7,477 3,148 (280) 10,345
------------ ----------- ----------- -----------
Total current liabilities................................. 9,343 8,140 (1,008) 16,475
Long-term debt, less current maturities....................... 85,179 14,163 (4,294) 95,048
Other liabilities............................................. 8,065 5,350 (9,090) 4,325
------------ ----------- ----------- -----------
Total liabilities......................................... 102,587 27,653 (14.392) 115,848
------------ ----------- ----------- -----------
Commitments and contingencies
Minority interest............................................. -- 1,035 -- 1,035
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock............................................. 252 -- (252) --
Common stock, $.10 par value; authorized 175,000,000
shares..................................................... 1,416 2 (120) 1,298
Special stock, $.10 par value; authorized 10,000,000
shares..................................................... -- -- -- --
Paid-in capital............................................. 32,384 2,455 (2,705) 32,134
Unrealized loss on securities available for sale, net....... (1,067) -- -- (1,067)
Accumulated (deficit) earnings.............................. (45,308) 7,348 -- (37,960)
------------ ----------- ----------- -----------
Total stockholders' equity (deficiency)................... (12,323) 9,805 (3,077) (5,595)
------------ ----------- ----------- -----------
Total liabilities and stockholders' equity
(deficiency)........................................... $ 90,264 $ 38,493 $ (17,469) $ 111,288
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
F-44
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE-MONTH PERIOD ENDED MARCH 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Gaming:
Routes................................................ $ 68,039 $ 11,914 $ (564) $ 79,389
Casinos and taverns................................... 11,629 221 (327) 11,523
Food and beverage sales................................. 4,171 4 (1,333) 2,842
Net equipment sales..................................... 22 -- -- 22
------------ ----------- ----------- -----------
83,861 12,139 (2,224) 93,776
------------ ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of gaming:
Routes................................................ 52,294 7,686 (569) 59,411
Casinos and taverns................................... 6,956 92 (305) 6,743
Cost of food and beverage............................... 2,038 -- -- 2,038
Cost of equipment sales................................. 10 -- -- 10
Selling, general & administrative....................... 8,649 1,788 (1,158) 9,279
Business development expenses........................... 5,647 -- -- 5,647
Corporate expenses...................................... 6,258 -- -- 6,258
Depreciation and amortization........................... 6,178 756 -- 6,934
------------ ----------- ----------- -----------
88,030 10,322 (2,032) 96,320
------------ ----------- ----------- -----------
Operating (loss) income................................... (4,169) 1,817 (192) (2,544)
Other income (expense):
Interest income......................................... 2,178 60 (3) 2,235
Interest expense........................................ (5,375) (472) 3 (5,844)
Minority share of income................................ -- (252) -- (252)
Royalty fee............................................. -- (27) -- (27)
Other, net.............................................. (73) 130 (24) 33
------------ ----------- ----------- -----------
(Loss) income before income taxes......................... (7,439) 1,256 (216) (6,399)
Income tax (expense) benefit.............................. 14 (624) 216 (394)
------------ ----------- ----------- -----------
Net (loss) income......................................... $ (7,425) $ 632 $ -- $ (6,793)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
F-45
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE-MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Gaming:
Routes................................................ $ 69,066 $ 12,380 $ (335) $ 81,111
Casinos and taverns................................... 8,572 24,380 (254) 32,698
Food and beverage sales................................. 3,899 678 (1,601) 2,976
Net equipment sales..................................... 11 -- -- 11
------------ ----------- ----------- -----------
81,548 37,438 (2,190) 116,796
------------ ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of gaming:
Routes................................................ 54,756 7,873 (336) 62,293
Casinos and taverns................................... 5,997 8,908 (179) 14,726
Cost of food and beverage............................... 1,766 226 -- 1,992
Cost of equipment sales................................. 3 -- -- 3
Selling, general & administrative....................... 7,604 8,210 (1,506) 14,308
Business development expenses........................... 14,233 -- -- 14,233
Corporate expenses...................................... 4,606 -- -- 4,606
Provision for impaired assets........................... 3,179 -- -- 3,179
Depreciation and amortization........................... 5,705 1,623 -- 7,328
------------ ----------- ----------- -----------
97,849 26,840 (2,021) 122,668
------------ ----------- ----------- -----------
Operating (loss) income................................... (16,301) 10,598 (169) (5,872)
Other income (expense):
Interest income......................................... 1,344 220 (358) 1,206
Interest expense........................................ (5,223) (1,476) 358 (6,341)
Minority share of income................................ -- (708) -- (708)
Royalty fee............................................. -- (2,931) -- (2,931)
Other, net.............................................. 499 426 (527) 398
------------ ----------- ----------- -----------
(Loss) income before income taxes......................... (19,681) 6,129 (696) (14,248)
Income tax expense........................................ (403) (874) 696 (581)
------------ ----------- ----------- -----------
Net (loss) income......................................... $ (20,084) $ 5,255 $ -- $ (14,829)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
F-46
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE-MONTH PERIOD ENDED MARCH 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................. $ (7,425) $ 632 $ -- $ (6,793)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................... 6,178 756 -- 6,934
Loss (gain) on sale of property equipment................... 951 (126) -- 825
Write-off of other assets................................... 1,620 -- -- 1,620
Provision for losses on receivables......................... 380 -- -- 380
Amortization of debt discounts.............................. 60 177 -- 237
Equity in losses of affiliate............................... 386 -- -- 386
Net change in operating assets and liabilities:
(Increase) decrease in:
Inventories................................................. (14) -- -- (14)
Prepaid expenses............................................ 1,011 616 -- 1,627
Other assets................................................ (47) -- -- (47)
Increase (decrease) in:
Accounts and slot contracts payable......................... 43 (314) -- (271)
Accrued expenses............................................ (1,091) (1,610) (1,462) (4,163)
Minority interests.......................................... -- 251 -- 251
Other liabilities........................................... (668) (137) -- (805)
Intercompany accounts....................................... (552) 552 -- --
------------- ----------- ----------- -----------
Net cash (used in) provided by operating activities:...... 832 797 (1,462) 167
------------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........................... (7,797) (19) -- (7,816)
Proceeds from sale of property and equipment.................. 202 126 -- 328
Additions to receivables...................................... (11,213) -- 962 (10,251)
Cash collections on receivables............................... 10,734 400 (71) 11,063
Net cash provided by acquisition of business.................. -- 2,481 -- 2,481
Investment in subsidiary...................................... (2,417) -- 832 (1,585)
Cash used in purchase of securities available for sale........ (577) -- -- (577)
Additions to intangible assets................................ (282) -- -- (282)
Additions to other long-term assets........................... (3,152) -- -- (3,152)
------------- ----------- ----------- -----------
Net cash (used in) provided by investing activities: (14,502) 2,988 1,723 (9,791)
------------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.................................. -- 1,304 (1,304) --
Reduction of long-term debt................................... (762) (1,213) -- (1,975)
Issuance of stock............................................. (577) -- 1,043 466
------------- ----------- ----------- -----------
Net cash (used in) provided by financing activities....... (1,339) 91 (261) (1,509)
------------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS:
(Decrease) increase for period................................ (15,009) 3,876 -- (11,133)
Balance, beginning of period.................................. 34,750 2,335 -- 37,085
------------- ----------- ----------- -----------
Balance, end of period.................................... $ 19,741 $ 6,211 $ -- $ 25,952
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
F-47
<PAGE>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE-MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND CORPORATION
GUARANTEEING PLEDGING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................. $ (20,084) $ 5,255 $ -- $ (14,829)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................... 5,705 1,623 -- 7,328
Loss (gain) on sale of property and equipment............... 293 (16) -- 277
Write-off of other assets................................... 396 -- -- 396
Provision for losses on receivables......................... 29 17 -- 46
Amortization of debt discounts.............................. -- 177 -- 177
Provision for impaired assets............................... 3,179 -- -- 3,179
Deferred income tax provision............................... 388 -- -- 388
Net change in operating assets and liabilities:
Increase in:
Inventories................................................. 19 4 -- 23
Prepaid expenses............................................ 829 35 -- 864
Refundable income taxes..................................... -- 361 -- 361
Other assets................................................ 232 (31) -- 201
Increase (decrease) in:
Accounts and slot contracts payable......................... 481 (150) -- 331
Accrued and deferred income taxes........................... (206) 775 166 735
Other liabilities, including minority interests............. -- 392 -- 392
Intercompany accounts....................................... 765 (765) -- --
Accrued expenses............................................ (402) -- -- (402)
------------- ----------- ----------- -----------
Net cash (used in) provided by operating activities....... (8,376) 7,677 166 (533)
------------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........................... (4,844) (1,780) -- (6,624)
Proceeds from sale of property and equipment.................. 2,084 129 -- 2,213
Additions to receivables...................................... (11,225) (334) 2,256 (9,303)
Cash collections on receivables............................... 11,311 233 (1,770) 9,774
Proceeds from sale of securities available for sale........... 12,950 -- -- 12,950
Additions to intangible assets................................ (150) (337) -- (487)
Additions to other long-term assets........................... (3,268) -- -- (3,268)
------------- ----------- ----------- -----------
Net cash (used in) provided by investing activities....... 6,858 (2,089) 486 5,255
------------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt................................... (130) (3,524) 487 (3,167)
Proceeds from long-term debt.................................. 533 1,288 (1,139) 682
------------- ----------- ----------- -----------
Net cash (used in) provided by financing activities....... 403 (2,236) (652) (2,485)
------------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS:
(Decrease) increase for period................................ (1,115) 3,352 -- 2,237
Balance, beginning of period.................................. 8,234 5,500 -- 13,734
------------- ----------- ----------- -----------
Balance, end of period.................................... $ 7,119 $ 8,852 $ -- $ 15,971
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
F-48
<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, included on pages
F-50-- F-81, hereafter. 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-49
<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-50
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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-51
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN- RETAINED TRANSLATION UNEARNED STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENTS COMPENSATION EQUITY
------ ---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992........................... $106 $65,757 $24,885 $11,662 $(1,133) $101,277
Net loss............................................. -- -- (23,443 ) -- -- (23,443)
Issuance of restricted Company common stock award.... 1 1,149 -- -- (1,150) --
Exercise of warrants................................. -- 30 -- -- -- 30
Amortization of unearned compensation................ -- -- -- -- 951 951
Foreign currency translation adjustment.............. -- -- -- (4,536) -- (4,536)
Issuance of stock warrants........................... -- 600 -- -- -- 600
------ ---------- -------- ----------- ------------ -------------
Balance at December 31, 1993........................... 107 67,536 1,442 7,126 (1,332) 74,879
Net income........................................... -- -- 3,793 -- -- 3,793
Amortization of unearned compensation................ -- -- -- -- 555 555
Foreign currency translation adjustment.............. -- -- -- 6,434 -- 6,434
Issuance of Company common stock under compensation
agreement.......................................... -- 222 -- -- -- 222
------ ---------- -------- ----------- ------------ -------------
Balance at December 31, 1994........................... 107 67,758 5,235 13,560 (777) 85,883
------ ---------- -------- ----------- ------------ -------------
Net loss............................................. -- -- (3,393 ) -- -- (3,393)
Exercise of stock options............................ 1 587 -- -- -- 588
Amortization of unearned compensation................ -- -- -- -- 230 230
Foreign currency translation adjustment.............. -- -- -- 5,102 -- 5,102
------ ---------- -------- ----------- ------------ -------------
Balance at December 31, 1995........................... $108 $68,345 $ 1,842 $18,662 $ (547) $ 88,410
------ ---------- -------- ----------- ------------ -------------
------ ---------- -------- ----------- ------------ -------------
<CAPTION>
COMMON
STOCK
SHARE AMOUNTS ISSUED
- ------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992........................... 10,623
Issuance of restricted Company common stock award.... 100
Exercise of warrants................................. 2
-------------
Balance at December 31, 1993........................... 10,725
Issuance of Company common stock under compensation
agreement.......................................... 25
-------------
Balance at December 31, 1994........................... 10,750
Exercise of stock options............................ 50
-------------
Balance at December 31, 1995........................... 10,800
-------------
-------------
</TABLE>
See accompanying notes.
F-52
<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 notes 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 notes payable for license agreement............................. -- 1,465 --
</TABLE>
See accompanying notes.
F-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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 notes 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 notes payable for license
agreement.................................. -- -- -- 1,465 -- 1,465
</TABLE>
See accompanying notes.
F-77
<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-78
<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-79
<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>
BALLY BALLY CONSOLIDATING BALLY GAMING
WULFF WULFF BALLY AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS GAMING, 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>
BALLY BALLY CONSOLIDATING BALLY GAMING
WULFF WULFF BALLY AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS GAMING, 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-80
<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 INTERNATIONAL,
AUTOMATEN VERTRIEBS GAMING, 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 INTERNATIONAL,
AUTOMATEN VERTRIEBS GAMING, 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-81
<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-82
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 5,526 $ 2,009
Accounts and notes receivable, net of allowance for doubtful accounts of $16,281 and
$17,054............................................................................ 87,176 82,872
Inventories, net:
Raw materials and work-in process................................................. 16,066 17,342
Finished goods.................................................................... 35,525 34,619
------------ -----------
51,591 51,961
Other current assets................................................................ 3,983 4,450
------------ -----------
Total current assets.......................................................... 148,276 141,292
Long-term notes receivable, net of allowance for doubtful accounts of $7,869 and
$7,887............................................................................... 9,981 9,696
Property, plant and equipment, net.................................................... 23,244 23,615
Intangible assets, less accumulated amortization of $13,720 and $14,045............... 10,814 10,417
Other assets.......................................................................... 2,001 1,916
------------ -----------
$ 194,316 $ 186,936
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 18,556 $ 14,707
Accrued liabilities and other payables.............................................. 17,406 16,258
Current maturities of long-term debt................................................ 14,957 24,678
------------ -----------
Total current liabilities......................................................... 50,919 55,643
------------ -----------
10 3/8 Senior Secured Notes due 1998, net of unamortized discount of $344 and $312.... 39,656 39,688
Other long-term debt, less current maturities......................................... 15,331 5,605
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock..................................................................... -- --
Common stock........................................................................ 108 108
Additional paid-in capital.......................................................... 68,345 68,345
Retained earnings................................................................... 1,842 1,329
Cumulative translation adjustments.................................................. 18,662 16,708
Unearned compensation............................................................... (547) (490)
------------ -----------
Total stockholders' equity........................................................ 88,410 86,000
------------ -----------
$ 194,316 $ 186,936
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-83
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1995 1996
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Sales.................................................................................... $ 67,658 $ 57,435
Other.................................................................................... 631 1,109
----------- -----------
68,289 58,544
----------- -----------
Costs and expenses:
Cost of sales............................................................................ 43,500 37,757
Selling, general and administrative...................................................... 16,998 16,526
Provision for doubtful receivables....................................................... 1,154 991
Unusual charges.......................................................................... -- 996
----------- -----------
61,652 56,270
----------- -----------
Operating income........................................................................... 6,637 2,274
Interest expense........................................................................... 1,733 1,665
----------- -----------
Income before income taxes................................................................. 4,904 609
Provision for income taxes................................................................. 2,042 1,122
----------- -----------
Net income (loss).......................................................................... $ 2,862 $ (513)
----------- -----------
----------- -----------
Net income (loss) per common share......................................................... $0.27 $(0.05 )
----------- -----------
----------- -----------
Weighted average number of common shares and common stock equivalents outstanding.......... 10,751 10,805
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-84
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN- RETAINED TRANSLATION UNEARNED STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENTS COMPENSATION EQUITY
----------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ $ 108 $ 68,345 $ 1,842 $ 18,662 $ (547) $ 88,410
Net loss.......................... -- -- (513) -- -- (513)
Foreign currency translation
adjustments...................... -- -- -- (1,954) -- (1,954)
Amortization of unearned
compensation..................... -- -- -- -- 57 57
----------- ----------- ----------- ------------ ------ ------------
Balance at March 31, 1996........... $ 108 $ 68,345 $ 1,329 $ 16,708 $ (490) $ 86,000
----------- ----------- ----------- ------------ ------ ------------
----------- ----------- ----------- ------------ ------ ------------
</TABLE>
<TABLE>
<CAPTION>
COMMON
STOCK
SHARE AMOUNTS ISSUED
- -------------------------------------------------------------------------------------------------------- -----------
<S> <C>
Balance at December 31, 1995
and March 31, 1996..................................................................................... 10,800
-----------
-----------
</TABLE>
See accompanying notes.
F-85
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1995 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................................ $ 2,862 $ (513)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization.......................................................... 1,440 1,898
Provision for doubtful receivables..................................................... 1,154 991
Provision for inventory valuation...................................................... 158 538
Changes in operating assets and liabilities............................................ (10,795) (4,299)
Other, net............................................................................... (424) (372)
----------- -----------
Cash used in operating activities...................................................... (5,605) (1,757)
Cash flows from investing activities:
Purchases of property, plant and equipment............................................... (2,232) (2,733)
Proceeds from disposals of property, plant and equipment................................. 410 554
Other.................................................................................... (286) (39)
----------- -----------
Cash used in investing activities...................................................... (2,108) (2,218)
Cash flows from financing activities:
Net change in lines of credit............................................................ 2,602 817
Repayments of long-term debt............................................................. (914) (227)
----------- -----------
Cash provided by financing activities.................................................. 1,688 590
Effect of exchange rate changes on cash.................................................... 780 (132)
----------- -----------
Decrease in cash and cash equivalents...................................................... (5,245) (3,517)
Cash and cash equivalents, beginning of period............................................. 9,204 5,526
----------- -----------
Cash and cash equivalents, end of period................................................... $ 3,959 $ 2,009
----------- -----------
----------- -----------
Supplemental cash flows information:
Operating activities include cash payments for interest and income taxes as follows:
Interest paid............................................................................ $ 2,721 $ 2,598
Income taxes paid........................................................................ 1,333 1,264
</TABLE>
See accompanying notes.
F-86
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Bally Gaming International, Inc. (the "Company") was formed in August 1991
by Bally Entertainment Corporation ("BEC") to consolidate the gaming machine
manufacturing and distribution operations of BEC. These operations are conducted
in Germany under the name Bally Wulff ("Wulff") and in the United States under
the name Bally Gaming ("Gaming") and Bally Systems ("Systems"). Wulff designs,
manufactures (through its wholly-owned subsidiary Bally Wulff Automaten GmbH,
"Automaten") and distributes (through its wholly-owned subsidiary Bally Wulff
Vertriebs GmbH. ("Vertriebs")) wall-mounted, coin-operated, armless gaming
machines similar to slot machines known as wall machines and also distributes
recreational and amusement machines manufactured by third parties. Gaming
designs, manufactures and distributes electronic slot machines and video gaming
machines. Systems designs, assembles and sells computerized slot monitoring
systems for slot and video gaming machines. In three transactions dated November
1991, July 1992, and September 1993, BEC divested all of its interests in the
Company.
The accompanying condensed consolidated financial statements reflect all
adjustments which management believes necessary to present fairly the financial
position, results of operations and cash flows of the Company. All such
adjustments are of a normal recurring nature. Interim results may not
necessarily be indicative of results which may be expected for any other interim
period or for the year as a whole. The accompanying condensed consolidated
financial statements should be read in conjunction with the financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
The condensed consolidated balance sheet at December 31, 1995 was derived
from audited financial statements, but does not include all disclosures required
under generally accepted accounting principles.
Certain reclassifications have been made to prior years' financial
statements to conform with the 1996 presentation.
MERGER AGREEMENT, TENDER OFFER AND RELATED LITIGATION
On October 17, 1995 the Board of Directors of the Company approved an
Agreement and Plan of Merger with Alliance Gaming Corporation ("Alliance") which
was subsequently amended as of January 23, 1996 ("Merger Agreement"). Pursuant
to the Merger Agreement, the Company will merge with a subsidiary of Alliance
("Alliance Merger Subsidiary") with the Company being the surviving corporation
and becoming a wholly-owned subsidiary of Alliance ("Merger"). The Merger
Agreement and certain mutual waivers entered into by the parties provide that
the Company's stockholders will have the right to receive, in exchange for each
of their issued and outstanding shares of the Company's common stock (i) an
amount of cash determined by dividing $76,700,000 by the number of shares
("Converted Shares") of the Company's common stock outstanding immediately prior
to the effective time of the Merger (other than shares which are held by the
Company, Alliance or their respective subsidiaries) ("Cash Consideration"), plus
interest accruing at a rate of 5.5% per annum from May 3, 1996 to the effective
time of the merger, (ii) a fraction of a share of common stock, $.10 par value,
of Alliance ("Alliance Common Stock") having a value determined in accordance
with the Merger Agreement of $.30 (the "Common Stock Consideration") and (iii)
that number of shares (or fractions thereof) of 15% Non-Voting Junior Special
Stock, Series B, $.10 par value, of Alliance (the "Series B Special Stock")
having a value determined in accordance with the Merger Agreement equal to
$11.40 less the Cash Consideration, plus dividends accruing at a rate of 15% per
annum from May 3, 1996. The obligations of Alliance and the Company to
consummate the Merger are subject to various conditions, including obtaining
requisite regulatory approvals and Alliance's obtaining $150 million in
financing on commercially reasonable terms, at least two-thirds of which must be
in the form of bank debt, other debt having a term of at least four years or
equity. In conjunction with the Merger Agreement, Alliance terminated its
unsolicited tender offer and consent solicitation and withdrew its litigation
against the Company and the Company withdrew its litigation against Alliance.
The Company and Alliance have extended the unilateral termination date of the
Merger Agreement until June 18, 1996.
F-87
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt and lines of credit consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
10 3/8% Senior Secured Notes due 1998, net of unamortized discount
of $344 and $312................................................... $ 39,656 $ 39,688
-------- --------------
-------- --------------
Other long-term debt:
Wulff revolving lines of credit................................... $ 15,905 $ 16,289
Bally Gaming, Inc. revolving line of credit....................... 9,400 9,332
Notes payable 5% to 12%........................................... 4,983 4,662
Less current maturities........................................... (14,957) (24,678)
-------- --------------
$ 15,331 $ 5,605
-------- --------------
-------- --------------
</TABLE>
INCOME TAXES
The Company's effective tax rate in the 1995 and 1996 periods differs from
the U.S. statutory rate of 35% principally due to a higher effective tax rate on
income earned in Germany and the lack of current tax benefits available for
losses in the U.S.
RESEARCH AND DEVELOPMENT
Wulff, Gaming and Systems expense product research and development costs as
incurred. Research and development costs were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Wulff................................................................................ $ 853 $ 868
Gaming............................................................................... 971 877
Systems.............................................................................. 473 502
--------- ---------
$ 2,297 $ 2,247
--------- ---------
--------- ---------
</TABLE>
UNUSUAL CHARGES
During the quarter ended March 31, 1996, the Company incurred approximately
$1.0 million in legal, accounting, investment banking, public and investor
relations and printing costs in connection with the pending Merger. All of these
costs have been expensed as incurred.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding totaling 10,751,299 and 10,805,262 for the three months
ended March 31, 1995 and 1996, respectively.
COMMITMENTS AND CONTINGENCIES
In conjunction with sales by Gaming, with recourse to Gaming and/or the
Company, of certain trade receivables to third parties, Gaming and/or the
Company have guaranteed amounts due from various customers of approximately
$16.7 million at March 31, 1996. It is possible that one or more of Gaming's
customers whose obligation has been guaranteed by Gaming and/or the Company may
be unable to make payments as such become due. In this case Gaming and/or the
Company may become responsible for repayment of at least a portion of such
amounts over the term of the receivables. At March 31, 1996, amounts due from
one customer under three contracts totaling $3.7 million were past due and these
amounts and subsequent installments have not been paid. In general, under the
terms of these contracts, Gaming and/or the Company may be responsible for
monthly payments of the outstanding obligations. The
F-88
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
third party holder of these contracts has not yet asserted demands under these
contracts although such demands may be imminent. The Company intends to pursue a
restructuring of the contracts although no assurance can be given that such a
restructuring would be successfully negotiated. The outcome of this issue is not
anticipated to have a material effect on the financial position, results of
operations or cash flows of the Company. A provision for doubtful accounts of
approximately $6.6 million on all receivables with recourse is included in the
Company's allowance for doubtful accounts at March 31, 1996.
During 1995, Wulff increased the amount of value added tax reserves by $1.0
million as a result of developments to date in an ongoing quadrennial audit of
Wulff's returns for the years 1988 through 1991. While no written claim or
assessment has been issued, the German tax authorities have orally proposed
preliminary adjustments which range from $1.4 million (which has been accrued)
to $5.0 million. The Company has accrued the liability as, based on current
developments, the Company's estimate of the ultimate outcome and its experience
in contesting these matters, it is probable that a liability has been incurred
and a range of costs can be reasonably estimated. As the scope of the liability
is better determined, there could be changes in the estimate of the ultimate
liability. Management believes that the preliminary proposed adjustments are
without merit and the ultimate results of the audit will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
In early 1995, the Governor of the State of New Mexico signed compacts with
certain Indian tribes to permit casino gaming on tribal lands in New Mexico.
These compacts went through appropriate federal approval processes and a number
of casinos began operating. In July 1995 the Supreme Court of New Mexico found
that the Governor did not have proper authority to sign the compacts. The Indian
tribes have filed a lawsuit in federal court to seek resolution to this issue.
Gaming and Systems had sold product to the Indian tribes prior to this ruling.
At March 31, 1996, the Company has $4.6 million in accounts and notes receivable
from an operator of two casinos for two different Indian tribes including $1.9
million of trade receivables sold to a third party with recourse to Gaming. This
operator is currently four months ahead on payments. No provision for doubtful
accounts for this customer has been included in the accompanying financial
statements at March 31, 1996. Management believes the receivable is properly
valued at March 31, 1996. As events change during 1996, management will
reevaluate its estimate of the realizability of the receivable.
On or about June 19, 1995, three purported class actions were filed in the
Chancery Court of Delaware by Company stockholders against the Company and its
directors (the "Fiorella, Cignetti and Neuman Actions"). The Fiorella and Neuman
Actions in identical complaints alleged that the Company's directors had
breached their fiduciary duties of good faith, fair dealing, loyalty and candor
by approving the merger agreement with WMS Industries Inc. ("WMS Merger")
instead of the unsolicited tender offer transaction proposed by Alliance
("Alliance Proposal"), by not properly exposing the Company for sale, and by
failing to take all reasonable steps to maximize stockholder value. These
actions sought injunctions to prevent the Company from proceeding with,
consummating or closing the WMS Merger, and to rescind it should it be
consummated, as well as compensatory damages. The Cignetti Action made similar
allegations, and also alleged that the Company had in place a shareholders'
right plan, commonly known as a "poison pill". The Cignetti Action sought an
injunction requiring the Company to negotiate with all BONA FIDE parties or
other potential acquirees or to conduct an unencumbered market check in a manner
designed to maximize shareholder value and preventing the Company from
implementing any unlawful barriers to the acquisition of the Company by any
third party or taking other actions that would lessen its attractiveness as an
acquisition candidate. The Cignetti Action also specifically requested an
injunction barring triggering of the Company's alleged "poison pill" until full
consideration was given to the Alliance Proposal (subsequently superseded by the
execution of the Merger Agreement with Alliance) ("Alliance Merger"), and sought
compensatory damages.
Also on or about June 19, 1995, a purported class action was filed in the
Delaware Court of Chancery by a Company stockholder against the Company and its
directors and Alliance (the "Strougo Action"). The
F-89
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Strougo Action alleged that the Alliance Proposal (subsequently superseded by
the execution of the Alliance Merger Agreement) to acquire the Company stock was
at a grossly unfair and inadequate price; that the Company's directors had
breached their fiduciary duties by failing seriously to consider potential
purchasers for the Company other than Alliance; and that the transaction
proposed by Alliance was wrongful, unfair and harmful to the Company's public
stockholders. The Strougo Action sought a declaration that defendants had
breached their fiduciary duties; an injunction preventing the consummation of
the Alliance transaction or requiring its rescission; an order requiring
defendants to permit a stockholders' committee to participate in any process
undertaken in connection with the sale of the Company; and compensatory damages.
On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman
Actions and the Strougo Action (collectively, the "Stockholder Plaintiffs")
filed with the Court a motion to consolidate the four actions.
On or about July 27, 1995, certain of the Stockholder Plaintiffs filed an
amended complaint (the "Amended Fiorella Action") that adopted certain
allegations concerning self-dealing by the Company's directors in connection
with the WMS Merger, added a claim relating to the Company's alleged failure to
hold an annual meeting as required and added WMS as defendant. The Amended
Fiorella Action also alleged that the Company intended, in violation of Delaware
law, to sell Wulff without first seeking stockholder approval of the sale. The
action sought an order enjoining defendants from proceeding with, consummating
or closing the WMS Merger, or rescinding if it closed; preventing the sale of
Wulff without prior stockholder approval; declaring invalid the Company's
agreement to pay WMS a fee if the WMS Merger is terminated by the Company in
certain circumstances; compelling an auction of the Company and the provision of
due diligence to Alliance, scheduling an immediate meeting of the Company
stockholders; and awarding compensatory damages. The Company believes these
lawsuits to be without merit and intends to vigorously defend these actions.
On October 23, 1995, WMS instituted a suit in New York State Court against
the Company for the Company's failure to pay $4.8 million upon termination of
the WMS Merger. The Company believes the lawsuit to be without merit and intends
to vigorously defend this action. On November 22, 1995, the Company answered the
complaint and brought counterclaims against WMS alleging that WMS repudiated and
breached the WMS Merger by, among other things, failing to act in good faith
toward the consummation of the WMS Merger, advising the Company that it would
not perform as agreed but would impose new conditions on the WMS Merger, acting
in excess of its authority and undermining the ability of the Company to perform
the WMS Merger. On February 8, 1996 WMS moved for summary judgment. On April 2,
1996, the Company opposed WMS's motion for summary judgment and cross-moved for
summary judgment. Pursuant to the Merger Agreement, Alliance has agreed to
indemnify the directors and officers of the Company under certain circumstances.
In June 1995, BEC asserted that a certain agreement between BEC and the
Company (the "Non-compete Agreement") prohibits the use by the Company of the
tradename "Bally" if it is merged with a company that is in the casino business
within or without the United States and operates such business prior to January
8, 1999. The Company believes such a claim is entirely without merit since the
restriction referred to expired on January 8, 1996 and in any event does not
relate to the use of the "Bally" tradename, which is covered by the License
Agreement. The restriction in the Non-compete Agreement will not have any impact
on the combined company after the Merger since the effective time of the
Alliance Merger contemplates a closing of the Alliance Merger after the
restriction in the Non-compete Agreement lapses. BEC has not reasserted this
position since it was informed by the Company in July 1995 that the restriction
lapses on January 8, 1996. Consequently, the Company believes BEC has determined
not to contest the Company's position.
On February 16, 1996, the Company received notice from BEC alleging that the
Company has violated the License Agreement by, among other things, granting to
Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which
provides Bally Gaming, Inc.'s revolving line of credit, a security interest in
F-90
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
general intangibles. In such notice, BEC also stated that as a result of the
foregoing, it was immediately terminating the License Agreement. The Company
does not believe that it has violated the terms of the License Agreement and the
Company will defend its position against BEC's claims.
BEC has also asserted that its permission is required for use of the "Bally"
tradename by any entity other than the Company and that the Merger would violate
the terms of the License Agreement. The Company has denied these claims and
believes that the surviving company in the Alliance Merger will be permitted to
use the "Bally" tradename in accordance with the terms of the License Agreement.
The Company believes that no breach of such License Agreement is caused by the
Alliance Merger and the use of the "Bally" tradename by the surviving
corporation. In a letter dated November 9, 1995, BEC reasserted its position. On
November 20, 1995, Alliance, the Alliance Merger Subsidiary and the Company
commenced an action against BEC in Federal District Court in Delaware seeking a
declaratory judgment, among other things, that the surviving company in the
Alliance Merger will be permitted to use the "Bally" tradename in accordance
with the terms of the License Agreement, and seeking injunctive relief (the
"Alliance Action"). On November 28, 1995, BEC commenced an action against the
Company, Bally Gaming, Inc., Alliance and the Alliance Merger Subsidiary in
Federal District Court in New Jersey to enjoin the defendants from using the
"Bally" tradename (the "BEC" Action). The BEC Action alleges that the Company's
continued use of the tradename after the Alliance Merger will (1) constitute a
prohibited assignment of the Company's rights to use the tradename and (2)
exceed the scope of the license granted to the Company because the Company will
be under the control of Alliance. Also on November 28, 1995, BEC filed a motion
to dismiss, transfer to New Jersey, or stay the Alliance Action pending
resolution of the BEC action. On December 15, 1995 BEC filed a motion to
dismiss, transfer to New Jersey or stay the Alliance Action pending resolution
of the BEC Action. On December 15, 1995, BEC filed a motion for a preliminary
injunction in the BEC Action. At a hearing on January 17, 1996, the court
declined to issue a preliminary injunction, but held BEC's motion in abeyance
pending the defendant's motion to dismiss and for summary judgment, which
defendants had filed on December 26, 1995. Thereafter the parties advised the
court that they are negotiating a settlement of the BEC Action. On March 29,
1996, at the court's request, the parties entered into a consent order providing
for the administrative dismissal of the BEC Action, subject to its reopening
should the settlement not be consummated. If the parties do not agree on a
settlement, the Company, Bally Gaming, Inc., Alliance and the Alliance Merger
Subsidiary intend to vigorously defend their position in these actions.
In 1994, after an intensive federal investigation of Gaming's former
distributor, eighteen individuals were indicted on charges of racketeering and
fraud against Gaming and the Louisiana regulatory system. Among those indicted
were the former distributor's stockholders, directors, employees and others
alleged to be associated with organized crime. Fifteen entered pleas of guilty
before trial and the remaining three were convicted in October 1995. The
Company, its subsidiaries and its current employees were not subject to such
investigation.
Prior to the conclusion of the federal criminal case, the Company's
activities with regard to its former VLT distributor in Louisiana were the
subject of inquiries by gaming regulators and a report by the New Jersey
Division of Gaming Enforcement ("DGE") dated August 24, 1995. The New Jersey
Casino Control Commission ("CCC") has indicated that it may hold a hearing on
the matter, but no date has been set at this time. The New Jersey report makes
no specific recommendations for action by the CCC. The gaming authorities in
Ontario, Canada, who have investigated the matters, issued a gaming registration
to the Company's subsidiary Bally Gaming, Inc. on February 8, 1996.
The DGE's report is similar in many respects to one prepared by the
President of the Louisiana Economic Development and Gaming Corporation ("LEDGC")
in January 1995. Hearings on that report were held in January 1995. On February
7, 1995 the Board of Directors of the LEDGC found all of the allegations in its
President's report to be without merit and granted a license to the Company and
has announced that it will continue to monitor the Company's conduct in light of
any further information disclosed as a result of the trial of the eighteen
defendants (all of whom have now pled, or been found, guilty)
F-91
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and other regulatory proceedings. In November 1995, the operator of the
land-based casino in New Orleans filed for bankruptcy reorganization and ceased
operations. That action resulted in the termination of funding for the LEDGC
regulatory operation and shortly thereafter the Attorney General of Louisiana
took control of the agency and effectively closed its operations. LEDGC's
President and employees were dismissed. The foregoing occurred prior to
completion of review of the Company's pending application.
The Company believes that the information contained in the DGE's report does
not differ in any material respect from the prior report to the LEDGC the
conclusions of which were found to be without merit in February 1995. An adverse
determination by a gaming regulator in any jurisdiction could result in the loss
of the Company's ability to do business in that jurisdiction. Further regulatory
scrutiny in other jurisdictions would be likely to follow. The Company would
appeal any adverse finding, as was the case when the Company successfully
appealed the LEDGC President's decision in January 1995.
On September 25, 1995, the Company was named as defendant in a class action
lawsuit filed in the United States District Court, District of Nevada, by Larry
Schreier on behalf of himself and all others similarly situated (the
"plaintiffs"). The plaintiffs filed suit against the Company and approximately
45 other defendants (each a "defendant," and collectively the "defendants").
Each defendant is involved in the gaming business as either a gaming machine
manufacturer, distributor, or casino operator. The class action lawsuit arises
out of alleged fraudulent marketing and operation of casino video poker machines
and electronic slot machines. The plaintiffs allege that the defendants have
engaged in a course of fraudulent and misleading conduct intended to induce
people in playing their gaming machines based on a false belief concerning how
these machines actually operate as well as the extent to which there is actually
an opportunity to win on any given play. The plaintiffs allege that the
defendants' actions constitute violations of the Racketeer Influenced and
Corrupt Organizations Act ("RICO") and give rise to claims of common law fraud
and unjust enrichment. The plaintiffs are seeking monetary damages in excess of
one billion dollars, and are asking that any damage awards be trebled under
applicable federal law. The Company believes the plaintiffs' lawsuit to be
without merit and intends to vigorously defend these actions.
While the ultimate results of the matters described above are not presently
known, management does not expect that the results will have a material adverse
effect on the Company's results of operations, financial position or cash flows.
The Company and its subsidiaries are from time to time also subject to
litigation incidental to the conduct of their business. The Company believes
that the results of such litigation and other pending legal proceedings will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial statements are presented to
provide information regarding Bally Gaming, Inc., as guarantor of the Senior
Secured Notes, and Automaten and Vertriebs, because substantially all of the
common stock of these entities is pledged as collateral for the Senior Secured
Notes. The results herein are presented by each legal entity rather than by
business segment as presented elsewhere in these financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Such business segment information for Gaming and Wulff includes an
allocation of parent company revenues and expenses whereas the following
condensed consolidating financial statements do not reflect these allocations to
the subsidiaries. The condensed consolidating financial statements should be
read in conjunction with the notes to the condensed consolidated financial
statements provided herein, as well as the notes to the Company's consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
F-92
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC PARENT ADJUSTMENTS INC.
----------- --------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 1,353 $ 3,240 $ 933 $ -- $ -- $ 5,526
Accounts and notes receivable, net of
allowance for doubtful accounts of
$19, $7,201 and $9,061 for Automaten,
Vertriebs and Gaming................. 1,804 51,110 38,948 4,772 (9,458) 87,176
Inventories, net:
Raw materials and work-in-process... 4,974 -- 11,092 -- -- 16,066
Finished goods...................... 3,548 12,340 21,020 -- (1,383) 35,525
----------- --------- --------- ---------- ------------- -------------
8,522 12,340 32,112 -- (1,383) 51,591
Other current assets.................... 1,236 1,443 651 560 93 3,983
----------- --------- --------- ---------- ------------- -------------
Total current assets.................. 12,915 68,133 72,644 5,332 (10,748) 148,276
Long-term notes receivable, net of
allowance for doubtful accounts of $48
and $7,821 for Vertriebs and Gaming.... -- 1,654 8,327 -- -- 9,981
Long-term receivables from affiliate.... 23,208 -- -- 28,380 (51,588) --
Property, plant and equipment, net...... 1,332 12,057 12,070 -- (2,215) 23,244
Intangible assets, less accumulated
amortization of $11,527, $94 and $2,099
for Vertriebs, Gaming and Parent....... -- 6,089 156 4,569 -- 10,814
Investment in subsidiaries.............. -- -- -- 90,766 (90,766) --
Other assets............................ 332 561 113 497 498 2,001
----------- --------- --------- ---------- ------------- -------------
$ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316
----------- --------- --------- ---------- ------------- -------------
----------- --------- --------- ---------- ------------- -------------
</TABLE>
(Continued)
F-93
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS--(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALLY BALLY CONSOLIDATING BALLY GAMING
BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC PARENT ADJUSTMENTS INC.
----------- --------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 557 $ 6,386 $ 19,342 $ 31 $ (7,760) $ 18,556
Accrued liabilities and other
payables............................. 3,807 4,501 6,611 2,507 (20) 17,406
Current maturities of long-term
debt................................. -- 14,333 212 412 -- 14,957
----------- --------- --------- ---------- ------------- -------------
Total current liabilities........... 4,364 25,220 26,165 2,950 (7,780) 50,919
Long-term payables to affiliate......... -- 26,421 28,380 -- (54,801) --
10 3/8% Senior Secured Notes due 1998,
net of unamortized discount of $344 -- -- -- 39,656 -- 39,656
Other long-term debt, less current
maturities............................. -- 4,721 9,435 1,175 -- 15,331
Commitments and contingencies
Stockholders' equity:
Preferred stock....................... -- -- -- -- -- --
Common stock.......................... 2,638 15,142 -- 108 (17,780) 108
Additional paid-in-capital............ 19,191 6,455 34,596 74,439 (66,336) 68,345
Retained earnings (accumulated
deficit) 2,155 286 (5,273) 11,969 (7,295) 1,842
Cumulative translation adjustments.... 9,439 10,249 7 (206) (827) 18,662
Unearned compensation................. -- -- -- (547) -- (547)
----------- --------- --------- ---------- ------------- -------------
Total stockholders' equity.......... 33,423 32,132 29,330 85,763 (92,238) 88,410
----------- --------- --------- ---------- ------------- -------------
$ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316
----------- --------- --------- ---------- ------------- -------------
----------- --------- --------- ---------- ------------- -------------
</TABLE>
F-94
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
BALLY BALLY BALLY CONSOLIDATING BALLY GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- --------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 502 $ 2,626 $ (1,119) $ -- $ -- $ 2,009
Accounts and notes receivable, net of
allowance for doubtful accounts of $30,
$7,319 and $9,705 for Automaten, Vertriebs
and Gaming................................. 2,890 48,566 35,951 5,331 (9,866) 82,872
Inventories, net:
Raw materials and work-in-process......... 5,295 -- 12,047 -- -- 17,342
Finished goods............................ 3,426 13,231 19,684 -- (1,722) 34,619
----------- --------- --------- ---------- ------------- -------------
8,721 13,231 31,731 -- (1,722) 51,961
Other current assets........................ 1,028 1,655 731 837 199 4,450
----------- --------- --------- ---------- ------------- -------------
Total current assets.................... 13,141 66,078 67,294 6,168 (11,389) 141,292
Long-term notes receivable, net of allowance
for doubtful accounts of $66 and $7,821 for
Vertriebs and Gaming......................... -- 2,052 7,644 -- -- 9,696
Long-term receivables from affiliate.......... 24,325 -- -- 25,170 (49,495) --
Property, plant and equipment; net............ 1,149 12,703 11,866 -- (2,103) 23,615
Intangible assets, less accumulated
amortization of $11,597, $100 and $2,348 for
Vertriebs, Gaming and Parent................. -- 5,947 150 4,320 -- 10,417
Investment in subsidiaries.................... -- -- -- 90,766 (90,766) --
Other assets.................................. 313 524 113 449 517 1,916
----------- --------- --------- ---------- ------------- -------------
$ 38,928 $ 87,304 $ 87,067 $ 126,873 $ (153,236) $ 186,936
----------- --------- --------- ---------- ------------- -------------
----------- --------- --------- ---------- ------------- -------------
</TABLE>
(Continued)
F-95
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS--(CONTINUED)
MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
BALLY
BALLY BALLY BALLY CONSOLIDATING GAMING
WULFF WULFF GAMING AND OTHER INTERNATIONAL
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- --------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 831 $ 5,637 $ 16,365 $ 31 $ (8,157) $ 14,707
Accrued liabilities and other payables....... 4,315 3,891 6,045 1,907 100 16,258
Current maturities of long-term debt......... -- 14,765 9,460 453 -- 24,678
----------- --------- --------- ---------- ------------- ------------
Total current liabilities.............. 5,146 24,293 31,870 2,391 (8,057) $ 55,643
Long-term payables to affiliate................ -- 27,484 25,170 -- (52,654) --
10 3/8% Senior Secured Notes due 1998, net of
unamortized discount of $312.................. -- -- -- 39,688 -- 39,688
Other long-term debt, less current
maturities.................................. -- 4,578 15 1,012 -- 5,605
Commitments and contingencies
Stockholders' equity:
Preferred stock.............................. -- -- -- -- -- --
Common stock................................. 2,638 15,142 -- 108 (17,780) 108
Additional paid-in-capital................... 19,191 6,455 34,596 74,439 (66,336) 68,345
Retained earnings (accumulated deficit)...... 3,546 87 (4,571) 9,931 (7,664) 1,329
Cumulative translation adjustments........... 8,407 9,265 (13) (206) (745) 16,708
Unearned compensation........................ -- -- -- (490) -- (490)
----------- --------- --------- ---------- ------------- ------------
Total stockholders' equity................... 33,782 30,949 30,012 83,782 (92,525) 86,000
----------- --------- --------- ---------- ------------- ------------
$ 38,928 $ 87,304 $ 87,067 $ 126,873 $ (153,236) $ 186,936
----------- --------- --------- ---------- ------------- ------------
----------- --------- --------- ---------- ------------- ------------
</TABLE>
F-96
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
BALLY
BALLY BALLY BALLY CONSOLIDATING GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales................................ $ 18,742 $ 31,186 $ 33,991 $ -- $ (16,261) $ 67,658
Other................................ 282 732 127 335 (845) 631
----------- --------- --------- --------- ------------- -------------
19,024 31,918 34,118 335 (17,106) 68,289
----------- --------- --------- --------- ------------- -------------
Costs and expenses:
Cost of sales........................ 10,859 26,475 21,690 -- (15,524) 43,500
Selling, general and
administrative...................... 2,292 5,782 7,387 1,533 4 16,998
Provision for doubtful receivables... 9 130 1,015 -- -- 1,154
----------- --------- --------- --------- ------------- -------------
13,160 32,387 30,092 1,533 (15,520) 61,652
----------- --------- --------- --------- ------------- -------------
Operating income (loss)................ 5,864 (469) 4,026 (1,198) (1,586) 6,637
Interest expense....................... -- 329 1,038 1,161 (795) 1,733
----------- --------- --------- --------- ------------- -------------
Income (loss) before income taxes...... 5,864 (798) 2,988 (2,359) (791) 4,904
Provision (benefit) for income taxes... 2,677 (363) 1,048 (995) (325) 2,042
----------- --------- --------- --------- ------------- -------------
Net income (loss)...................... $ 3,187 $ (435) $ 1,940 $ (1,364) $ (466) $ 2,862
----------- --------- --------- --------- ------------- -------------
----------- --------- --------- --------- ------------- -------------
</TABLE>
F-97
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
BALLY
BALLY BALLY BALLY CONSOLIDATING GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales................................ $ 12,947 $ 28,025 $ 28,311 $ -- $ (11,848) $ 57,435
Other................................ 143 751 335 671 (791) 1,109
----------- --------- --------- --------- ------------- -------------
13,090 28,776 28,646 671 (12,639) 58,544
----------- --------- --------- --------- ------------- -------------
Costs and expenses:
Cost of sales........................ 8,540 22,289 18,440 -- (11,512) 37,757
Selling, general and
administrative...................... 2,009 6,032 7,503 959 23 16,526
Provision for doubtful receivables... 12 360 619 -- -- 991
Unusual charges...................... -- -- 50 946 -- 996
----------- --------- --------- --------- ------------- -------------
10,561 28,681 26,612 1,905 (11,489) 56,270
----------- --------- --------- --------- ------------- -------------
Operating income (loss)................ 2,529 95 2,034 (1,234) (1,150) 2,274
Interest expense....................... -- 330 972 1,113 (750) 1,665
----------- --------- --------- --------- ------------- -------------
Income (loss) before income taxes...... 2,529 (235) 1,062 (2,347) (400) 609
Provision (benefit) for income taxes... 1,138 (36) 360 (309) (31) 1,122
----------- --------- --------- --------- ------------- -------------
Net income (loss)...................... $ 1,391 $ (199) $ 702 $ (2,038) $ (369) $ (513)
----------- --------- --------- --------- ------------- -------------
----------- --------- --------- --------- ------------- -------------
</TABLE>
F-98
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
BALLY BALLY BALLY CONSOLIDATING BALLY GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- ----------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 3,187 $ (435) $ 1,940 $ (1,364) $ (466) $ 2,862
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Depreciation and amortization................ 516 652 514 248 (490) 1,440
Provision for doubtful receivables........... 9 130 1,015 -- -- 1,154
Provision for inventory valuation............ -- -- 158 -- -- 158
Changes in operating assets and
liabilities................................. (3,927) (845) (6,574) (1,116) 1,667 (10,795)
Other, net..................................... -- -- -- -- (424) (424)
----------- ----------- --------- --------- ------ -------------
Cash provided by (used in) operating
activities................................ (215) (498) (2,947) (2,232) 287 (5,605)
Cash flows from investing activities:
Purchases of property, plant and equipment..... (386) (1,296) (550) -- -- (2,232)
Proceeds from disposals of property, plant and
equipment..................................... 11 399 -- -- -- 410
Other.......................................... -- -- -- -- (286) (286)
----------- ----------- --------- --------- ------ -------------
Cash used in investing activities.......... (375) (897) (550) -- (286) (2,108)
Cash flows from financing activities:
Net changes in lines of credit -- (388) 2,592 -- -- 2,204
Repayments of long-term debt................... -- (1) (396) (118) (1) (516)
Change in payables to/receivables from
affiliates.................................... -- (2,285) (65) 2,350 -- --
----------- ----------- --------- --------- ------ -------------
Cash provided by (used in) financing
activities................................ -- (2,674) 2,131 2,232 (1) 1,688
Effect of exchange rate changes on cash.......... 132 648 -- -- -- 780
----------- ----------- --------- --------- ------ -------------
Decrease in cash and cash equivalents............ (458) (3,421) (1,366) -- -- (5,245)
Cash and cash equivalents, beginning of period... 1,362 7,487 355 -- -- 9,204
----------- ----------- --------- --------- ------ -------------
Cash and cash equivalents, end of period......... $ 904 $ 4,066 $ 1,011 $ -- $ -- $ 3,959
----------- ----------- --------- --------- ------ -------------
----------- ----------- --------- --------- ------ -------------
</TABLE>
F-99
<PAGE>
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
BALLY BALLY BALLY CONSOLIDATING BALLY GAMING
WULFF WULFF GAMING, AND OTHER INTERNATIONAL,
AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC.
----------- --------- --------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 1,391 $ (199) $ 702 $ (2,038) $ (369) $ (513)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Depreciation an amortization.................. 233 905 426 355 (21) 1,898
Provision for doubtful receivables:........... 12 360 619 -- -- 991
Provision for inventory valuation:............ -- -- 538 -- -- 538
Changes in operating assets and
liabilities:................................. (581) (2,393) (1,072) (1,045) 792 (4,299)
Other, net:..................................... -- 7 (20) -- (359) (372)
----------- --------- --------- --------- ----- -------------
Cash provided by (used in) operating
activities:................................ 1,055 (1,320) 1,193 (2,728) 43 (1,757)
Cash flows from investing activities:
Purchase of property, plant and equipment....... (82) (2,428) (223) -- -- (2,733)
Proceeds from disposals of property, plant and
equipment...................................... -- 554 -- -- -- 554
Other........................................... -- 3 1 -- (43) (39)
----------- --------- --------- --------- ----- -------------
Cash used in investing activities........... (82) (1,871) (222) -- (43) (2,218)
Cash flows from financing activities:
Net change in lines of credit................... -- 885 (68) -- -- 817
Repayments of long-term debt.................... -- -- (104) (123) -- (227)
Change in payables to/receivables from
affiliates..................................... (1,787) 1,787 (2,851) 2,851 -- --
----------- --------- --------- --------- ----- -------------
Cash provided by (used in) financing
activities................................. (1,787) 2,672 (3,023) 2,728 -- 590
Effect of exchange rate changes on cash........... (37) (95) -- -- -- (132)
----------- --------- --------- --------- ----- -------------
Decrease in cash and cash equivalents............. (851) (614) (2,052) -- -- (3,517)
Cash and cash equivalents, beginning of period.... 1,353 3,240 933 -- -- 5,526
----------- --------- --------- --------- ----- -------------
Cash and cash equivalents, end of period.......... $ 502 $ 2,626 $ (1,119) $ -- $ -- $ 2,009
----------- --------- --------- --------- ----- -------------
----------- --------- --------- --------- ----- -------------
</TABLE>
F-100
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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>
Incorporation by Reference............................................... ii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 19
The Merger and Related Financings........................................ 28
Use of Proceeds.......................................................... 30
Dividend Policy.......................................................... 31
Capitalization........................................................... 31
Unaudited Pro Forma Condensed Combined Financial Information............. 33
Notes To Unaudited Pro Forma Condensed Combined Financial Information.... 37
Supplemental Analysis of Adjusted Operating Cash Flow.................... 42
Forecast of Operations................................................... 44
Summary of Significant Assumptions and Accounting Policies for the
Forecast................................................................ 47
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........................................................... 61
Business................................................................. 78
Gaming Regulation and Licensing.......................................... 97
Management............................................................... 107
Security Ownership of Certain Beneficial Holders and Management.......... 110
Certain Relationships and Related Transactions........................... 114
Description of Certain Other Indebtedness................................ 115
Description of the Senior Secured Notes.................................. 117
Description of Capital Stock............................................. 140
Material Federal Income Tax Consequences to Holders of Preferred Stock... 144
Underwriting............................................................. 147
Legal Matters............................................................ 148
Experts.................................................................. 148
Available Information.................................................... 149
Index to Financial Statements............................................ F-1
</TABLE>
[LOGO]
$140,000,000 % SENIOR SECURED NOTES DUE 2003
$15,000,000 15% NON-VOTING SENIOR
PAY-IN-KIND
SPECIAL STOCK, SERIES B
PROSPECTUS
JEFFERIES & COMPANY, INC.
WASSERSTEIN PERELLA SECURITIES, INC.
LADENBURG, THALMANN & CO. INC.
June , 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................ $ 16,897
Blue Sky fees and expenses......................................... 10,000
NASD fee........................................................... 2,000
NASDAQ listing fee................................................. 7,450
Legal fees and expenses............................................ 616,000
Accounting fees and expenses....................................... 375,000
Printing and engraving expenses.................................... 375,000
Transfer Agent and Registrar fees.................................. 5,000
Miscellaneous...................................................... 125,000
----------
Total.......................................................... $1,532,347
</TABLE>
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, has no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or
II-1
<PAGE>
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>
.*11 -- Form of Preferred Stock Underwriting Agreement.
<C> <C> <S>
1.2 -- Form of Senior Secured Note Underwriting Agreement (incorporated herein by reference to Alliance's
Form S-2, Registration Number 333-02147, and subsequent amendments thereto).
2.1 -- Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of October
18, 1995, as amended and restated (incorporated herein by reference to Alliance's Form S-4,
Registration Number 333-02799, and subsequent amendments thereto).
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 Special Stock and Qualifications, Limitations and Restrictions thereof of 15% Non-Voting
Senior Pay-in-Kind Stock, Series B (incorporated herein by reference to Alliance's Form S-4,
Registration Number 333-01527, and subsequent amendments thereto).
4.2 -- Form of Certificate evidencing 15% Non-Voting Senior Pay-in-Kind Special Stock, Series B
(incorporated herein by reference to Alliance's Form S-4, Registration Number 333-01527, and
subsequent amendments thereto).
4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan commitment with
Video Services, Inc. (incorporated herein by reference to Alliance's Form 8-K dated March 31, 1992).
4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and NationsBank of Texas,
N.A., as Trustee in respect of Alliance's 7 1/2% Convertible Subordinated Debentures due 2003
(incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990, and
subsequent amendments thereto).
4.5 -- Form of 7-1/2% Convertible Subordinated Debenture due 2003 (included in Exhibit 4.4, above).
4.6 -- Registration Rights Agreement, dated as of September 21, 1993, by and among United Gaming, Inc.,
Donaldson Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc. and L.H. Friend,
Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration
Number 33-72990, and subsequent amendments thereto).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- ----------------------------------------------------------------------------------------------------
<C> <C> <S>
4.7 -- Form of Senior Secured Note Indenture (including form of Note and Guarantee) (incorporated herein by
reference to Alliance's Form S-2, Registration Number 333-02147, and subsequent amendments thereto).
4.8 -- Form of Collateral Documents (incorporated herein by reference to Alliance's Form S-2, Registration
Number 333-02147, and subsequent amendments thereto).
4.9 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special
Rights of Special Stock and Qualifications, Limitations and Restrictions thereof of 11 1/2%
Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E (incorporated herein by reference
to Alliance's Schedule E-4 (Amendment No. 1) dated May 9, 1996.
4.10 -- Form of Indenture between Alliance and The Bank of New York, as Trustee in respect of Alliance's
7 1/2% Convertible Senior Subordinated Debentures due 2003 (incorporated herein by reference to
Alliance's Schedule E-4 (Amendment No. 1) dated May 9, 1996.
*5.1 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey as to legality of the Prefered Stock being
registered.
*8 -- Opinion of Milbank, Tweed, Hadley & McCloy.
10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video Services, Inc.
and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated March 31, 1992).
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).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- ----------------------------------------------------------------------------------------------------
<C> <C> <S>
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).
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).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- ----------------------------------------------------------------------------------------------------
<C> <C> <S>
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).
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).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- ----------------------------------------------------------------------------------------------------
<C> <C> <S>
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).
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
(incorporated herein by reference to Alliance's Form S-2, Registration Number 333-02147, and
subsequent amendments thereto).
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).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- ----------------------------------------------------------------------------------------------------
<C> <C> <S>
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 Amendement to Trademark License Agreement and Settlement Agreement, dated March 31, 1995, by
and between Bally Entertainment Corporation and Bally Gaming International, Inc. (incorporated
herein by reference to Exhibit I, included in BGII's Current Report on Form 8-K dated April 3,
1995).
10.59 -- 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>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------- ----------------------------------------------------------------------------------------------------
<C> <C> <S>
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).
10.77 -- Third Amendment to Trademark License Agreement and Settlement Agreement, dated May 10, 1996, by and
between Bally Entertainment Corporation, Alliance Gaming Corporation and BGII Acquisition Corp.
(incorporated herein by reference to Alliance's Form S-2, Registration Number 333-02147, and
subsequent amendments thereto).
*12 -- Statement re computation of ratios.
*23.1 -- Consent of KPMG Peat Marwick LLP.
*23.2 -- Consent of Coopers & Lybrand L.L.P.
*23.3 -- Consent of Schreck, Jones, Bernhard, Woloson and Godfrey (included in its opinion filed as Exhibit
5).
*23.4 -- Consent of Milbank, Tweed, Hadley & McCloy (included in its opinion filed as Exhibit 8).
24 -- Power of Attorney (included on signature page).
</TABLE>
- ------------------------
* Filed herewith.
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 May 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
- ------------------------------------------------------ --------------------------------- ----------------------
Chairman of the Board of
/s/ STEVE GREATHOUSE* Directors, President and Chief
------------------------------------------- Executive Officer (Principal May 24, 1996
Steve Greathouse Executive Officer)
Senior Vice President-Finance and
/s/ JOHN W. ALDERFER Administration, Chief Financial
------------------------------------------- Officer and Treasurer (Principal May 24, 1996
John W. Alderfer Financial and Accounting
Officer)
/s/ ANTHONY DICESARE*
------------------------------------------- Director and Executive Vice May 24, 1996
Anthony DiCesare President-Development
------------------------------------------- Director (Vice Chairman of the May 24, 1996
Dr. Craig Fields Board)
/s/ JOEL KIRSCHBAUM*
------------------------------------------- Director May 24, 1996
Joel Kirschbaum
</TABLE>
II-11
<PAGE>
<TABLE>
<C> <S> <C>
/s/ ALFRED H. WILMS*
------------------------------------------- Director May 24, 1996
Alfred H. Wilms
/s/ DAVID ROBBINS*
------------------------------------------- Director May 24, 1996
David Robbins
*By: /s/ JOHN W. ALDERFER
-----------------------------------------
John W. Alderfer
as attorney-in-fact
</TABLE>
II-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- --------------------------------------------------------------------------------------------- -----------
<C> <C> <S> <C>
<CAPTION>
.*11 -- Form of Preferred Stock Underwriting Agreement.
<C> <C> <S> <C>
1.2 -- Form of Senior Secured Note Underwriting Agreement (incorporated herein by reference to
Alliance's Form S-2, Registration Number 333-02147, and subsequent amendments thereto).
2.1 -- Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of
October 18, 1995, as amended and restated (incorporated herein by reference to Alliance's
Form S-4, Registration Number 333-02799, and subsequent amendments thereto).
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 Special Stock and Qualifications, Limitations and Restrictions thereof of
15% Non-Voting Senior Pay-in-Kind Stock, Series B (incorporated herein by reference to
Alliance's Form S-4, Registration Number 333-01527, and subsequent amendments thereto).
4.2 -- Form of Certificate evidencing 15% Non-Voting Senior Pay-in-Kind Special Stock, Series B
(incorporated herein by reference to Alliance's Form S-4, Registration Number 333-01527, and
subsequent amendments thereto).
4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan commitment
with Video Services, Inc. (incorporated herein by reference to Alliance's Form 8-K dated
March 31, 1992).
4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and NationsBank of
Texas, N.A., as Trustee in respect of Alliance's 7 1/2% Convertible Subordinated Debentures
due 2003 (incorporated herein by reference to Alliance's Form S-2, Registration Number
33-72990, and subsequent amendments thereto).
4.5 -- Form of 7-1/2% Convertible Subordinated Debenture due 2003 (included in Exhibit 4.4, above).
4.6 -- Registration Rights Agreement, dated as of September 21, 1993, by and among United Gaming,
Inc., Donaldson Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc. and L.H.
Friend, Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's Form S-2,
Registration Number 33-72990, and subsequent amendments thereto).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- --------------------------------------------------------------------------------------------- -----------
<C> <C> <S> <C>
4.7 -- Form of Senior Secured Note Indenture (including form of Note and Guarantee) (incorporated
herein by reference to Alliance's Form S-2, Registration Number 333-02147, and subsequent
amendments thereto).
4.8 -- Form of Collateral Documents (incorporated herein by reference to Alliance's Form S-2,
Registration Number 333-02147, and subsequent amendments thereto).
4.9 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Special Stock and Qualifications, Limitations and Restrictions thereof of
11 1/2% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E (incorporated
herein by reference to Alliance's Schedule E-4 (Amendment No. 1) dated May 9, 1996.
4.10 -- Form of Indenture between Alliance and The Bank of New York, as Trustee in respect of
Alliance's 7 1/2% Convertible Senior Subordinated Debentures due 2003 (incorporated herein by
reference to Alliance's Schedule E-4 (Amendment No. 1) dated May 9, 1996.
*5.1 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey as to legality of the Prefered Stock
being registered.
*8 -- Opinion of Milbank, Tweed, Hadley & McCloy.
10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video Services,
Inc. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated March
31, 1992).
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- --------------------------------------------------------------------------------------------- -----------
<C> <C> <S> <C>
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).
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ---------------------- --------------------------------------------------------------------------------------------- -----------
<C> <C> <S> <C>
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).
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).
</TABLE>
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<TABLE>
<CAPTION>
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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).
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).
</TABLE>
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<TABLE>
<CAPTION>
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10.54 -- Agreement, dated March 31, 1995 between Anthony DiCesare and Alliance Gaming Corporation
(incorporated herein by reference to Alliance's Form S-2, Registration Number 333-02147, and
subsequent amendments thereto).
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 Amendement to Trademark License Agreement and Settlement Agreement, dated March 31,
1995, by and between Bally Entertainment Corporation and Bally Gaming International, Inc.
(incorporated herein by reference to Exhibit I, included in BGII's Current Report on Form 8-K
dated April 3, 1995).
10.59 -- 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).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
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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).
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).
10.77 -- Third Amendment to Trademark License Agreement and Settlement Agreement, dated May 10, 1996,
by and between Bally Entertainment Corporation, Alliance Gaming Corporation and BGII
Acquisition Corp. (incorporated herein by reference to Alliance's Form S-2, Registration
Number 333-02147, and subsequent amendments thereto).
*12 -- Statement re computation of ratios.
*23.1 -- Consent of KPMG Peat Marwick LLP.
*23.2 -- Consent of Coopers & Lybrand L.L.P.
*23.3 -- Consent of Schreck, Jones, Bernhard, Woloson and Godfrey (included in its opinion filed as
Exhibit 5).
*23.4 -- Consent of Milbank, Tweed, Hadley & McCloy (included in its opinion filed as Exhibit 8).
24 -- Power of Attorney (included on signature page).
</TABLE>
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* Filed herewith.
<PAGE>
Alliance Gaming Corporation
15% Non-Voting Senior Pay-in-Kind
Special Stock, Series B
UNDERWRITING AGREEMENT
June __, 1996
JEFFERIES & COMPANY, INC.
LADENBURG, THALMANN & CO. INC.
c/o Jefferies & Company, Inc.
11100 Santa Monica Boulevard
Los Angeles, California 90029
Ladies and Gentlemen:
Subject to the terms and conditions herein contained, Alliance Gaming
Corporation, a Nevada corporation (the "Company"), proposes to issue and sell to
Jefferies & Company, Inc. ("Jefferies") and Ladenburg, Thalmann & Co. Inc.
("Ladenburg" and together with Jefferies, the "Underwriters") __________ shares
of its 15% Non-Voting Senior Pay-in-Kind Special Stock, Series B ("Preferred
Stock"), par value $10.00 per share (the "Firm Shares"). The Company also
proposes to sell to the Underwriters up to an additional __________ shares of
Preferred Stock (the "Additional Shares" and, together with the Firm Shares, the
"Shares"), if requested by the Underwriters as provided in Sections 2 and 3
hereof.
Capitalized terms used herein without definition shall have the
meanings ascribed thereto in the Prospectus (as hereinafter defined). Unless
the context otherwise requires, all references herein to "the Company" shall be
deemed to give effect to the acquisition by the Company or its subsidiaries
(collectively, the "Subsidiaries"), as applicable, of all of the capital stock
of Bally Gaming International, Inc. ("BGII") pursuant to the Agreement and Plan
of Merger (the "Merger Agreement"), dated October 18, 1995, as amended and
restated prior to the date hereof, among the Company, BGII Acquisition Corp. and
BGII at or prior to consummation of the issuance of the Shares. All references
herein to the "Subsidiaries" shall be deemed to include BGII and its
subsidiaries unless the context otherwise requires. Concurrently with the
issuance of the Shares, the Company is proposing to (i) issue, under an
indenture (the "Indenture") by and among the Company, the
<PAGE>
guarantors named therein (the "Guarantors") and United States Trust Company of
New York, as trustee, and sell to certain underwriters pursuant to an
underwriting agreement (the "Debt Underwriting Agreement"), to be dated as of
the date hereof, by and among the Company, the Guarantors and each of Jefferies
and Ladenburg, an aggregate of $140,000,000 principal amount of ___% Senior
Secured Notes due 2003 (the "Notes") and (ii) _____ shares of its Common Stock,
$.10 par value per share (the "Common Stock"), pursuant to a letter agreement
(the "Subscription Agreement") by and between the Company and Banque Indosuez
dated March 22, 1996, as amended, prior to the date hereof (the "Private
Placement"). In addition, at such time $____ aggregate principal amount of
Alliance's 7 1/2% Convertible Senior Subordinated Debentures due 2003 (the "New
Convertible Debentures") issued in connection with Alliance's exchange offer
(the "Exchange Offer") consummated on June __, 1996, will automatically be
converted (the "Automatic Conversion") into ___ shares of Common Stock and ____
shares of Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E,
$.10 par value per share (the "Junior Preferred Stock").
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission"), in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated pursuant thereto
(collectively, the "Act"), a registration statement on Form S-2 (No. 333-02145)
with respect to the Shares, including a preliminary prospectus, subject to
completion, relating to the Shares. The registration statement, as amended at
the time it becomes effective (including a registration statement (if any) filed
pursuant to Rule 462(b) under the Act, all financial statements and exhibits and
the information, if any, contained in a prospectus that is deemed to be a part
of the registration statement at the time of its effectiveness pursuant to Rule
430A or Rule 434 under the Act) and including all documents incorporated by
reference therein pursuant to Item 12 of Form S-2 under the Act, is hereinafter
referred to as the "Registration Statement," and the prospectus constituting a
part of the Registration Statement, in the form first furnished to the
Underwriters and used to confirm sales of the Shares and including all documents
incorporated by reference therein pursuant to Item 12 of Form S-2 under the Act,
is hereinafter referred to as the "Prospectus."
2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the
representations and warranties contained in this Agreement, and subject to the
terms and conditions contained in this Agreement, the Company agrees to issue
and sell to the Underwriters, and each Underwriter agrees, severally and not
jointly, to purchase from the Company the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto, plus such number, if
any, as they may individually become obligated to purchase pursuant to Section 9
hereof at the price
2
<PAGE>
per share set forth in the table on the cover page of the Prospectus under the
heading "Proceeds to the Company" (the "Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell to the Underwriters, and the Underwriters shall have a right to
purchase, severally and not jointly, up to ________ Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased, as provided
in Section 3 hereof solely for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. If any Additional Shares are
to be purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Company the number of Additional Shares (subject to such adjustments to
eliminate fractional shares as you may determine) which bears the same
proportion to the total number of Additional Shares to be purchased from the
Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares.
3. DELIVERY AND PAYMENT. Delivery to you of and payment for the
Firm Shares shall be made at 10:00 A.M., New York City time, on the third or
fourth business day, unless otherwise permitted by the Commission pursuant to
Rule 15c6-1 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), (such time and date being referred to as the "Closing Date") following
the date of the initial public offering of the Shares as advised by Jefferies to
the Company, at the offices of Skadden, Arps, Slate, Meagher & Flom, 919 Third
Avenue, New York, New York, 10022, or such other place as you shall reasonably
designate. The Closing Date and the location of delivery of and the form of
payment for the Firm Shares may be varied by agreement among Jefferies and the
Company.
Delivery to the Underwriters of any payment for any Additional Shares
to be purchased by the Underwriters shall be made at such place as Ladenburg
shall designate, at 10:00 A.M., New York City time, on such date or dates (each,
an "Option Closing Date"), which may be the same as the Closing Date but shall
in no event be earlier than the Closing Date, as shall be specified in a written
notice from Jefferies to the Company of the Underwriters' determination to
purchase a certain number, specified in said notice, of Additional Shares. Such
notice may be given at any time within 30 days after the date of this
Agreement, PROVIDED that no Option Closing Date shall be earlier than two
business days nor later than ten business days after such notice. Any Option
Closing Date and the location and delivery of any payment for any Additional
Shares may be varied by agreement between you and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business
3
<PAGE>
days prior to the Closing Date, or, if applicable, each Option Closing Date, and
shall be made available to you at the offices of Jefferies (or at such other
place as shall be acceptable to you) for inspection not later than 10:00 A.M.,
New York City time, no later than the business day next preceding the Closing
Date or, if applicable, such Option Closing Date. Certificates in definitive
form evidencing the Shares shall be delivered to you on the Closing Date or, if
applicable, such Option Closing Date, with any transfer taxes payable upon
initial issuance thereof duly paid by the Company, for your respective accounts
against payment of the Purchase Price by check or checks payable in, or wire
transfer of, same day funds to the order of the Company.
4. AGREEMENTS OF THE COMPANY. The Company agrees with each of you
that:
(a) It will, if the Registration Statement has not heretofore become
effective under the Act, and, if necessary or required by law, file an
amendment to the Registration Statement or, if necessary pursuant to Rule
430A under the Act, a post-effective amendment to the Registration
Statement, in each case as soon as practicable after the execution and
delivery of this Agreement, and will use its best efforts to cause the
Registration Statement or such post-effective amendment to become effective
at the earliest possible time. If the Registration Statement has become
effective and the Company, omitting from the Prospectus certain information
in reliance upon Rule 430A of the Act, elects not to file a post-effective
amendment pursuant to Rule 430A of the Act, it will file the form of
Prospectus required by Rule 424(b) of the Act within the time period
specified by Rule 430A and Rule 424(b) of the Act. The Company will
otherwise comply fully and in a timely manner with the applicable
provisions of Rule 424 and Rule 430A under the Act.
(b) It will advise you promptly and, if requested by any of you,
confirm such advice in writing, (i) when the Registration Statement has
become effective, if and when the Prospectus is sent for filing pursuant to
Rule 424 under the Act and when any post-effective amendment to the
Registration Statement becomes effective, (ii) of the receipt of any
comments from the Commission or any state securities commission or any
other regulatory authority that relate to the Registration Statement or
requests by the Commission or any state securities commission or any other
regulatory authority for any amendment or supplements to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement, or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of
4
<PAGE>
any proceeding for such purpose by the Commission or any state securities
commission or other regulatory authority, and (iv) of the happening of any
event during the period referred to in paragraph (d) below which makes any
statement of a material fact made in the Registration Statement (as amended
or supplemented from time to time) untrue or which requires the making of
any additions to or changes in the Registration Statement (as amended or
supplemented from time to time) in order to make the statements therein not
misleading or that makes any statement of a material fact made in the
Prospectus (as amended or supplemented from time to time) untrue or which
requires the making of any addition to or change in the Prospectus (as
amended or supplemented from time to time) in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Company shall use its best efforts to prevent the issuance
of any stop order or order suspending the qualification or exemption of the
Shares under any Federal or state securities or Blue Sky laws, and, if at
any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, or any state securities
commission or other regulatory authority shall issue an order suspending
the qualification or exemption of the Shares under any state securities or
Blue Sky laws, the Company shall use every effort to obtain the withdrawal
or lifting of such order at the earliest possible time.
(c) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period in your reasonable judgment as
a prospectus is required by the Act, the Exchange Act or any Blue Sky or
state securities laws to be delivered in connection with sales of the
Shares by an Underwriter or a dealer, it will furnish to each Underwriter
and each dealer, without charge, as many copies of the Prospectus (and of
any amendment or supplement to the Prospectus) as such Underwriter or
dealer may reasonably request.
(d) If during the period during which in your reasonable judgment you
are required to deliver a prospectus in connection with offers or sales of
Shares by you, any event shall occur as a result of which it becomes
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing as of the
date the Prospectus is delivered to an offeree or a purchaser, not
misleading, or if it is necessary to amend or supplement the Prospectus to
comply with applicable law, it will promptly prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not,
in the light of the circumstances existing as of the date the Prospectus is
so delivered, be misleading, and will comply with applicable law and will
promptly notify you
5
<PAGE>
of such event and amendment or supplement and furnish to you without charge
such number of copies thereof as you may reasonably request.
(e) It will mail and make generally available to its security holders
as soon as practicable and for the time period specified by Rule 158 under
the Act, a consolidated earning statement which shall satisfy the
provisions of Section 11(a) of the Act and Rule 158 thereunder and advise
you in writing when such statement has been made available.
(f) It will furnish to each of the Underwriters, without charge, two
(2) signed copies (plus one additional signed copy to your legal counsel)
of the Registration Statement, as first filed with the Commission, and of
each amendment or supplement to it, including each post-effective amendment
and all exhibits filed therewith or incorporated by reference therein, and
will furnish to each of the Underwriters, such number of conformed copies
of the Registration Statement as so filed and of each amendment to it,
including each post-effective amendment, but without exhibits, as you may
reasonably request.
(g) It will not file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or
make any amendment or supplement to the Prospectus, of which you shall not
previously have been advised and provided a copy of within two business
days prior to the filing thereof or to which you shall reasonably object,
and it will prepare and file with the Commission, promptly upon your
reasonable request, any amendment or supplement to the Registration
Statement or amendment or supplement to the Prospectus which in your sole
judgment may be necessary in connection with the distribution of the Shares
by you, and will use its best efforts to cause the same to become effective
as promptly as possible.
(h) Prior to any public offering of the Shares, it will cooperate
with you and your counsel in connection with the registration or
qualification of the Shares for offer and sale by the Underwriters under
the state securities or Blue Sky laws of such jurisdictions as you may
request. The Company will continue such qualification in effect so long as
required by law for distribution of the Shares and will file such consents
to service of process or other documents as may be necessary in order to
effect such registration or qualification (PROVIDED, that the Company shall
not be obligated to qualify as a foreign corporation or general
partnership, as the case may be, in any jurisdiction in which it is not so
qualified or to take any action that would subject it to general consent to
service of process in any jurisdiction in which it is not now so subject).
6
<PAGE>
(i) It will timely complete all required filings and otherwise comply
fully in a timely manner with all provisions of the Exchange Act and will
file promptly all reports and any definitive proxy or information
statements required to be filed by the Company with the Commission pursuant
to Sections 13(a), 13(c), 14(a) or 15(d) of the Exchange Act subsequent to
the date of the Prospectus and for so long as the delivery of a prospectus
is required in connection with the offer or sale of Shares.
(j) So long as any of the Shares are outstanding, it will furnish to
you, without charge, a copy of each report or other publicly available
information of the Company furnished to holders of the Shares or filed with
the Commission, whether or not required by law, and such other publicly
available information concerning the Company or the Subsidiaries as you may
reasonably request, at the same time as such reports or other information
are furnished to such holders.
(k) During the period beginning on the date of this Agreement and
continuing to and including the Closing Date and each Option Closing Date,
if applicable, except as described in the Prospectus with respect to the
Transaction and obtaining working capital revolving facilities (the
"Working Capital Facilities") at Gaming and Wulff (providing for up to
$40 million borrowing availability, in aggregate), there will be no
transactions entered into by the Company or any of the Subsidiaries, which
are material with respect to the Company or any of the Subsidiaries, taken
individually or as a whole, and there will be no dividend or distribution
of any kind declared, paid or made by the Company on any class of its
capital stock.
(l) It will use the proceeds from the sale of the Shares in the
manner described in the Prospectus under the caption "Use of Proceeds."
(m) It will cause the Preferred Stock to be quoted on the Nasdaq
National Market System ("Nasdaq NMS") and will use its best efforts to
maintain such quotation while any of the Shares are outstanding.
(n) It will use its best efforts to do and perform all things
required to be done and performed under this Agreement by it prior to or
after the Closing Date and each Option Closing Date, if applicable, and to
satisfy all conditions precedent to the delivery of the Shares.
5. PAYMENT OF EXPENSES. The Company agrees with you that, whether
or not the transactions contemplated hereby are consummated or this Agreement is
terminated, it will pay and be responsible for all costs, charges, liabilities,
expenses, fees and taxes incurred in connection with or incident to (i) the
7
<PAGE>
preparation, printing (including word processing), filing, distribution and
delivery under the Act of the Registration Statement (including financial
statements and exhibits), each preliminary prospectus, the Prospectus and all
amendments and supplements thereto, (ii) the registration with the Commission
and the issuance and delivery of the Shares, (iii) the preparation, printing
(including word processing), execution, distribution and delivery of the Merger
Agreement, this Agreement, the Indenture, the Notes, the Debt Underwriting
Agreement, the Security and Pledge Agreement (as defined in the Indenture), the
Subscription Agreement, the Purchase Agreement pursuant to which Alliance
Holding Company will purchase all the shares of Bally Wulff Automaten GmbH and
Bally Wulff Vertriebs GmbH (the "Wulff Purchase Agreement") and such other
documents and agreements entered into or to be entered into in connection with
the Transaction (collectively, the "Operative Documents"), the Preliminary and
Final Blue Sky Memoranda, and all other agreements, memoranda, reports,
correspondence and other documents printed, distributed and delivered in
connection with the offering of the Shares, (iv) the registration or
qualification of the Shares for offer and sale under state securities or Blue
Sky laws of the jurisdictions pursuant to paragraph 4(h) above (including, in
each case, the fees and disbursements of counsel for the Underwriters relating
to such registration or qualification and any memoranda relating thereto and any
filing fees in connection therewith), (v) furnishing such copies of the
Registration Statement (including exhibits), Prospectus and preliminary
prospectus, and all amendments and supplements to any of them, including any
document incorporated by reference therein, as may be reasonably requested by
the Underwriters or by dealers, (vi) the filing, registration and clearance with
the National Association of Securities Dealers, Inc. (the "NASD") of the
Underwriters' compensation in connection with the offering of the Shares
(including, without limitation, any filing fees in connection therewith), (vii)
the fees charged by securities ratings services for rating the Shares, (viii)
the listing of the Shares on the Nasdaq NMS, (ix) distributing the terms of
agreement relating to the organization of the underwriting syndicate and selling
group to the members thereof by mail, telex or other means of communication, (x)
any "qualified independent underwriter" as required by Schedule E of the Bylaws
of the NASD (including fees and disbursements of counsel for such qualified
independent underwriter), and (xi) the performance by the Company and each of
the Subsidiaries of its other obligations under this Agreement and each of the
other Operative Documents, including (without limitation) the fees and expenses
of the transfer agent, the costs of its personnel and other internal costs, the
cost of printing and engraving the certificates representing the Shares, and all
expenses and taxes incident to the sale and delivery of the Shares to you,
including, without limitation, filing and recording fees and expenses and fees
and expenses of counsel for the Company for providing such opinions as you may
reasonably request. The Company's obligations pursuant to this Section 5 shall
be in addition to any liability or obligation the Company may otherwise have to
the Underwriters or any other person.
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6. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to each Underwriter that:
(a) The Company meets the requirements for the use of Form S-2 under
the Act, and, when the Registration Statement became or becomes effective,
including on the date of any post-effective amendment, at the date of the
Prospectus (if different) and at the Closing Date and at each Option
Closing Date, as the case may be, the Registration Statement will comply in
all material respects with the provisions of the Act, and will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading; the Prospectus and each supplement or amendment thereto
will not, at the date of the Prospectus, at the date of any such supplement
or amendment and at the Closing Date and at each Option Closing Date, as
the case may be, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties contained in
this paragraph (a) shall not apply to statements in or omissions from the
Registration Statement or the Prospectus (or any supplement or amendment to
them) made in reliance upon and in conformity with information relating to
any Underwriter furnished to the Company in writing by or on behalf of such
Underwriter through Ladenburg expressly for use therein. The Company
acknowledges for all purposes under this Agreement (including this
paragraph and Section 7 hereof) that the statements set forth in [the last
paragraph of the cover page of the Prospectus and the second paragraph of
the section entitled "Underwriting" of the Prospectus] constitute the only
written information furnished to the Company by or on behalf of any
Underwriter through Jefferies expressly for use in the Registration
Statement, the preliminary prospectus or the Prospectus (or any amendment
or supplement to any of them) and that the Underwriters shall not be deemed
to have provided any information (and therefore are not responsible for any
statements or omissions) pertaining to any arrangement or agreement with
respect to any party other than the Underwriters. No contract or document
of a character required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement
has not been described and filed as required.
(b) The documents incorporated by reference in the Prospectus
pursuant to Item 12 of the Form S-2 under the Act, at the time they were
filed with the Commission, complied in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission there-
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under (the "Exchange Act Regulations"), and, when read together and with
the other information in the Prospectus, at the time the Registration
Statement becomes effective and at all times subsequent thereto up to the
Closing Date, will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading.
(c) Each preliminary prospectus and the Prospectus, filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 or 430A under the Act, and each
Registration Statement filed pursuant to Rule 462(b) under the Act, if any,
complied when so filed in all material respects with the Act.
(d) No action has been taken and no statute, rule, regulation or
order has been enacted, adopted or issued by any governmental body, agency
or official which prevents the issuance of the Shares, suspends the
effectiveness of the Registration Statement, prevents or suspends the use
of any preliminary prospectus or suspends the sale of the Shares in any
jurisdiction referred to in Section 4(h) hereof; no injunction, restraining
order or order of any nature by any Federal or state court of competent
jurisdiction has been issued with respect to the Company or any of the
Subsidiaries which would prevent or suspend the issuance or sale of the
Shares, the effectiveness of the Registration Statement, or the use of any
preliminary prospectus or Prospectus or in any jurisdiction referred to in
Section 4(h) hereof; no action, suit or proceeding before any court or
arbitrator or any governmental body, agency or official, domestic or
foreign, is pending against or, to the best knowledge of the Company, after
due inquiry, threatened against, the Company or any of the Subsidiaries
which, if adversely determined, could interfere with or materially
adversely affect the issuance of the Shares or in any manner draw into
question the validity of this Agreement any of the other Operative
Documents or this Agreement; and the Company and each of the Subsidiaries
has complied in all material respects with every request (unless otherwise
withdrawn) of the Commission, or any securities authority or agency of any
jurisdiction for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(e) The Shares have been duly and validly authorized and, when issued
and delivered to the Underwriters against payment therefor as provided by
this Agreement, will be validly issued, fully paid and nonassessable, and
the issuance of such Shares will not be subject to any preemptive or
similar rights.
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(f) This Agreement has been duly and validly authorized and duly
executed and delivered by the Company and constitutes a legal, valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws affecting
creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law
or in equity) and except to the extent that indemnification from liability
in connection with the Federal securities laws or the basis of allocation
contained in contribution provisions herein may be unenforceable.
(g) Each of the other Operative Documents has been duly and validly
authorized by each of the Company and the Subsidiaries, as applicable, and
on the Closing Date and on each Option Closing Date, as the case may be,
will have been duly executed and delivered by each of the Company and the
Subsidiaries, as applicable, in accordance with its respective terms and
each will be a legal, valid and binding agreement of the Company and each
of the Subsidiaries, as applicable, enforceable against the Company and
each of the Subsidiaries, as applicable, in accordance with its respective
terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and similar laws affecting creditors'
rights and remedies generally and to general principles of equity
(regardless of whether enforcement is sought in a proceeding at law or in
equity).
(h) Each of the Operative Documents and each of the elements of the
Transaction described in the Prospectus conforms in all material respects
to the description thereof contained in the Prospectus.
(i) The Company and each of the Subsidiaries, as applicable, has all
the requisite corporate or partnership power to execute, deliver and
perform its obligations under each of the Operative Documents to which it
is a party, and to authorize, issue and sell the Shares. The execution and
delivery by the Company and each of the Subsidiaries of the Operative
Documents to which it is a party, the issuance and sale of the Shares, the
performance of the Operative Documents and the consummation of the
transactions contemplated hereby and thereby will not conflict with or
result in a breach or violation of (i) any of the respective charters,
bylaws or partnership agreements, as the case may be, of the Company or any
of the Subsidiaries, (ii) any of the terms or provisions of, or constitute
a default or cause an acceleration of any obligation under, or result in
the imposition or creation of (or the obligation to create or impose), any
security interest, mortgage, pledge, claim, lien, encumbrance or adverse
interest of any nature (each, a "Lien") other than Liens permitted under
the Indenture, with respect
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to any obligation, bond, agreement, note, debenture or other evidence of
indebtedness or any indenture, mortgage, deed of trust or other agreement,
lease or instrument to which the Company or any of the Subsidiaries is a
party or by which they or any of them are bound, or to which any of the
properties or assets of the Company or any of the Subsidiaries is or may be
subject, or (iii) any Federal, state or local law, rule, administrative
regulation or ordinance or order of any court or governmental agency, body
or official having jurisdiction over the Company or any of the Subsidiaries
or any of their properties, except, in the case of clause (ii) or (iii),
for such conflicts, breaches, violations, defaults or Liens that could not
reasonably be expected to have, singly or as the aggregate, a material
adverse effect on the properties, plans, business, results of operations,
general affairs, management, condition (financial or otherwise), prospects,
or business affairs of the Company or the Subsidiaries, (a "Material
Adverse Effect").
(j) No authorization, approval, consent or order of, or filing with,
any court or governmental body, agency or official, including from the
Nevada State Gaming Control Board and the Nevada Gaming Commission
(collectively, the "Nevada Gaming Authorities"), the Video Gaming Division
of the Gaming Enforcement Section of the Office of State Police within the
Department of Public Safety and Corrections of the State of Louisiana (the
"Louisiana Gaming Authorities"), the Mississippi Gaming Commission (the
"Mississippi Gaming Authorities"), the New Jersey Casino Control Commission
(the "New Jersey Gaming Authorities") (collectively, the "Gaming
Authorities"), is necessary in connection with the issuance of the Shares
and the other transactions contemplated by this Agreement and the other
Operative Documents, including the Transaction, except such as may be
required by the NASD or have been obtained and under the Nevada Gaming
Control Act (the "Nevada Gaming Laws"), the Louisiana Video Draw Poker
Devices Control Act (the "Louisiana Act"), the Louisiana Riverboat Economic
Development Act (together with the Louisiana Act, the "Louisiana Gaming
Laws"), the Mississippi Gaming Control Act (the "Mississippi Gaming Laws"),
the New Jersey Gaming Control Act (the "New Jersey Gaming Laws")
(collectively, the "Gaming Laws"), the Act, the TIA or state securities or
Blue Sky laws or regulations. Neither the Company, any Subsidiary nor any
of their affiliates is presently doing business with the government of Cuba
or with any person or affiliate located in Cuba.
(k) The Company and each of the Subsidiaries has been duly
incorporated and the Company and each of the Subsidiaries is validly
existing as a corporation or general partnership, as the case may be, under
the laws of its jurisdiction of incorporation and has the requisite
corporate power and authority to carry on its business as it is currently
being conducted or is
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proposed to be conducted (as discussed in the Prospectus) and to own, lease
and operate its properties, as applicable, and is duly qualified as a
foreign corporation, authorized to do business and is in good standing in
each jurisdiction (each, a "Foreign Jurisdiction") where the operation,
ownership or leasing of property or the conduct of its business requires
such qualification, except where the failure to be so qualified could not
reasonably be expected to have, singly or in the aggregate, a Material
Adverse Effect;
(l) The consolidated capitalization as of December 31, 1995 of the
Company and BGII is as set forth in the Prospectus, under the caption
"Capitalization" in the respective columns "Alliance Actual" and "BGII
Actual", and the consolidated capitalization of the Company will be as set
forth in the column "The Company Pro Forma As Adjusted." All of the issued
and outstanding shares of capital stock of the Company and each of the
Subsidiaries have been duly authorized and are, and, in the case of Common
Stock or Junior Preferred Stock to be issued upon the Automatic Conversion,
will be, validly issued, fully paid and nonassessable. On the Closing Date
and at each Option Closing Date, if applicable, except as disclosed in the
Prospectus and for directors' qualifying shares, the Company will own all
of the outstanding capital stock of each Subsidiary, including BGII and its
direct and indirect subsidiaries, free and clear of any Liens, restrictions
on transfer, agreements, voting trusts or other defects of title
whatsoever, other than as may be imposed (i) by law or by any of the Gaming
Authorities an (ii) in the organization documents of any Subsidiary and
(iii) such stock pledges granted by Alliance in connection with the
issuance of the Notes; the issuance of the shares of capital stock by the
Company upon conversion of the New Convertible Debentures will not be
subject to preemptive or other similar rights; except as disclosed in the
Prospectus, there are no outstanding subscriptions, rights, warrants,
options, calls, convertible or exchangeable securities or commitments of
sale related to or entitling any person to purchase or otherwise to acquire
any shares of the capital stock of, or other ownership interests in, the
Company or any Subsidiary.
(m) Neither the Company nor any of the Subsidiaries is (i) in
violation of its respective charter, bylaws or partnership agreements or
(ii) in default in the performance of any obligation, bond, agreement,
debenture, note or any other evidence of indebtedness or any indenture,
mortgage, deed of trust or other contract, lease or other instrument to
which the Company or any of the Subsidiaries is a party or by which any of
them is bound, or to which any of the property or assets of the Company or
any of the Subsidiaries is subject, except, in the case of clause (ii), for
such defaults that could not reasonably be expected to have a Material
Adverse Effect.
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(n) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, pending against or
affecting the Company or any of the Subsidiaries or any of their respective
assets or properties, which is required to be disclosed in the Registration
Statement or the Prospectus, or which could have a Material Adverse Effect,
or which could materially and adversely affect the performance by the
Company or any of the Subsidiaries of its obligations pursuant to this
Agreement and the Operative Documents or the transactions contemplated
hereby or thereby, in each case except as disclosed in the Prospectus, and,
to the best knowledge of the Company, after due inquiry, no such action,
suit or proceeding is contemplated or threatened.
(o) (i) Neither the Company nor any of the Subsidiaries is in
violation of any Federal, state or local laws and regulations relating to
pollution or protection of human health or the environment (including,
without limitation, ambient air, surface water, ground water, land surface
or subsurface strata), including, without limitation, laws and regulations
relating to emissions, discharges, releases or threatened releases of toxic
or hazardous substances, materials or wastes, or petroleum and petroleum
products ("Materials of Environmental Concern"), or otherwise relating to
the protection of human health and safety, or the storage, disposal,
transport or handling of Materials of Environmental Concern (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations, except
to the extent that any such violation could not have a Material Adverse
Effect or otherwise require disclosure in the Prospectus; and (ii) (A)
neither the Company nor any of the Subsidiaries has received any
communication (written or oral), whether from a governmental authority or
otherwise, alleging any such violation or noncompliance, and there are no
circumstances, either past, present or that are reasonably foreseeable,
that may lead to such violation in the future, (B) there is no pending or
threatened claim, action, investigation or notice (written or oral) by any
person or entity alleging potential liability for investigatory, cleanup,
or governmental responses costs, or natural resources or property damages,
or personal injuries, attorney's fees or penalties relating to (x) the
presence, or release into the environment, of any Material of Environmental
Concern at any location owned or operated by the Company or any Subsidiary,
now or in the past, or (y) circumstances forming the basis of any
violation, or alleged violation, of any Environmental Law (collectively,
"Environmental Claims") that could have a Material Adverse Effect or
otherwise require disclosure in the Prospectus, and (C) there are no past
or present actions, activities, circumstances, conditions, events or
incidents, that could form the basis of any Environmental Claim against the
Company or any Subsidiary or against any person or entity whose
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liability for any Environmental Claim the Company or any Subsidiary has
retained or assumed either contractually or by operation of law.
(p) Neither the Company nor any of the Subsidiaries is in violation
of any Federal, state or local law relating to discrimination in the
hiring, promotion or pay of employees nor any applicable wage or hour laws,
except as could not have a Material Adverse Effect. There is (A) no
material unfair labor practice complaint pending against the Company or any
Subsidiary or, to the best knowledge of the Company, after due inquiry,
threatened against any of them, before the National Labor Relations Board
or any state or local labor relations board, and no material grievance or
material arbitration proceeding arising out of or under any collective
bargaining agreement is so pending against the Company or any Subsidiary
or, to the best knowledge of the Company, after due inquiry, threatened
against any of them, and (B) no labor dispute in which the Company or any
Subsidiary is involved nor, to the best knowledge of the Company, after due
inquiry, is any labor dispute imminent, other than routine disciplinary and
grievance matters. The Company and the Subsidiaries are in compliance in
all material respects with all applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, and the regulations and
published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA has occurred with respect to any "pension plan" (as
defined in ERISA established or maintained by the Company or any of the
Subsidiaries or with respect to which the Company or the Subsidiaries are
obligated to make contributions. The Company and the Subsidiaries have not
incurred and do not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "employee benefit
plan" as such term is defined in Section 3(3) of ERISA or (ii) Sections
4971, 4975, or 4980B of the Internal Revenue Code of 1986, as amended (the
"Code"). Each "employee benefit plan" established or maintained by the
Company and the Subsidiaries that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the
loss of such qualification.
(q) The Company and each of the Subsidiaries has good and marketable
title, free and clear of all Liens (except for Permitted Liens (as defined
in the Indenture)), to all property and assets described in the
Registration Statement as being owned by it and such properties and assets
are in the condition and suitable for use as so described. All leases to
which any of the Company or the Subsidiaries is a party are valid and
binding and no default has occurred and is continuing thereunder (in the
case of defaults by persons other than the Company and the Subsidiaries, to
the best knowledge of the Company and the Subsidiaries, after due inquiry),
and the
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Company and the Subsidiaries enjoy peaceful and undisturbed possession
under all such leases to which any of them is a party as lessee with such
exceptions as do not interfere with the use made or proposed to be made by
the Company or such Subsidiary.
(r) The Company and the Subsidiaries maintain insurance at least in
such amounts and covering at least such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar businesses
in similar industries.
(s) KPMG Peat Marwick LLP, the firm of accountants that has audited
or shall certify the applicable consolidated financial statements and
supporting schedules of the Company and the Subsidiaries filed or to be
filed with the Commission as part of the Registration Statement and the
Prospectus, are independent public accountants with respect to the Company
and the Subsidiaries, as required by the Act. Coopers & Lybrand L.L.P.,
the firm of accountants that has audited the applicable historical
consolidated financial statements and supporting schedules of BGII and its
subsidiaries filed with the Commission as part of the Registration
Statement and the Prospectus for the period commencing January 1, 1992 to
present and Ernst & Young, the firm of accountants that has audited the
applicable historical consolidated financial statements and supporting
schedules of BGII and its subsidiaries for its fiscal year 1991, are each
independent public accountants with respect to BGII and its subsidiaries,
as required by the Act. The historical consolidated financial statements
of the Company and BGII, together with related schedules and notes, set
forth in the Prospectus and the Registration Statement, comply as to form
in all material respects with the requirements of the Act and fairly
present in all material respects in accordance with GAAP (consistently
applied except as otherwise specified therein) the consolidated financial
position of the Company and BGII, as applicable, at the respective dates
indicated and the results of their operations and their cash flows, as
applicable, for the respective periods indicated. The PRO FORMA financial
statements contained in the Registration Statement (including the financial
statements under the captions "Unaudited Pro Forma Condensed Financial
Statements" and "Supplemental Analysis of Adjusted Operating Cash Flow")
have been prepared on a basis consistent with such historical statements
and give effect to assumptions made on a reasonable basis and fairly
present the historical and proposed transactions contemplated to be
addressed by the preliminary prospectuses, the Prospectus, the Operative
Documents and this Agreement. The historical ratio of deficit to fixed
charges of the Company and the PRO FORMA ratio of earnings to fixed charges
of the Company included in the Prospectus under the caption "Selected
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Historical Information of Alliance" have been calculated in compliance with
Item 503(d) of Regulation S-K promulgated by the Commission. The other
financial and statistical information and data included in the Prospectus
and in the Registration Statement, historical and PRO FORMA, are accurately
presented in all material respects and prepared on a basis consistent with
such financial statements and the books and records of the Company and
BGII, as applicable.
(t) The forecasted financial statement information included in the
Registration Statement (i) are within the coverage of Rule 175(b) of the
Act, (ii) were made by the Company with a reasonable basis and in good
faith, (iii) have been prepared in accordance with Item 10 of Regulation S-
K of the Act and (iv) have been properly compiled on the bases described
therein. The assumptions used in the preparation of such forecasted
consolidated financial statement information (i) are all those the Company
believes are significant in forecasting the financial results of the
Company and (ii) reflect, for the relevant periods, a reasonable estimate
of the events, contingencies and circumstances described therein. Such
forecasted financial statement information presents the Company's
reasonable estimate of the expected consolidated results of operations,
except for the omission of non-operating items, income taxes, extraordinary
items and the calculation of net income for the forecasted periods.
(u) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and up to the
Closing Date and at each Option Closing Date, if applicable, (i) neither
the Company nor any of the Subsidiaries has incurred any liabilities or
obligations, direct or contingent, which are material to the Company or the
Subsidiaries, singly or in the aggregate, nor entered into any transaction
not in the ordinary course of business, except as described in the
Prospectus with respect to the Transaction and the Working Capital
Facilities, (ii) there has been no decision or judgment in the nature of
litigation, administrative or regulatory proceedings or arbitration that
could reasonably be expected to have, singly or in the aggregate, a
Material Adverse Effect and (iii) there has not been any material adverse
change or any development which could involve, singly or in the aggregate,
a material adverse change, in the properties, plans, business, results of
operations, general affairs, management, condition (financial or
otherwise), prospects or business affairs of the Company or the
Subsidiaries, singly or in the aggregate (any of the items set forth in
clauses (i), (ii) or (iii) of this paragraph (t), a "Material Adverse
Change").
(v) All material Tax (as defined below) returns required to be filed
by the Company and the Subsidiaries have been filed and all such returns
are
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true, complete, and correct in all material respects. All material Taxes
that are due or claimed to be due from the Company and the Subsidiaries
have been paid other than those (i) currently payable without penalty or
interest or (ii) being contested in good faith and by appropriate
proceedings and, in either case, for which adequate reserves have been
established on the books and records of the Company and the Subsidiaries in
accordance with GAAP. The Company and the Subsidiaries are not parties to
any pending action, proceeding, inquiry, or investigation by any government
authority for the assessment or collection of Taxes, nor does the Company
or any of the Subsidiaries have any knowledge, after due inquiry, of any
such proposed or threatened action, proceeding, inquiry, or investigation.
For purposes of this agreement, the terms "Tax" and "Taxes" shall mean all
Federal, state, local and foreign taxes, and other assessments of a similar
nature (whether imposed directly or through withholding), including any
interest, additions to tax, or penalties applicable thereto.
(w) (i) The Company, each of the Subsidiaries and each of the persons
listed under the caption "Management" in the Registration Statement has all
material certificates, consents, exemptions, orders, permits, licenses,
authorizations or other approvals or rights (each, an "Authorization") of
and from, and has made all material declarations and filings with, all
Federal, state, local and other governmental authorities, all self-
regulatory organizations and all courts and other tribunals, including,
without limitation, all such Authorizations with respect to engaging in
gaming operations and the manufacture of gaming machines in the State of
Nevada, Louisiana, Mississippi and New Jersey and the Federal Republic of
Germany or required to own, lease, license and use its properties and
assets and to conduct its current business in the manner described in or
contemplated by the Prospectus; (ii) all such Authorizations are valid and
in full force and effect; (iii) the Company, each of the Subsidiaries and
each of the persons listed under the caption "Management" in the
Registration Statement is in compliance in all material respects with the
terms and conditions of all such Authorizations and with the rules and
regulations of the regulatory authorities and governing bodies having
jurisdiction with respect thereto and (iv) other than the current
investigation being carried out by the State of New Jersey Division of Land
and Public Safety, Division of Gaming Enforcement in connection with the
operation of Worldwide Gaming of Louisiana, neither the Company nor any
Subsidiary nor any of the persons listed
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under the caption "Management" in the Registration Statement has received
any notice of proceedings relating to the revocation or modification of any
such Authorization and no such Authorization contains any restrictions that
are materially burdensome to any of them. Neither the Company nor any of
the Subsidiaries nor, to the best knowledge of the Company, any of the
persons listed under the caption "Management" in the Registration Statement
has any reason to believe that any Gaming Authority is considering
modifying, limiting, conditioning, suspending, revoking or not renewing any
such Authorization of the Company, any of the Subsidiaries or any of the
persons listed under the caption "Management" in the Registration Statement
or that any Gaming Authority or any other governmental agency is
investigating the Company or any of the Subsidiaries or related parties
(other than normal overseeing reviews of the Gaming Authorities incident to
the gaming activities of the Company and the Subsidiaries). Neither the
Company nor any Subsidiary, and to the best knowledge of the Company, none
of the persons listed under the caption "Management" in the Registration
Statement, has any reason to believe that there is an existing basis for
any of the Gaming Authorities to deny the renewal of the current gaming
licenses held by any of them.
(x) The Company and each of the Subsidiaries possess the licenses,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names (collectively, the
"Licensed Marks"), presently or proposed to be employed by them in
connection with their businesses as currently being conducted or as
proposed to be conducted (as discussed in the Prospectus). Except as
disclosed in the Prospectus, after due inquiry, there is no material claim,
suit, action or proceeding pending and served or threatened with respect to
the validity of any of the Licensed Marks, the infringement of any of the
Licensed Marks by any third party or the infringement of any of the
Licensed Marks by any third party arising out of the use of the Licensed
Marks.
(y) The Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
(z) Neither the Company nor any agent acting on their behalf has
taken or will take any action that is reasonably likely to cause the
issuance or sale of the Shares to violate Regulation G, T, U, or X of the
Board of Governors of the Federal Reserve System, in each case as in effect
on the Closing Date and at each Option Closing Date, if applicable.
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(aa) Neither the Company nor any of the Subsidiaries is (i) an
"investment company" or a company "controlled" by an investment company
within the meaning of the Investment Company Act of 1940, as amended, or
(ii) a "holding company" or a "subsidiary company" of a holding company, or
an "affiliate" thereof within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
(ab) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-K of the Commission.
(ac) The Company has registered the Common Stock pursuant to Section
12(b) of the Exchange Act and has filed all requisite documents necessary
to list the Shares on the Nasdaq NMS, and has received notification that
the listing has been approved, subject to official notice of issuance of
the Shares.
(ad) Except as disclosed in the Prospectus, no holder of any security
of the Company has any right to require registration of any security of the
Company. No holder of any security of the Company has or will have any
right to require the registration of such security by virtue of any
transaction contemplated by this Agreement.
(ae) The authorized capital stock of the Company conforms to the
description thereof contained in the Prospectus under the caption
"Description of Capital Stock."
(af) Except as would not be unlawful, neither the Company nor any of
the Subsidiaries has (i) taken, directly or indirectly, any action designed
to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of the Company
or any of the Subsidiaries to facilitate the sale or resale of the Shares
or (ii) since the date of the preliminary prospectus (A) sold, bid for,
purchased or paid any person any compensation for soliciting purchases of,
the Shares or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(ag) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters in connection
therewith shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters covered thereby.
7. INDEMNIFICATION.
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(a) The Company and each of the Subsidiaries, jointly and severally,
agree to indemnify and hold harmless, each Underwriter and its affiliates
and their respective officers, shareholders, counsel, agents, employees,
directors and any person who controls such Underwriter or any of its
affiliates within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, and the respective officers, shareholders, counsel, agents,
employees, and directors of such persons (each Underwriter and each such
other person or entity being referred to herein as an "Indemnified Person),
to the fullest extent lawful, from and against any and all losses, claims,
damages, judgments, actions, costs, assessments, expenses and other
liabilities (collectively, "Liabilities"), including without limitation and
as incurred, reimbursement of all reasonable costs of investigating,
preparing, pursuing, or defending any claim or action, or any investigation
or proceeding by any governmental agency or body, commenced or threatened,
including the reasonable fees and expenses of counsel to any Indemnified
Person directly or indirectly caused by, related to, based upon, arising
out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or
any amendment or supplement thereto) or the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus, or any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they were made) not
misleading, except insofar as such Liabilities are caused by an untrue
statement or omission or alleged untrue statement or omission that is made
in reliance upon and in conformity with information relating to any
Underwriter furnished in writing to the Company by or on behalf of any such
Underwriter through Jefferies expressly for use in the Registration
Statement (or any amendment or supplement thereto) or the Prospectus (or
any amendment or supplement thereto) or any preliminary prospectus. The
Company shall notify you promptly of the institution, threat or assertion
of any claim, proceeding (including any governmental investigation) or
litigation in connection with the matters addressed by this Agreement which
involves the Company or an Indemnified Person.
(b) In case any action or proceeding (for all purposes of this
Section 7, including any governmental investigation) shall be brought or
asserted against any of the Indemnified Persons with respect to which
indemnity may be sought against the Company or any Subsidiary, such
Underwriter (or the Underwriter controlled by such controlling person)
shall promptly notify the Company in writing; PROVIDED, that the failure to
give such notice shall not relieve the Company or any of the Subsidiaries
of their obligations pursuant to this Agreement. Upon receiving such
notice, the
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Company shall be entitled to participate in any such action or proceeding
and to assume, at its sole expense, the defense thereof, with counsel
reasonably satisfactory to such Indemnified Person and, after receipt of
written notice from the Company to such Indemnified Person of its election
so to assume the defense thereof made within ten business days after
receipt of the notice from the Indemnified Person of such action or
proceeding, the Company and the Subsidiaries shall not be liable to such
Indemnified Person hereunder for legal expenses of other counsel
subsequently incurred by such Indemnified Person in connection with the
defense thereof, other than costs of investigation, unless (i) the Company
or such Subsidiary, as the case may be, agrees to pay such fees and
expenses, or (ii) the Company fails promptly to assume such defense or
fails to employ counsel reasonably satisfactory to such Indemnified Person
or (iii) the named parties to any such action or proceeding (including any
impleaded parties) include both such Indemnified Person and the Company or
an affiliate of the Company and either (x) there may be one or more legal
defenses available to such Indemnified Person that are different from or
additional to those available to the Company or such affiliate or (y) a
conflict may exist between such Indemnified Person and the Company or such
affiliate. In the event of any of clause (i), (ii) and (iii) of the
immediately preceding sentence, if such Indemnified Person notifies the
Company in writing, the Company shall not have the right to assume the
defense thereof and such Indemnified Person shall have the right to employ
its own counsel in any such action and the reasonable fees and expenses of
such counsel shall be paid, as incurred, by the Company and the
Subsidiaries, regardless of whether it is ultimately determined that an
Indemnified Person is not entitled to indemnification hereunder, it being
understood, however, that the Company and the Subsidiaries shall not, in
connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings arising out of the
same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any
local counsel) at any time for each such Indemnified Person. Each of the
Company and the Subsidiaries agrees to be liable for any settlement of such
action or proceeding effected with the Company's prior written consent,
which consent will not be unreasonably withheld, and the Company and the
Subsidiaries agree to indemnify and hold harmless any Indemnified Person
from and against any liabilities by reason of any settlement of any action
effected with the written consent of the Company. The Company and each of
the Subsidiaries agrees to be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered into
more than 20 business days after receipt by the Company of the aforesaid
request for payment in respect of an indemnification obligation pursuant
hereto and (ii) the Indemnified Person shall not have been reimbursed in
accordance with such request prior to the date of
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such settlement. Neither the Company nor any Subsidiary shall, without the
prior written consent of each Indemnified Person, settle or compromise or
consent to the entry of any judgment in or otherwise seek to terminate any
pending or threatened action, claim, litigation or proceeding in respect of
which indemnification or contribution may be sought pursuant hereto
(whether or not any Indemnified Person is a party thereto), unless such
settlement, compromise, consent or termination includes an unconditional
release of each Indemnified Person from all liability arising out of such
action, claim, litigation or proceeding.
(c) Each of the Underwriters agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement and any person controlling (within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act) the
Company, to the same extent as the foregoing indemnity from the Company and
the Subsidiaries to each of the Indemnified Persons, but only with respect
to claims and actions based on information relating to such Underwriter and
conforming to information furnished in writing by or on behalf of such
Underwriter through Jefferies expressly for use in the Registration
Statement, Prospectus or any preliminary prospectus, as applicable. In
case any action or proceeding (including any governmental investigation)
shall be brought or asserted against the Company, any of its directors, any
such officer, or any such controlling person based on the Registration
Statement, the Prospectus or any preliminary prospectus in respect of which
indemnity is sought against any Underwriter pursuant to the foregoing
sentence, the Underwriter shall have the rights and duties given to the
Company (except that if the Company shall have assumed the defense thereof,
such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter), and
the Company, its directors, any such officers and each such controlling
person shall have the rights and duties given to the Indemnified Person by
Section 7(b) above.
(d) If the indemnification provided for in this Section 7 is finally
determined by a court of competent jurisdiction to be unavailable to an
indemnified party in respect of any Liabilities referred to herein, then
each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as
a result of such Liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Subsidiaries,
on the one hand, and the Underwriter, on the other hand, from the offering
of the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the
23
<PAGE>
relative benefits referred to in clause (i) above, but also the relative
fault of the indemnifying parties and the indemnified party, as well as any
other relevant equitable considerations. The relative benefits received by
the Company and the Subsidiaries, on the one hand, and any of the
Underwriters (and its related Indemnified Persons), on the other hand,
shall be deemed to be in the same proportion as the total proceeds from the
Shares (net of underwriting discounts and commissions but before deducting
expenses) received by the Company bears to the total underwriting discounts
and commissions received by such Underwriter, in each case as set forth in
the Prospectus. The relative fault of the Company and the Subsidiaries, on
the one hand, and the Underwriters, on the other hand, shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact related to information supplied by the Company and the
Subsidiaries, on the one hand, or by the Underwriters, on the other, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
indemnity and contribution obligations of the Company and the Subsidiaries
set forth herein shall be in addition to any liability or obligation the
Company and the Subsidiaries may otherwise have to any Indemnified Person.
The Company, the Subsidiaries and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 7(d)
were determined by PRO RATA allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
judgments, liabilities or expenses referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 7, none of the
Underwriters (and its related Indemnified Persons) shall be required to
contribute, in the aggregate, any amount in excess of the amount by which
the total underwriting discount applicable to the Shares purchased by such
Underwriter exceeds the amount of any damages and related expenses which
such of the Underwriters (and its related Indemnified Persons) has
otherwise been required to pay or incur by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to
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this Section 7(d) are several in proportion to the respective number of
Shares purchased by each of the Underwriters hereunder and not joint.
8. CONDITIONS TO UNDERWRITERS' OBLIGATIONS. The respective
obligations of the several Underwriters to purchase any Shares under this
Agreement are subject to the satisfaction of each of the following conditions on
the Closing Date and, as applicable, each Option Closing Date:
(a) All the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date and each
Option Closing Date, if applicable, with the same force and effect as if
made on and as of the Closing Date and each such Option Closing Date, if
applicable. All of the representations and warranties of the Company and
the Subsidiaries, as applicable, made in the other Operative Documents (i)
on the date made and (ii) on the Closing Date and each Option Closing Date
to the extent such document contains a representation or warranty made on
the Closing Date or an Option Closing Date was and shall be true and
correct on such date. The Company and the Subsidiaries shall have
performed or complied with all of their obligations and agreements herein
and therein contained and required to be performed or complied with by them
at or prior to the Closing Date and such Option Closing Date, if
applicable.
(b) (i) The Registration Statement (including a registration
statement (if any) filed pursuant to Rule 462(b) under the Act) shall have
become effective (or, if a post-effective amendment is required to be filed
pursuant to Rule 430A under the Act, such post-effective amendment shall
have become effective (or, if any Shares are sold in reliance upon Rule
430A of the Act and no post-effective amendment is so required to be filed,
the Prospectus shall have been timely filed with the Commission in
accordance with Section 4(a) hereof) not later than 5:30 p.m. New York City
time, on the date of this Agreement or at such later date and time as you
may approve in writing, (ii) at the Closing Date and each Option Closing
Date, if applicable, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been commenced or shall be pending before or, to the
best knowledge of the Company, after due inquiry, threatened by the
Commission and every request for additional information on the part of the
Commission shall have been complied with in all respects, and (iii) no stop
order suspending the sale of the Shares in any jurisdiction referred to in
Section 4(h) shall have been issued and no proceeding for that purpose
shall have been commenced or shall be pending or, to the best knowledge of
the Company, after due inquiry, threatened.
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<PAGE>
(c) No action shall have been taken and no statute, rule, regulation
or order shall have been enacted, adopted or issued by any governmental
agency, body or official (including, without limitation, any Gaming
Authority), which would, as of the Closing Date and each Option Closing
Date, if applicable, prevent the issuance of the Shares or have a Material
Adverse Effect; and no injunction, restraining order or order of any nature
by any Federal or state court shall have been issued as of the Closing Date
or any Option Closing Date, if applicable, which would prevent the issuance
of the Shares or have a Material Adverse Effect. Subsequent to the
execution and delivery of this Agreement and prior to the Closing Date and
each Option Closing Date, if applicable, there shall not have been any
downgrading, or indication that such securities have been placed on any
"watch list" for possible downgrading, nor shall any review for a possible
change that does not indicate the direction of the possible change, in the
rating accorded any of the Company's or any Subsidiary's securities by any
nationally recognized statistical rating organization, as such term is
defined for purposes of Rule 436(g)(2) of the Act.
(d) (i) Since the earlier of the date hereof or the dates of which
information is given in the Registration Statement and the Prospectus,
there shall not have been any Material Adverse Change, (ii) since the date
of the latest balance sheet included in the Registration Statement and the
Prospectus, there shall not have been any material adverse change, or any
development involving a prospective material adverse change, in respect of
the Company or any of the Subsidiaries, (iii) the Company and each of the
Subsidiaries shall have no liability or obligation, direct or contingent,
that is material to the Company and the Subsidiaries, taken as a whole, and
which is not disclosed in the Registration Statement and the Prospectus.
(e) You shall have received a certificate of the Company, dated the
Closing Date and each Option Closing Date, if applicable, executed on
behalf of the Company by the Chief Executive Officer and the Senior Vice
President of Corporate Finance of the Company, in their capacities as
officers of the Company, confirming the matters set forth in paragraphs
(a), (b), (c) and (d) of this Section 8.
(f) You shall have received an opinion (satisfactory to you and your
counsel), dated the Closing Date and each Option Closing Date, if
applicable, of Milbank, Tweed, Hadley & McCloy, counsel for the Company, to
the effect that:
(i) the Registration Statement was declared effective in
compliance with the Act; any required filing of the Prospectus, and any
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amendments or supplements thereto, pursuant to Rule 424(b), have been made
in the manner and within the time period required by Rule 424(b); to the
best of such counsel's knowledge, after due inquiry, no stop order
suspending the effectiveness of the Registration Statement or any part
thereof has been issued and no proceedings therefor have been instituted or
to the best of such counsel's knowledge, after due inquiry, are pending or
contemplated under the Act;
(ii) at the time it became effective and on the Closing Date
and on each Option Closing Date, if applicable, the Registration Statement
(excluding documents incorporated by reference therein and except for
financial statements, the notes thereto and related schedules and other
financial, numerical and statistical data included therein or incorporated
by reference therein, as to which no opinion need be expressed) complied as
to form in all material respects with the applicable requirements of the
Act;
(iii) the documents incorporated by reference in the Prospectus
(except for the financial statements, the notes thereto and related
schedules and other financial, numerical and statistical data included
therein, as to which no opinion need be expressed), as of the dates they
were filed with the Commission, appear on their face to have been
appropriately responsive in all material respects to the requirements of
the Exchange Act and the Exchange Act Regulations.
(iv) each of BGII Acquisition Corp., Native American
Investments, Inc. and Alliance Holding Corp. (the "Delaware Subsidiaries")
is duly incorporated and is validly existing as a corporation, under the
laws of the State of its incorporation and has the requisite corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and Prospectus;
(v) all of the issued and outstanding shares of capital stock
of the Delaware Subsidiaries have been duly authorized and validly issued,
and are fully paid and nonassessable, and the shares of capital stock of
each such Subsidiary are owned, directly or indirectly, by the Company,
free and clear of any Liens; except as disclosed in the Prospectus and to
the best of such counsel's knowledge, after due inquiry, there are no
outstanding subscriptions, rights, warrants, options, calls, convertible
securities, commitments of sale or Liens related to or entitling any person
to purchase or otherwise to acquire any shares of capital stock of, or
other ownership interest in, any such Subsidiary;
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(vi) the Company and each Subsidiary is duly qualified as a
foreign corporation or general partnership, as the case may be, in each
Foreign Jurisdiction, except where the failure to be so qualified could not
have a material adverse effect on the properties, plans, business, results
of operation, general affairs, management, condition (financial or
otherwise) or business affairs of the Company and the Subsidiaries, in the
aggregate; each such Subsidiary is in good standing under the laws of its
jurisdiction of incorporation and in each Foreign Jurisdiction.
(vii) each of the Delaware Subsidiaries has the requisite
corporate power and authority to execute, deliver and perform all of its
obligations pursuant to this Agreement and to each of the other Operative
Documents to which it is a party; this Agreement and each of the other
Operative Documents has been duly authorized, executed and delivered by the
Company and each of the Subsidiaries, as applicable, and constitutes a
valid and legally binding obligation of the Company and each of the
Subsidiaries, as applicable, enforceable against the Company and each of
the Subsidiaries, as applicable, in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and similar laws and to general principles of equity (regardless
of whether enforcement is sought in a proceeding of law or in equity),
including, without limitation, the possible unavailability of injunctive
relief or any other equitable remedy and concepts of good faith
reasonableness, fair dealing and materiality and except to the extent that
indemnification from liability contained in this Agreement in connection
with the Federal securities laws may be unenforceable and the contribution
formulas specified in Section 7 of this Agreement may not be given effect;
(viii) this Agreement and each of the other Operative Documents
which is described in the Registration Statement and the Prospectus
conforms in all material respects to the descriptions thereof contained in
the Registration Statement and the Prospectus; the descriptions in the
Registration Statement and the Prospectus of legal proceedings and
contracts to which any of the Company or the Subsidiaries is a party have
been reviewed by such counsel and are accurate summaries thereof in all
material respects (except for financial data included therein or omitted
therefrom, as to which counsel need express no opinion);
(ix) neither the Company nor any of the Subsidiaries is (a) an
"investment company" or a company "controlled" by an investment company
within the meaning of the Investment Company Act of 1940, as amended, or
(b) a "holding company" or a "subsidiary company" of a holding company,
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or an "affiliate" thereof within the meaning of the Public Utility Holding
Company Act of 1935, as amended;
(x) to the best of such counsel's knowledge after due inquiry,
there are no legal or governmental proceedings required to be described in
the Registration Statement or Prospectus which are not described as
required, or any contracts or agreements to which the Company or any of the
Subsidiaries is a party or by which any of them may be bound that are
required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement other than those
described therein or filed or incorporated by reference as exhibits
thereto; to the best of such counsel's knowledge, after due inquiry, there
is no current, pending or threatened action, suit or proceeding before any
court or governmental agency, authority or body or any arbitrator involving
the Company or any of the Subsidiaries or to which any of their respective
properties are subject of a character required to be disclosed in the
Registration Statement which is not adequately disclosed in the Prospectus;
(xi) to the best of such counsel's knowledge, after due inquiry,
no authorization, approval, consent or order of any court or governmental
body, agency or official, is necessary in connection with the issuance of
the Shares and the other transactions contemplated by this Agreement or the
other Operative Documents, including the Transaction, except such as may be
required by the NASD or have been obtained under the Gaming Laws, the Act,
the Trust Indenture Act, or state securities or Blue Sky laws or
regulations;
(xii) the execution and delivery of the Operative Documents by
the Company, as applicable, the issuance and sale of the Shares, the
performance of the Company's and each Subsidiary's obligations pursuant to
the Operative Documents, as applicable, and the consummation of the
transactions contemplated hereby and thereby will not conflict with or
result in a breach or violation of or constitute a default or cause an
acceleration of any obligation under, or result in the imposition or
creation of (or the obligation to create or impose) any Lien (other than
under the Security Documents) with respect to (A) any of the respective
charters, by-laws and partnership agreements of the Company and each of the
Subsidiaries, (B) any agreement or instrument filed as an Exhibit to the
Registration Statement, (C) any applicable statute, rule or regulation
under New York law, United States Federal law or the Corporation Law of the
State of Delaware or (D) any order of any New York or Delaware court or
governmental agency, body or official having jurisdiction over any of the
Company or the Subsidiaries or any of their properties except, in the case
of clauses (B), (C) or (D), for such
29
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conflicts, breaches, violations or defaults that could not reasonably be
expected to have, singly or in the aggregate, a Material Adverse Effect;
(xiii) to the best of such counsel's knowledge, after due
inquiry, no default exists in the due performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other instrument
described in or filed as an Exhibit to the Registration Statement, except
for defaults which could not have a material adverse effect on the
properties, plans, business, results of operation, general affairs,
management, condition (financial or otherwise) or business of the Company
and the Subsidiaries, in the aggregate;
(xiv) to the best of such counsel's knowledge, after due
inquiry, the Company and each of the Subsidiaries has the right to use the
Licensed Marks presently or proposed to be employed by it in connection
with its businesses as currently being conducted or as proposed to be
conducted (as discussed in the Prospectus), and, to the best of such
counsel's knowledge, after due inquiry, the Licensed Marks are free and
clear of Liens and any other rights of third parties and neither the
Company nor any of the Subsidiaries has received any notice, or has any
knowledge, of infringement or of conflict with asserted rights of others
with respect to any of the Licensed Marks;
(xv) neither the consummation of the transactions
contemplated by this Agreement nor the sale, issuance, execution or
delivery of the Shares will violate Regulation G, T, U or X of the Board of
Governors of the Federal Reserve System;
(xvi) the statements set forth in the Prospectus under the
caption "Material Income Tax Considerations for holders of Preferred
Stock," insofar as such statements constitute matters of law, summaries of
legal matters, documents or proceedings, or legal conclusions, are correct
in all material respects;
(xvii) the offer and sale of the securities by the Company
pursuant to the Subscription Agreement does not require regulation under
the Act; the sale of such securities will not be subject to integration
with the offer and sale of any securities of the Company pursuant to either
of the Offerings, the Exchange Offer or the Automatic Conversion; and
(xviii) the Merger has become effective under Delaware Law.
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In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company and the Subsidiaries, representations of BGII and their counsel,
representatives of KPMG Peat Marwick LLP, independent public accountants
for the Company and the Subsidiaries, Coopers & Lybrand L.L.P., independent
public accountants for BGII and its subsidiaries, your representatives and
your counsel in connection with the preparation of the Registration
Statement and Prospectus and has considered the matters required to be
stated therein and the statements contained therein, and such counsel shall
advise you that, although (without limiting the opinions provided) such
counsel has not independently verified the accuracy, completeness or
fairness of the statements contained in the Registration Statement and
Prospectus, on the basis of the foregoing, no facts came to such counsel's
attention that caused such counsel to believe that the Registration
Statement (including any Registration Statement filed under Rule 462(b) of
the Act (if any)), as amended or supplemented, at the time such
Registration Statement or any post-effective amendment became effective and
as of the date of such opinion, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (other than
information omitted therefrom in reliance on Rule 430A under the Act), or
the Prospectus, as amended or supplemented, as of its date and the Closing
Date and at each Option Closing Date, if applicable, contained an untrue
statement of a material fact or omitted to state a material fact necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(g) You shall have received a signed opinion of Schreck, Jones,
Bernard, Woloson & Godfrey, Chartered, Nevada counsel for the Company,
dated as of the Closing Date and each Option Closing Date, if applicable,
in form and substance satisfactory to counsel for the Underwriters, to the
effect that:
(i) the Company and each of the Subsidiaries incorporated in the
State of Nevada (such Subsidiaries, other than Bally Gaming, Inc. being
referred to as the "Nevada Subsidiaries") has the requisite corporate power
and authority to execute, deliver and perform all of its obligations
pursuant to this Agreement and each of the other Operative Documents to
which it is a party; this Agreement and each of the other Operative
Documents has been duly authorized, executed and delivered by the Company,
Bally Gaming, Inc. ("Gaming") and each of the Nevada Subsidiaries, as
applicable;
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(ii) the Company and each of the Nevada Subsidiaries is duly
incorporated and is validly existing as a corporation, under the laws of
the State of Nevada and has the requisite corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement and Prospectus;
(iii) all of the issued and outstanding capital stock of the
Company and the Nevada Subsidiaries has been duly authorized and validly
issued and is fully paid and nonassessable, and the shares of capital stock
of each of the Nevada Subsidiaries are owned, either directly or
indirectly, by the Company, free and clear of any perfected security
interest and, to such counsel's knowledge, after due inquiry, any other
security interests, claims or Liens; to the best of such counsel's
knowledge, after due inquiry, there are no outstanding subscriptions,
rights, warrants, options, calls, convertible securities, commitments of
sale or Liens related to or entitling any person to purchase or otherwise
to acquire any shares of capital stock of, or other ownership interest in,
the Company nor any Nevada Subsidiary;
(iv) the Shares have been duly and validly authorized and, when
issued and delivered to the Underwriters against payment therefor as
provided by this Agreement, will be validly issued, fully paid and
nonassessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(v) the statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Preferred Stock, the Junior
Preferred Stock or the Common Stock, are accurate, complete and fair;
(vi) the Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued and are fully paid
and non-assessable; all of the shares of Common Stock (including the
Shares) have been duly listed and admitted for trading on the Nasdaq NMS;
the holders of outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to acquire the Shares to be
purchased from the Company under this Agreement; there are no restrictions
on subsequent transfers of the Shares except restrictions which may be
imposed by any of the Gaming Authorities which restrictions are disclosed
in the Prospectus under "Gaming Regulation and Licensing";
(vii) the execution and delivery of the Operative Documents by
the Company and the Subsidiaries, as applicable, the issuance and sale of
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<PAGE>
the Shares, the performance of the Company's and each Subsidiary's
obligations pursuant to the Operative Documents, as applicable, and the
consummation of the transactions contemplated hereby and thereby will not
conflict with or result in a breach or violation of or constitute a default
or cause an acceleration of any obligation under, or result in the
imposition or creation of (or the obligation to create or impose) any Lien
with respect to (A) any of the respective charters and by-laws of any of
the Company, Gaming or the Nevada Subsidiaries, (B) any applicable statute,
rule or regulation under Nevada, or (C) any order of any court or
governmental agency, body or official having jurisdiction over the Company
or any of the Subsidiaries or any of their properties, except, in the case
of clause (B) or (C), for such conflicts, breaches, violations or defaults
that could not reasonably be expected to have, singly or in the aggregate,
a Material Adverse Effect;
(viii) no authorization, approval, consent or order of the
Nevada Gaming Authorities or any other governmental body, agency or
official of the State of Nevada ("Nevada Authorities") is necessary in
connection with the issuance of the Shares and the due and valid execution,
delivery and performance by the Company or any of the Subsidiaries, as the
case may be, this Agreement and the other Operative Documents, as
applicable, and any of the transactions contemplated hereby of thereby to
be entered into prior to or contemporaneously with such agreements, except
(a) as disclosed in the Registration Statement, (b) such authorizations,
approvals, consents or licenses of the Nevada Authorities that have been
obtained prior to the date of such opinion and (c) the periodic and other
filings and reporting requirements to which any of the Company and the
Subsidiaries are subject generally. Each of the Operative Documents has
been presented to the Nevada Gaming Authorities to the extent required by
the Nevada Gaming Laws, and such documents and the transactions described
therein have been approved by the Nevada Gaming Authorities to the extent
required by Nevada Gaming Laws. Such counsel has received no notice that
such approvals have been revoked, modified or rescinded as of the date of
such opinion;
(ix) except as disclosed in the Registration Statement, (a) to
the best knowledge of such counsel, the Company and each of its
subsidiaries has made all declarations and filings with the Nevada Gaming
Authorities necessary to use its properties and assets and to conduct its
business pursuant to Nevada Gaming Laws, as of the date of such opinion;
(b) no facts have come to the attention of such counsel that would lead
such counsel to believe that all authorizations of and from the Nevada
Gaming Authorities are not valid and in full force and effect as of the
date of such opinion; (c) no facts
33
<PAGE>
have come to the attention of such counsel that would lead such counsel to
believe that the Company and each of its subsidiaries is not in compliance
in all material respects with the terms and conditions of all
authorizations of and from the Nevada Gaming Authorities and with the
Nevada Gaming Laws, as of the date of such opinion; and (d) as of the date
of such opinion, such counsel has received no notice of any proceedings
relating to the revocation or modification of any authority granted by any
of the Nevada Gaming Authorities to the Company and its subsidiaries, and
such counsel is aware of no restrictions imposed by any of the Nevada
Gaming Authorities which would have a material adverse effect on the
properties, plans, results of operations, management, condition (financial
or otherwise) or business affairs of the Company or its subsidiaries, in
the aggregate; no facts have come to the attention of such counsel that
would lead such counsel to believe that any of the Nevada Gaming
Authorities is considering modifying, limiting, conditioning, suspending,
revoking or not renewing the licenses, permits, certificates, consents,
orders, approvals and other authorizations from such Nevada Gaming
Authority (collectively, the "Gaming Licenses") of the Company or any of
its subsidiaries, except where such modification, revocation, suspension,
limitation or condition would not have a material adverse effect on the
properties, plans, results of operations, management, condition (financial
or otherwise) or business affairs of the Company or its subsidiaries, in
the aggregate; such counsel is aware of no notice given to the Company or
any of its subsidiaries that any of the Nevada Gaming Authorities are
investigating the Company or any of its subsidiaries (other than normal
overseeing reviews incident to the gaming activities of the Company and its
subsidiaries); and such counsel has received no notice that the Company or
any of its subsidiaries has any reason to believe there is an existing
basis for any of the Nevada Gaming Authorities to deny the renewal of the
Gaming Licenses held by the Company or any of its subsidiaries;
(x) each of the persons listed under the caption "Management" in
the Prospectus has been or will be qualified or licensed by the Nevada
Gaming Laws as required by the Nevada Gaming Laws; and
(xi) (a) the statements in the Prospectus under the captions
"Risk Factors--Strict Regulation by Gaming Authorities" and "Gaming
Regulation and Licensing - Nevada, fairly present the information with
respect to such Nevada Gaming Laws and proceedings thereunder; and (b) no
facts have come to the attention of such counsel that would lead such
counsel to believe that the statements listed in clause (a) of this
paragraph (i) contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
such statements, in light of the circumstances under which they are made,
not misleading, or that
34
<PAGE>
the statements listed in clause (a) of this paragraph (i), as contained in
the Prospectus at the time of filing thereof or on the date of such
counsel's opinion, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in
order to make such statements, in light of the circumstances under which
they were made, not misleading.
(h) You shall have received a signed opinion of McDonald, McCune
Bergin Frankovich & Hicks, Nevada regulatory counsel for BGII, dated as of
the Closing Date and each Option Closing Date, if applicable, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) except as disclosed in the Registration Statement, (a) to
the best knowledge of such counsel, each of BGII and Gaming (collectively,
the "Bally Subsidiaries") has made all declarations and filings with the
Nevada Gaming Authorities necessary to use its properties and assets and to
conduct its business pursuant to Nevada Gaming Laws, as of the date of such
opinion; (b) no facts have come to the attention of such counsel that would
lead such counsel to believe that all authorizations of and from the Nevada
Gaming Authorities are not valid and in full force and effect as of the
date of such opinion; (c) no facts have come to the attention of such
counsel that would lead such counsel to believe that each of the Bally
Subsidiaries is not in compliance in all material respects with the terms
and conditions of all authorizations of and from the Nevada Gaming
Authorities and with the Nevada Gaming Laws, as of the date of such
opinion; and (d) as of the date of such opinion, such counsel has received
no notice of any proceedings relating to the revocation or modification of
any authority granted by any of the Nevada Gaming Authorities to the Bally
Subsidiaries, and such counsel is aware of no restrictions imposed by any
of the Nevada Gaming Authorities which would have a material adverse effect
on the properties, plans, results of operations, management, condition
(financial or otherwise) or business affairs of the Bally Subsidiaries, in
the aggregate; no facts have come to the attention of such counsel that
would lead such counsel to believe that any of the Nevada Gaming
Authorities is considering modifying, limiting, conditioning, suspending,
revoking or not renewing the licenses, permits, certificates, consents,
orders, approvals and other authorizations from such Nevada Gaming
Authority (collectively, the "Gaming Licenses") held by any of the Bally
Subsidiaries, except where such modification, revocation, suspension,
limitation or condition would not have a material adverse effect on the
properties, plans, results of operations, management, condition (financial
or otherwise) or business affairs of the Company or the Subsidiaries, in
the aggregate; such counsel is aware of no notice given to the Bally
35
<PAGE>
Subsidiaries that any of the Nevada Gaming Authorities are investigating
the Company or any of the Subsidiaries (other than normal overseeing
reviews incident to the gaming activities of the Bally Subsidiaries); and
such counsel has received no notice that any of the Bally Subsidiaries has
any reason to believe there is an existing basis for any of the Nevada
Gaming Authorities to deny the renewal of the Gaming Licenses held by any
of the Bally Subsidiaries;
(i) You shall have received an opinion of Hoffman, Sutterfield,
Ensarat, a Professional corporation, Louisiana regulatory counsel for the
Company, dated as of the Closing Date, in form and substance satisfactory
to counsel for the Underwriters, to the effect that:
(i) each of Video Services, Inc. ("VSI"), Video Distributing
Services, Inc. ("VDSI") and Southern Video Services, Inc. ("SVS" and,
together with VSI and VDSI, the "Louisiana Subsidiaries") has the requisite
corporate power and authority to execute, deliver and perform all of its
obligations pursuant to this Agreement and each of the other Operative
Documents to which it is a party; each of this Agreement and such other
Operative Documents has been duly authorized, executed and delivered by
each of the Louisiana Subsidiaries, as applicable.
(ii) each of the Louisiana Subsidiaries is duly incorporated and
is validly existing as a corporation under the laws of the State of
Louisiana and has the requisite corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Registration Statement and Prospectus;
(iii) all of the issued and outstanding capital stock of
Louisiana Subsidiaries has been duly authorized and validly issued and is
fully paid and nonassessable, and 49% of the outstanding shares of capital
stock of each of the Louisiana Subsidiaries are owned, either directly or
indirectly, by the Company, free and clear of and perfected security
interest and, to such counsel's knowledge, after due inquiry, any other
security interests, claims or Liens; such capital stock owned by the
Company constitutes 100% of such capital stock with voting rights; except
as disclosed in the Prospectus and, to the best of such counsel's
knowledge, after due inquiry, there are no outstanding subscriptions,
rights, warrants, options, calls, convertible securities, commitments of
sale or Liens related to or entitling any person to purchase or otherwise
to acquire any shares of capital stock of, or other ownership interest in,
any such Louisiana Subsidiary; pursuant to the Articles of Association of
VSI, SVS and VDSI, as the case may be, the Company is
36
<PAGE>
entitled to 71%, 60% and 71% of the dividends of VSI, SVS and VDSI,
respectively;
(iv) (a) the statements in the Prospectus under the captions
"Risk Factors--Strict Regulation by Gaming Authorities", "Risk Factors-
Ongoing BGII Regulatory Investigation" and "Gaming Regulation and Licensing
- Louisiana", fairly present the information with respect to such Louisiana
Gaming Laws and proceedings thereunder; and (b) no facts have come to the
attention of such counsel that would lead such counsel to believe that the
statements listed in clause (a) of this paragraph (i) contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make such statements, in light of the
circumstances under which they are made, not misleading, or that the
statements listed in clause (a) of this paragraph (i), as contained in the
Prospectus at the time of filing thereof or on the date of such counsel's
opinion, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
such statements, in light of the circumstances under which they were made,
not misleading;
(v) the execution and delivery of the Operative Documents by the
Company and the Subsidiaries, as applicable, the issuance and sale of the
Shares, the performance of the Company's and each Subsidiary's obligations
pursuant to the Operative Documents, as applicable, and the consummation of
the transactions contemplated hereby and thereby will not conflict with or
result in a breach or violation of or constitute a default or cause an
acceleration of any obligation under, or result in the imposition or
creation of (or the obligation to create or impose) any Lien with respect
to (A) any of the respective charters and by-laws of any of the Louisiana
Subsidiaries, (B) any applicable statute, rule or regulation under
Louisiana law, or (C) any order of any Louisiana court or governmental
agency, body or official having jurisdiction over the Company or any of the
Subsidiaries or any of their properties, except, in the case of clauses (B)
and (C), for such conflicts, breaches, violations or defaults that could
not reasonably be expected to have, singly or in the aggregate, a Material
Adverse Effect;
(vi) no authorization, approval, consent or order of the
Louisiana Gaming Authorities or any other governmental body, agency or
official of the State of Louisiana ("Louisiana Authorities") is necessary
in connection with the issuance of the Shares and the due and valid
execution, delivery and performance by the Company or any of the
Subsidiaries, as the case may be, of this Agreement and the other Operative
Documents, as applicable, and any of the transactions contemplated hereby
of thereby to be entered into prior to or contemporaneously with such
agreements, except (a)
37
<PAGE>
as disclosed in the Registration Statement, (b) such authorizations,
approvals, consents or licenses of the Louisiana Authorities that have
been obtained prior to the date of such opinion and (c) the periodic and
other filings and reporting requirements to which any of the Company and
the Subsidiaries are subject generally. Each of the Operative Documents
has been presented to the Louisiana Gaming Authorities to the extent
required by the Louisiana Gaming Laws, and such documents and the
transactions described therein have been approved by the Louisiana Gaming
Authorities to the extent required by Louisiana Gaming Laws. Such counsel
has received no notice that such approvals have been revoked, modified or
rescinded as of the date of such opinion;
(vii) except as disclosed in the Registration Statement, (a) to
the best knowledge of such counsel, the Company and each of the
Subsidiaries has made all declarations and filings with the Louisiana
Gaming Authorities necessary to use its properties and assets and to
conduct its business pursuant to Louisiana Gaming Laws, as of the date of
such opinion; (b) no facts have come to the attention of such counsel that
would lead such counsel to believe that all authorizations of and from the
Louisiana Gaming Authorities are not valid and in full force and effect as
of the date of such opinion; (c) no facts have come to the attention of
such counsel that would lead such counsel to believe that the Company and
each of the Subsidiaries is not in compliance in all material respects with
the terms and conditions of all authorizations of and from the Louisiana
Gaming Authorities and with the Louisiana Gaming Laws, as of the date of
such opinion; and (d) as of the date of such opinion, such counsel has
received no notice of any proceedings relating to the revocation or
modification of any authority granted by any of the Louisiana Gaming
Authorities to the Company and the Subsidiaries, and such counsel is aware
of no restrictions imposed by any of the Louisiana Gaming Authorities which
would have a material adverse effect on the properties, plans, results of
operations, management, condition (financial or otherwise) or business
affairs of the Company or the Subsidiaries, in the aggregate; no facts have
come to the attention of such counsel that would lead such counsel to
believe that any of the Louisiana Gaming Authorities is considering
modifying, limiting, conditioning, suspending, revoking or not renewing the
licenses, permits, certificates, consents, orders, approvals and other
authorizations from such Louisiana Gaming Authority (collectively, the
"Gaming Licenses") of the Company or any of the Subsidiaries, except where
such modification, revocation, suspension, limitation or condition would
not have a material adverse effect on the properties, plans, results of
operations, management, condition (financial or otherwise) or business
affairs of the Company or the Subsidiaries, in the aggregate; such counsel
is aware of no notice given to the Company or any of the Subsidiaries that
any of the
38
<PAGE>
Louisiana Gaming Authorities are investigating the Company or any of the
Subsidiaries (other than normal overseeing reviews incident to the gaming
activities of the Company and the Subsidiaries); and such counsel has
received no notice that the Company or any of the Subsidiaries has any
reason to believe there is an existing basis for any of the Louisiana
Gaming Authorities to deny the renewal of the Gaming Licenses held by the
Company or any of the Subsidiaries; and
(viii) each of the persons listed under the caption "Management"
in the Prospectus has been or will be qualified or licensed by the
Louisiana Gaming Laws as required by the Louisiana Gaming Laws.
(j) You shall have received an opinion of Paul H. Johnson, Esq.,
Mississippi regulatory counsel for the Company, dated as of the Closing
Date, in form and substance satisfactory to counsel for the Underwriters,
to the effect that:
(i) (a) the statements in the Prospectus under the captions "Risk
Factors--Strict Regulation by Gaming Authorities" and "Gaming Regulation
and Licensing - Mississippi", fairly present the information with respect
to such Mississippi Gaming Laws and proceedings thereunder; and (b) no
facts have come to the attention of such counsel that would lead such
counsel to believe that the statements listed in clause (a) of this
paragraph (i) contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
such statements, in light of the circumstances under which they are made,
not misleading, or that the statements listed in clause (a) of this
paragraph (i), as contained in the Prospectus at the time of filing thereof
or on the date of such counsel's opinion, contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make such statements, in light of the
circumstances under which they were made, not misleading;
(ii) the execution and delivery of this Agreement and the other
Operative Documents by the Company and the Subsidiaries, as applicable, the
issuance and sale of the Shares, the performance of the Company's and each
Subsidiary's obligations pursuant to the Operative Documents, as
applicable, and the consummation of the transactions contemplated hereby
and thereby will not conflict with or result in a breach or violation of or
constitute a default or cause an acceleration of any obligation under, or
result in the imposition or creation of (or the obligation to create or
impose) any Lien with respect to (A) any applicable gaming statute, rule or
regulation under Mississippi law or (B) any outstanding order of a
Mississippi court or
39
<PAGE>
governmental agency, body or official having jurisdiction over the Company
or any of the Subsidiaries or any of their properties, except for such
conflicts, breaches, violations or defaults that could not reasonably be
expected to have, singly or in the aggregate, a Material Adverse Effect;
(iii) no authorization, approval, consent or order of the
Mississippi Gaming Authorities or any other governmental body, agency or
official of the State of Mississippi ("Mississippi Authorities") is
necessary in connection with the issuance of the Shares and the due and
valid execution, delivery and performance by the Company or any of the
Subsidiaries, as the case may be, of this Agreement and the other Operative
Documents, as applicable, and any of the transactions contemplated hereby
of thereby to be entered into prior to or contemporaneously with such
agreements, except (a) as disclosed in the Registration Statement, (b) such
authorizations, approvals, consents or licenses of the Mississippi
Authorities that have been obtained prior to the date of such opinion and
(c) the periodic and other filings and reporting requirements to which any
of the Company and the Subsidiaries are subject generally. Each of the
Operative Documents has been presented to the Mississippi Gaming
Authorities to the extent required by the Mississippi Gaming Laws, and such
documents and the transactions described therein have been approved by the
Mississippi Gaming Authorities to the extent required by Mississippi Gaming
Laws. Such counsel has received no notice that such approvals have been
revoked, modified or rescinded as of the date of such opinion;
(iv) except as disclosed in the Registration Statement, (a) to
the best knowledge of such counsel, the Company and each of the
Subsidiaries has made all declarations and filings with the Mississippi
Gaming Authorities necessary to use its properties and assets and to
conduct its business pursuant to Mississippi Gaming Laws, as of the date of
such opinion; (b) no facts have come to the attention of such counsel that
would lead such counsel to believe that all authorizations of and from the
Mississippi Gaming Authorities are not valid and in full force and effect
as of the date of such opinion; (c) no facts have come to the attention of
such counsel that would lead such counsel to believe that the Company and
each of the Subsidiaries is not in compliance in all material respects with
the terms and conditions of all authorizations of and from the Mississippi
Gaming Authorities and with the Mississippi Gaming Laws, as of the date of
such opinion; and (d) as of the date of such opinion, such counsel has
received no notice of any proceedings relating to the revocation or
modification of any authority granted by any of the Mississippi Gaming
Authorities to the Company and the Subsidiaries, and such counsel is aware
of no restrictions imposed by any of the Mississippi Gaming Authorities
which would have a
40
<PAGE>
material adverse effect on the properties, plans, results of operations,
management, condition (financial or otherwise) or business affairs of the
Company or the Subsidiaries, in the aggregate; no facts have come to the
attention of such counsel that would lead such counsel to believe that any
of the Mississippi Gaming Authorities is considering modifying, limiting,
conditioning, suspending, revoking or not renewing the licenses, permits,
certificates, consents, orders, approvals and other authorizations from
such Mississippi Gaming Authority (collectively, the "Gaming Licenses") of
the Company or any of the Subsidiaries, except where such modification,
revocation, suspension, limitation or condition would not have a material
adverse effect on the properties, plans, results of operations, management,
condition (financial or otherwise) or business affairs of the Company or
the Subsidiaries, in the aggregate; such counsel is aware of no notice
given to the Company or any of the Subsidiaries that any of the Mississippi
Gaming Authorities are investigating the Company or any of the Subsidiaries
(other than normal overseeing reviews incident to the gaming activities of
the Company and the Subsidiaries); and such counsel has received no notice
that the Company or any of the Subsidiaries has any reason to believe
there is an existing basis for any of the Mississippi Gaming Authorities to
deny the renewal of the Gaming Licenses held by the Company or any of the
Subsidiaries; and
(v) each of the persons listed under the caption "Management" in
the Prospectus has been or will be qualified or licensed by the Mississippi
Gaming Laws as required by the Mississippi Gaming Laws.
(k) You shall have received an opinion of Kozlow, Seaton, Romanini &
Brooks, New Jersey regulatory counsel for the Company, dated as of the
Closing Date, in form and substance satisfactory to counsel for the
Underwriters, to the effect that:
(i) (a) the statements in the Prospectus under the captions
"Risk Factors--Strict Regulation by Gaming Authorities" and "Gaming
Regulation and Licensing - New Jersey", fairly present the information with
respect to such New Jersey Gaming Laws and proceedings thereunder; and (b)
no facts have come to the attention of such counsel that would lead such
counsel to believe that the statements listed in clause (a) of this
paragraph (i) contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
such statements, in light of the circumstances under which they are made,
not misleading, or that the statements listed in clause (a) of this
paragraph (i), as contained in the Prospectus at the time of filing thereof
or on the date of such counsel's opinion, contain any untrue statement of a
material fact or omit to state a
41
<PAGE>
material fact required to be stated therein or necessary in order to make
such statements, in light of the circumstances under which they were made,
not misleading;
(ii) the execution and delivery of this Agreement and the other
Operative Documents by the Company and the Subsidiaries, as applicable, the
issuance and sale of the Shares, the performance of the Company's and each
Subsidiary's obligations pursuant to the Operative Documents, as
applicable, and the consummation of the transactions contemplated hereby
and thereby will not conflict with or result in a breach or violation of or
constitute a default or cause an acceleration of any obligation under, or
result in the imposition or creation of (or the obligation to create or
impose) any Lien with respect to (A) any applicable gaming statute, rule or
regulation under New Jersey law or (B) any outstanding order of a New
Jersey court or governmental agency, body or official having jurisdiction
over the Company or any of the Subsidiaries or its properties, except for
such conflicts, breaches, violations or defaults that could not reasonably
be expected to have, singly or in the aggregate, a Material Adverse Effect;
(iii) no authorization, approval, consent or order of the New
Jersey Gaming Authorities or any other governmental body, agency or
official of the State of New Jersey ("New Jersey Authorities") is
necessary in connection with the issuance of the Shares and the due and
valid execution, delivery and performance by the Company or any of the
Subsidiaries, as the case may be, of this Agreement and the other Operative
Documents, as applicable, and any of the transactions contemplated hereby
of thereby to be entered into prior to or contemporaneously with such
agreements, except (a) as disclosed in the Registration Statement, (b) such
authorizations, approvals, consents or licenses of the New Jersey
Authorities that have been obtained prior to the date of such opinion and
(c) the periodic and other filings and reporting requirements to which any
of the Company and the Subsidiaries are subject generally. Each of the
Operative Documents has been presented to the New Jersey Gaming Authorities
to the extent required by the New Jersey Gaming Laws, and such documents
and the transactions described therein have been approved by the New Jersey
Gaming Authorities to the extent required by New Jersey Gaming Laws. Such
counsel has received no notice that such approvals have been revoked,
modified or rescinded as of the date of such opinion;
(iv) except as disclosed in the Registration Statement, (a) to
the best knowledge of such counsel, the Company and each of its
subsidiaries has made all declarations and filings with the New Jersey
Gaming Authorities necessary to use its properties and assets and to
conduct its business pursuant
42
<PAGE>
to New Jersey Gaming Laws, as of the date of such opinion; (b) no facts
have come to the attention of such counsel that would lead such counsel to
believe that all authorizations of and from the New Jersey Gaming
Authorities are not valid and in full force and effect as of the date of
such opinion; (c) no facts have come to the attention of such counsel that
would lead such counsel to believe that the Company and each of its
subsidiaries is not in compliance in all material respects with the terms
and conditions of all authorizations of and from the New Jersey Gaming
Authorities and with the New Jersey Gaming Laws, as of the date of such
opinion; and (d) as of the date of such opinion, such counsel has received
no notice of any proceedings relating to the revocation or modification of
any authority granted by any of the New Jersey Gaming Authorities to the
Company and its subsidiaries, and such counsel is aware of no restrictions
imposed by any of the New Jersey Gaming Authorities which would have a
material adverse effect on the properties, plans, results of operations,
management, condition (financial or otherwise) or business affairs of the
Company or its subsidiaries, in the aggregate; no facts have come to the
attention of such counsel that would lead such counsel to believe that any
of the New Jersey Gaming Authorities is considering modifying, limiting,
conditioning, suspending, revoking or not renewing the licenses, permits,
certificates, consents, orders, approvals and other authorizations from
such New Jersey Gaming Authority (collectively, the "Gaming Licenses") of
the Company or any of its subsidiaries, except where such modification,
revocation, suspension, limitation or condition would not have a material
adverse effect on the properties, plans, results of operations, management,
condition (financial or otherwise) or business affairs of the Company or
its subsidiaries, in the aggregate; such counsel is aware of no notice
given to the Company or any of its subsidiaries that any of the New Jersey
Gaming Authorities are investigating the Company or any of its subsidiaries
(other than normal overseeing reviews incident to the gaming activities of
the Company and its subsidiaries); and such counsel has received no notice
that the Company or any of its subsidiaries has any reason to believe there
is an existing basis for any of the New Jersey Gaming Authorities to deny
the renewal of the Gaming Licenses held by the Company or any of its
subsidiaries; and
(v) each of the persons listed under the caption "Management" in
the Prospectus has been or will be qualified or licensed by the New Jersey
Gaming Laws as required by the New Jersey Gaming Laws.
(l) You shall have received an opinion of Waters McPherson, McNeil,
New Jersey regulatory counsel for BGII and its subsidiaries, dated as of
the Closing Date, in form and substance satisfactory to counsel for the
Underwriters, to the effect that:
43
<PAGE>
(i) except as disclosed in the Registration Statement, (a) to
the best knowledge of such counsel, BGII and its subsidiaries has made all
declarations and filings with the New Jersey Gaming Authorities necessary
to use its properties and assets and to conduct its business pursuant to
New Jersey Gaming Laws, as of the date of such opinion; (b) no facts have
come to the attention of such counsel that would lead such counsel to
believe that all authorizations of and from the New Jersey Gaming
Authorities are not valid and in full force and effect as of the date of
such opinion; (c) no facts have come to the attention of such counsel that
would lead such counsel to believe that BGII and its subsidiaries is not in
compliance in all material respects with the terms and conditions of all
authorizations of and from the New Jersey Gaming Authorities and with the
New Jersey Gaming Laws, as of the date of such opinion; and (d) as of the
date of such opinion, such counsel has received no notice of any
proceedings relating to the revocation or modification of any authority
granted by any of the New Jersey Gaming Authorities to BGII and its
subsidiaries, and such counsel is aware of no restrictions imposed by any
of the New Jersey Gaming Authorities which would have a material adverse
effect on the properties, plans, results of operations, management,
condition (financial or otherwise) or business affairs of BGII and its
subsidiaries, in the aggregate; no facts have come to the attention of such
counsel that would lead such counsel to believe that any of the New Jersey
Gaming Authorities is considering modifying, limiting, conditioning,
suspending, revoking or not renewing the licenses, permits, certificates,
consents, orders, approvals and other authorizations from such New Jersey
Gaming Authority (collectively, the "Gaming Licenses") of BGII and its
subsidiaries, except where such modification, revocation, suspension,
limitation or condition would not have a material adverse effect on the
properties, plans, results of operations, management, condition (financial
or otherwise) or business affairs of BGII and its subsidiaries, in the
aggregate; such counsel is aware of no notice given to BGII and its
subsidiaries that any of the New Jersey Gaming Authorities are
investigating BGII and its subsidiaries (other than normal overseeing
reviews incident to the gaming activities of BGII and its subsidiaries);
and such counsel has received no notice that BGII and its subsidiaries has
any reason to believe there is an existing basis for any of the New Jersey
Gaming Authorities to deny the renewal of the Gaming Licenses held by BGII
and its subsidiaries.
(m) You shall have received an opinion of Bruckhaus, Westrick,
Stegeman, German regulatory counsel for the Company, dated as of the
Closing Date, in form and substance satisfactory to counsel for the
Underwriters, to the effect that:
44
<PAGE>
(i) (a) the statements in the Prospectus under the captions "Risk
Factors--Strict Regulation by Gaming Authorities" and "Gaming Regulation
and Licensing - Germany", fairly present the information with respect to
such German Gaming Laws and proceedings thereunder; and (b) no facts have
come to the attention of such counsel that would lead such counsel to
believe that the statements listed in clause (a) of this paragraph (i)
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make such
statements, in light of the circumstances under which they are made, not
misleading, or that the statements listed in clause (a) of this paragraph
(i), as contained in the Prospectus at the time of filing thereof or on the
date of such counsel's opinion, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make such statements, in light of the circumstances
under which they were made, not misleading;
(ii) the execution and delivery of this Agreement and the other
Operative Documents by the Company and the Subsidiaries, as applicable, the
issuance and sale of the Shares, the performance of the Company's and each
Subsidiary's obligations pursuant to the Operative Documents, as
applicable, and the consummation of the transactions contemplated hereby
and thereby will not conflict with or result in a breach or violation of or
constitute a default or cause an acceleration of any obligation under, or
result in the imposition or creation of (or the obligation to create or
impose) (A) any Lien with respect to any of the respective charters and by-
laws of any of the German Subsidiaries; (B) any applicable gaming statute,
rule or regulation under German law or (C) any outstanding order of a
German court or governmental agency, body or official having jurisdiction
over the Company or any of the Subsidiaries or its properties , except, in
the case of clauses (B) and (C), for such conflicts, breaches, violations
or defaults that could not reasonably be expected to have, singly or in the
aggregate, a Material Adverse Effect;
(iii) no authorization, approval, consent or order of the
German Gaming Authorities or any other governmental body, agency or
official of the Federal Republic of Germany ("German Authorities") is
necessary in connection with the issuance of the Shares and the due and
valid execution, delivery and performance by the Company or any of the
Subsidiaries, as the case may be, of this Agreement and the other Operative
Documents, as applicable, and any of the transactions contemplated hereby
of thereby to be entered into prior to or contemporaneously with such
agreements, except (a) as disclosed in the Registration Statement, (b) such
authorizations, approvals, consents or licenses of the German Authorities
45
<PAGE>
that have been obtained prior to the date of such opinion and (c) the
periodic and other filings and reporting requirements to which any of the
Company and the Subsidiaries are subject generally. Each of the Operative
Documents has been presented to the German Gaming Authorities to the extent
required by the German Gaming Laws, and such documents and the transactions
described therein have been approved by the German Gaming Authorities to
the extent required by German Gaming Laws. Such counsel has received no
notice that such approvals have been revoked, modified or rescinded as of
the date of such opinion;
(iv) except as disclosed in the Registration Statement, (a) to
the best knowledge of such counsel, the Company and each of the
Subsidiaries has made all declarations and filings with the German Gaming
Authorities necessary to use its properties and assets and to conduct its
business pursuant to German Gaming Laws, as of the date of such opinion;
(b) no facts have come to the attention of such counsel that would lead
such counsel to believe that all authorizations of and from the German
Gaming Authorities are not valid and in full force and effect as of the
date of such opinion; (c) no facts have come to the attention of such
counsel that would lead such counsel to believe that the Company and each
of the Subsidiaries is not in compliance in all material respects with the
terms and conditions of all authorizations of and from the German Gaming
Authorities and with the German Gaming Laws, as of the date of such
opinion; and (d) as of the date of such opinion, such counsel has received
no notice of any proceedings relating to the revocation or modification of
any authority granted by any of the German Gaming Authorities to the
Company and the Subsidiaries, and such counsel is aware of no restrictions
imposed by any of the German Gaming Authorities which would have a material
adverse effect on the properties, plans, results of operations, management,
condition (financial or otherwise) or business affairs of the Company or
the Subsidiaries, in the aggregate; no facts have come to the attention of
such counsel that would lead such counsel to believe that any of the German
Gaming Authorities is considering modifying, limiting, conditioning,
suspending, revoking or not renewing the licenses, permits, certificates,
consents, orders, approvals and other authorizations from such German
Gaming Authority (collectively, the "Gaming Licenses") of the Company or
any of the Subsidiaries, except where such modification, revocation,
suspension, limitation or condition would not have a material adverse
effect on the properties, plans, results of operations, management,
condition (financial or otherwise) or business affairs of the Company or
the Subsidiaries, in the aggregate; such counsel is aware of no notice
given to the Company or any of the Subsidiaries that any of the German
Gaming Authorities are investigating the Company or any of the Subsidiaries
(other than normal overseeing reviews incident to the gaming activities of
the
46
<PAGE>
Company and the Subsidiaries); and such counsel has received no notice that
the Company or any of the Subsidiaries has any reason to believe there is
an existing basis for any of the German Gaming Authorities to deny the
renewal of the Gaming Licenses held by the Company or any of the
Subsidiaries;
(v) each of the persons listed under the caption "Management" in
the Prospectus has been or will be qualified or licensed by the German
Gaming Laws as required by the German Gaming Laws.
(n) You shall have received an opinion of Shereff, Friedman, Hoffman
& Goodman, LLP, counsel for BGII, dated as of the Closing Date, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) BGII is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and has the
requisite corporate power and authority to own, lease and operate its
properties and conduct its business as presently conducted;
(ii) Gaming is a corporation duly authorized, validly existing
and in good standing under the laws of the State of Nevada;
(iii) Based on a review of the stock register of Gaming as of
the date hereof, there are ____ shares of common stock, no par value, of
Gaming issued and outstanding. Based on our review of Gaming's minute
book, all outstanding shares of Gaming Common Stock have been duly
authorized and issued and are fully paid, nonassessable and free of
statutory preemptive rights. BGII owns of record and, to our knowledge,
beneficially all of the outstanding shares of Gaming Common Stock free and
clear of any perfected security interests and, to our knowledge, any other
security interest, claims, liens, encumbrances or other restrictions on
voting and transferability; and
(iv) Each of the Operative Documents to which BGII is a party
have been duly authorized, executed and delivered by BGII.
(o) You shall have received an opinion, dated the Closing Date and
each Option Closing Date, if applicable, of Skadden, Arps, Slate, Meagher &
Flom ("Skadden Arps"), counsel for the Underwriters, in form and substance
reasonably satisfactory to you.
(p) You shall have received letters on and as of the date hereof as
well as on and as of the Closing Date and each Option Closing Date, if any
47
<PAGE>
(in the latter cases constituting an affirmation of the statements set
forth in the former, based on limited procedures), in form and substance
satisfactory to you, from (A) KPMG Peat Marwick LLP, independent public
accountants for the Company and the Subsidiaries with respect to the
consolidated financial statements of the Company and certain other
financial information contained in the Registration Statement and the
Prospectus,including, without limitation, the financial forecasts, (B)
Coopers & Lybrand L.L.P., independent public accountants for BGII and its
subsidiaries, with respect to the consolidated financial statements of BGII
from January 1, 1992, and certain other financial information contained in
the Registration Statement and the Prospectus and (C) Ernst & Young,
independent public accountants for BGII and its subsidiaries, with respect
to the consolidated financial statements of BGII for its fiscal year 1991.
(q) You shall have received a certificate of a financial officer of
the Company as to certain agreed upon accounting matters, in substantially
the form previously delivered to you.
(r) Prior to the Closing Date and each Option Closing Date, if
applicable, the Company shall have furnished to you or caused to be
furnished to you such further information, certificates and documents as
you may reasonably request.
(s) The Company and the Subsidiaries shall not have failed, at or
prior to the Closing Date and each Option Closing Date, if applicable, to
perform or comply with any of the agreements herein contained and required
to be performed or complied with by the Company or the Subsidiaries at or
prior to the Closing Date and such Option Closing Date, if applicable.
(t) Each element of the Transaction, other than the Preferred Stock
Offering, shall have been consummated on substantially the terms described
in the Prospectus and the Registration Statement.
(u) All legal opinions and accountants "comfort letters" received in
connection with the Merger, whose form and substance shall have been
determined by the Company, shall be addressed to, or permit reliance on by,
and delivered to the Underwriters.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to satisfaction on and as of each Option Closing
Date of the conditions set forth in paragraphs (a) through (o), above, except
that the opinions called for and the letters referred to shall be revised to
reflect the sale of Additional Shares.
48
<PAGE>
9. EFFECTIVE DATE OF AGREEMENT, DEFAULTS AND TERMINATION. This
Agreement shall become effective upon the later of (i) the execution and
delivery of this Agreement by the parties hereto, (ii) unless the Company
intends to rely on Rule 430A of the Act, the effectiveness of the Registration
Statement (including, if applicable, the registration statement filed pursuant
to Rule 462(b) under the Act) and (iii) if the Company intends to rely on Rule
430A of the Act, the earlier of the effectiveness of a post-effective amendment
filed in compliance with Rule 430A of the Act or the filing of a final
prospectus pursuant to Rule 424(b) of the Act. Notwithstanding the foregoing,
this Agreement shall not become effective prior to the effectiveness of the Debt
Underwriting Agreement.
This Agreement may be terminated at any time on or prior to the
Closing Date by Jefferies by notice to the Company if any of the following has
occurred: (i) subsequent to the date the Registration Statement is declared
effective or the date of this Agreement, any Material Adverse Change which, in
the judgment of Jefferies, impairs the investment quality of the Shares, (ii)
any outbreak or escalation of hostilities or other national or international
calamity or crisis or material adverse change in the financial markets of the
United States or elsewhere or any other substantial national or international
calamity or emergency if the effect of such outbreak, escalation, calamity,
crisis or emergency would, in Jefferies' judgment, make it impracticable or
inadvisable to market the Shares or to enforce contracts for the sale of the
Shares, (iii) any suspension or limitation of trading generally in securities on
the New York, American or Pacific Stock Exchanges or the Nasdaq NMS, or the
over-the-counter markets or any setting of minimum prices for trading on such
exchanges or markets, (iv) any declaration of a general banking moratorium by
either Federal or New York state authorities, (v) the taking of any action by
any Federal, state or local government or agency in respect of its monetary or
fiscal affairs that in Jefferies' judgment has a material adverse effect on the
financial markets in the United States, and would, in Jefferies' judgment, make
it impracticable or inadvisable to market the Shares or to enforce contracts for
the sale of the Shares, (vi) any securities of the Company or any of the
Subsidiaries shall have been downgraded or placed on any "watch list" for
possible downgrading or reviewed for a possible change that does not indicate
the direction of the possible change by any "nationally recognized statistical
rating organization," as such term is defined for purposes of Rule 436(g)(2) of
the Act, (vii) the delisting of the Shares from the Nasdaq NMS, (viii) the
enactment, publication, decree or other promulgation of any Federal, state or
local statute, regulation, rule or order of any court or other governmental
authority which in the judgment of Jefferies could have a Material Adverse
Effect or make it inadvisable or impractical to market the Shares or (ix) the
occurrence, the scheduling of or the announcement of, or published discussion
regarding any proposed, pending or threatened or contemplated investigation or
inquest by a court or other governmental authority in respect of the
49
<PAGE>
Company, any Subsidiary or any person required to be licensed in connection
therewith.
If this Agreement shall be terminated by the Underwriters pursuant to
clause (i), (vi), (vii), (viii) or (ix) of the second paragraph of this
Section 9 or because of the failure or refusal on the part of the Company or the
Subsidiaries to comply with the terms or to fulfill any of the conditions of
this Agreement, the Company and the Subsidiaries jointly and severally agree to
reimburse you for all reasonable out-of-pocket expenses (including the
reasonable fees and disbursements of counsel) incurred by the Underwriters, and
(without duplication) to fulfill the obligations of that certain engagement
letters, dated April 24, 1996, as amended and supplemented through the date
hereof, among the Company and Jefferies. Notwithstanding any termination of
this Agreement, the Company and the Subsidiaries shall be liable, jointly and
severally, for all expenses which they agree to pay pursuant to Section 5
hereof. If this Agreement is terminated pursuant to this Section 9, such
termination shall be without liability of any Underwriter to the Company or any
of the Subsidiaries.
If on the Closing Date or on an Option Closing Date, as the case may
be, any of the Underwriters shall fail or refuse to purchase the Firm Shares or
the Additional Shares, as the case may be, which it has agreed to purchase
hereunder on such date, and the number of such Firm Shares or Additional Shares,
as the case may be, that such defaulting Underwriter or Underwriters, as the
case may be, agreed but failed or refused to purchase does not exceed 10% of the
total number of such Shares to be purchased on such date by all Underwriters,
each non-defaulting Underwriter shall be obligated severally, in the proportion
which the number of Firm Shares set forth opposite its name in Schedule I hereto
bears to the number of Firm Shares which all the non-defaulting Underwriters, as
the case may be, have agreed to purchase, or in such other proportion as you (at
your option) may specify, to purchase the Firm Shares or Additional Shares that
such defaulting Underwriter or Underwriters, as the case may be, agreed but
failed or refused to purchase on such date; PROVIDED that in no event shall the
number of Firm Shares or Additional Shares, as the case may be, that any
Underwriter has agreed to purchase pursuant to Section 2 hereof be increased
pursuant to this Section 9 by an number in excess of one-ninth of such number of
Firm Shares or Additional Shares without the written consent of such
Underwriter. If, on the Closing Date or on the Option Closing Date, as the case
may be, any of the Underwriters shall fail or refuse to purchase the Firm Shares
or the Additional Shares, as the case may be, and the total number of Firm
Shares or Additional Shares with respect to which such default occurs exceeds
10% of the total number of Shares to be purchased on such date by all
Underwriters and arrangements satisfactory to you and the Company for the
purchase of such Shares are not made within 48 hours after such default, this
Agreement shall terminate without liability on the part of the non-defaulting
50
<PAGE>
Underwriters and the Company, except as otherwise provided in this Section 9.
In any such case that does not result in termination of this Agreement, either
you or the Company may postpone the Closing Date or such Option Closing Date, as
the case may be, for not longer than seven (7) days, in order that the required
changes, if any, in the Registration Statement and the Prospectus or any other
documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve a defaulting Underwriter from liability in respect
of any default of any such Underwriter under this Agreement.
10. NOTICES. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (a) if to the Company, to it at
Alliance Gaming Corporation, 4380 Boulder Highway, Las Vegas, NV 89121,
Attention: David Johnson, Esq., with a copy to Milbank, Tweed, Hadley & McCloy,
1 Chase Manhattan Plaza, New York, New York 10005, Attention: Mark Weissler (b)
if to any Underwriter, to Jefferies & Company, Inc. 11100 Santa Monica
Boulevard, Los Angeles, California 90025, Attention: Jerry Gluck, Esq., with a
copy to Ladenburg, Thalmann & Co. Inc., 540 Madison Avenue, 10th Floor New York,
New York 10022, Attention: Ronald J. Kramer and a copy to Skadden, Arps, Slate,
Meagher & Flom at 300 South Grand Avenue, Suite 3400, Los Angeles, California
90071, Attention: Nicholas P. Saggese, Esq. or (c) in any case to such other
address as the person to be notified may have requested in writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE COMPANY, ON BEHALF OF ITSELF AND
ITS SUBSIDIARIES, HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF
THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE CITY OF NEW YORK IN
CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING RELATED TO THIS AGREEMENT OR ANY
OF THE MATTERS CONTEMPLATED HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF
PERSONAL JURISDICTION AND IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF ANY
SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE
COMPANY, ON BEHALF OF ITSELF AND THE SUBSIDIARIES, IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT THEY MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION
WHICH THEY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT,
ACTION
51
<PAGE>
OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.
12. SEVERABILITY. Any determination that any provision of this
Agreement may be, or is, unenforceable shall not affect the enforceability of
the remainder of this Agreement.
13. SUCCESSORS. Except as otherwise provided, this Agreement has
been and is made solely for the benefit of and shall be binding upon the
Company, the Subsidiaries, the Underwriters, any Indemnified Person referred to
herein and their respective successors and assigns, all as and to the extent
provided in this Agreement, and no other person shall acquire or have any right
under or by virtue of this Agreement. The terms "successors and assigns" shall
not include a purchaser of any of the Shares from any of the several
Underwriters merely because of such purchase.
14. CERTAIN DEFINITIONS. For purposes of this Agreement, (a)
"business day" means any day on which the New York Stock Exchange, Inc. is open
for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of the
Securities Act.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and, if executed in one or more counterparts, the executed
counterparts shall each be deemed to be an original, and all such counterparts
shall together constitute one and the same instrument.
16. HEADINGS. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
17. SURVIVAL. The indemnity and contribution provisions and the
other agreements, representations and warranties of the Company, its officers
and directors and of the Underwriters set forth in or made pursuant to this
Agreement shall remain operative and in full force and effect, and will survive
delivery of and payment for the Shares, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any of the
Underwriters or by or on behalf of the Company or the officers or directors of
the Company or any controlling person of the Company, (ii) acceptance of the
Shares and payment for them hereunder and (iii) termination of this Agreement.
52
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company and you.
Very truly yours,
ALLIANCE GAMING CORPORATION
By: ____________________________
Name:
Title:
BGII ACQUISITION CORP.
By: ____________________________
Name:
Title:
APT GAMES, INC.
By: ____________________________
Name:
Title:
CASINO ELECTRONICS, INC.
By: ____________________________
Name:
Title:
FOREIGN GAMING VENTURES, INC.
By: ____________________________
Name:
Title:
<PAGE>
UNITED COIN MACHINE CO.
By: ____________________________
Name:
Title:
APT COIN MACHINE CO.
By: ____________________________
Name:
Title:
TROLLEY STOP, INC.
By: ____________________________
Name:
Title:
PLANTATION INVESTMENTS, INC.
By: ____________________________
Name:
Title:
MIZPAH INVESTMENTS, INC.
By: ____________________________
Name:
Title:
<PAGE>
UNITED GAMES, INC.
By: ____________________________
Name:
Title:
SLOT PALACE, INC.
By: ____________________________
Name:
Title:
WCAL, INC.
By: ____________________________
Name:
Title:
DOUBLE EAGLE HOTEL & CASINO, INC.
By: ____________________________
Name:
Title:
FCJI, INC.
By: ____________________________
Name:
Title:
<PAGE>
UNITED NATIVE AMERICAN, INC.
By: ____________________________
Name:
Title:
NATIVE AMERICAN INVESTMENTS, INC.
By: ____________________________
Name:
Title:
OREGON VENTURES, INC.
By: ____________________________
Name:
Title:
INDIANA GAMING VENTURES, INC.
By: ____________________________
Name:
Title:
MISSISSIPPI VENTURES, INC.
By: ____________________________
Name:
Title:
<PAGE>
UNITED GAMING OF IOWA, INC.
By: ____________________________
Name:
Title:
UNITED GAMING RAINBOW
By: ____________________________
Name:
Title:
MISSISSIPPI VENTURES II, INC.
By: ____________________________
Name:
Title:
VERMONT FINANCIAL VENTURES, INC.
By: ____________________________
Name:
Title:
MISSOURI VENTURES II, INC.
By: ____________________________
Name:
Title:
<PAGE>
LOUISIANA VENTURES, INC.
By: ____________________________
Name:
Title:
VIDEO DISTRIBUTING SERVICES, INC.
By: ____________________________
Name:
Title:
SOUTHERN VIDEO SERVICES, INC.
By: ____________________________
Name:
Title:
ALPINE WILLOW INVESTMENTS, INC.
By: ____________________________
Name:
Title:
KANSAS GAMING VENTURES, INC.
By: ____________________________
Name:
Title:
<PAGE>
PENNSYLVANIA GAMING VENTURES I, INC.
By: ____________________________
Name:
Title:
BALLY GAMING INTERNATIONAL, INC.
By: ____________________________
Name:
Title:
BALLY GAMING, INC.
By: ____________________________
Name:
Title:
ALLIANCE HOLDING CORP.
By: ____________________________
Name:
Title:
<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
By: JEFFERIES & COMPANY, INC.
By: ____________________________________
Name:
Title:
LADENBURG, THALMANN & CO. INC.
By: ____________________________________
Name:
Title:
<PAGE>
SCHEDULE I
Number of Firm
Shares to be
Purchased
---------
Jefferies & Company, Inc. . . . . . . . . . . . . . . . . . . . .
Ladenburg, Thalmann & Co. Inc.. . . . . . . . . . . . . . . . . . __________
Total
<PAGE>
May 24, 1996
Alliance Gaming Corporation
4380 Boulder Highway
Las Vegas, Nevada 89121
RE: ALLIANCE GAMING CORPORATION
REGISTRATION STATEMENT ON FORM S-2
Dear Ladies and Gentlemen:
We refer to the Registration Statement and all amendments thereto
(Registration No. 333-02145) (the "Registration Statement") of Alliance
Gaming Corporation, a Nevada corporation ("Alliance"), on Form S-2, filed
by Alliance with the Securities and Exchange Commission in order to register
under the Securities Act of 1933, as amended (the "Act"), a total of
$17,250,000 of Alliance's 15% Non-Voting Senior Pay-in-Kind Special Stock,
Series B, $0.10 par value (the "Preferred Stock").
In rendering the opinions hereinafter expressed, we have made such
legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction as
being true reproductions of originals, of all such records, agreements and
other instruments, certificates of public officials, certificates of officers
and representatives of Alliance, and such other documents as we have deemed
necessary, as a basis for the opinions expressed below, including without
limitation the Registration Statement. Capitalized terms used but not defined
herein shall have the meaning ascribed thereto in the Prospectus contained
in the Registration Statement.
Without limiting the generality of the foregoing, in our examination,
we have assumed without independent verification, that (i) each of the
parties thereto has duly and validly executed and delivered each instrument,
document, and agreement to which such party is a signatory, and such party's
obligations set forth therein are its legal, valid, and binding obligations,
enforceable in accordance with their respective terms, (ii) each natural
person executing any such instrument, document, or agreement is legally
competent to do so, (iii) all documents submitted to us as originals are
authentic, the signatures on all documents that we examined are genuine, and
all documents submitted to us as certified, conformed, photostatic or
facsimile copies conform to the original document, (iv) all corporate records
made available to us by Alliance and all public records
<PAGE>
Alliance Gaming Corporation
May 24, 1996
Page 2
reviewed are accurate and complete, (v) the conditions to the offering of the
Preferred Stock set forth in the Registration Statement shall have been
fulfilled, including the obtaining of all required stockholder and gaming
approvals, and (vi) prior to the issuance of the Preferred Stock, the
Certificate of Designations, Preferences and Relative, Participating, Optional
and Other Special Rights of Special Stock and Qualifications, Limitations and
Restrictions of the Preferred Stock will be approved by the Board of Directors
and filed with the Nevada Secretary of State in accordance with Nevada Revised
Statutes Sections 78.195 and 78.1955. As to various questions of fact material
to such opinions, we have, when relevant facts were not independently
established, relied upon certificates of officers of Alliance and other
appropriate persons.
Based upon the foregoing, and having regard to legal considerations we
deem relevant, we are of the opinion that when the shares of Preferred Stock
have been registered under the Act and issued and sold in the manner referred
to in the Registration Statement, such shares will be legally issued, fully
paid and nonassessable.
We are qualified to practice law in the State of Nevada. The opinions
set forth herein are expressly limited to the laws of the State of Nevada and
we do not purport to be experts on, or to express any opinion herein
concerning, or to assume any responsibility as to the applicability to or the
effect on any of the matters covered herein of, any laws other than the laws
of the State of Nevada. We express no opinion concerning, and we assume no
responsibility as to laws or judicial decisions related to, or any orders,
consents or other authorizations or approvals as may be required by, any
federal law, including any federal securities law, or any state securities or
blue sky laws.
We hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement and to the reference to our firm in the Registration
Statement.
Yours very truly,
SCHRECK, JONES, BERNHARD,
WOLOSON & GODFREY
/s/ Schreck, Jones, Bernhard,
-----------------------------
Woloson & Godfrey
-----------------------------
<PAGE>
May ___, 1996
Alliance Gaming Corporation
4380 Boulder Highway
Las Vegas, NV 89121
Re: Federal Income Tax Considerations
Relating to the Exchange Offer
---------------------------------
Dear Sirs:
We have acted as counsel to Alliance Gaming Corporation ("Alliance")
in connection with the proposed offering of $15 Million of its 15% Non-Voting
Senior Pay-In-Kind Special Stock, Series B, as described in Alliance's
Registration Statement on Form S-2 (the "Registration Statement"), filed on this
date with the Securities and Exchange Commission, and any amendments and
supplements thereto. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference to us under the
headings "Material Federal Income Tax Consequences To Holders of Preferred
Stock" in the prospectus contained in the Registration Statement.
In rendering our opinion, we have examined and are familiar with
originals or copies, certified or otherwise
<PAGE>
2 May __, 1996
identified to our satisfaction, of such documents as we have deemed necessary or
appropriate as a basis for the opinion set forth below. In our examination, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such copies. As
to any facts material to this opinion that we did not independently establish or
verify, we have relied upon statements and representations of officers and other
representatives of Alliance.
Subject to the assumptions, qualifications and comments in this
letter, we are of the opinion that the statements in the prospectus contained in
the Registration Statement with respect to United States Federal income taxation
under the heading "Material Federal Income Tax Consequences To Holders of
Preferred Stock," to the extent they constitute matters of law or legal
conclusions, are correct in all material respects.
Very truly yours,
<PAGE>
EXHIBIT 12
ALLIANCE GAMING CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, MARCH 31
---------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
-------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net loss................................... $(15,816) $(4,680) $(3,650) $(13,128) $(10,752) $ (6,793) $(14,829)
Income taxes............................... (5,958) -- -- 241 265 394 581
Imputed interest on rents(1)............... 16,485 16,524 19,839 22,584 22,030 16,548 17,070
Interest and debt discount amortization.... 4,663 4,505 5,046 6,830 8,133 5,844 6,341
-------- ------- ------- -------- -------- -------- --------
Earnings (loss) as defined for ratio..... $ (626) $16,349 $21,235 $ 16,527 $ 19,676 $ 15,993 $ 9,163
-------- ------- ------- -------- -------- -------- --------
-------- ------- ------- -------- -------- -------- --------
Fixed Charges:
Imputed interest on rents(1)............... $ 16,485 $16,524 $19,839 $ 22,584 $ 22,030 16,548 17,070
Interest and debt discount amortization.... 4,663 4,505 5,046 6,830 8,133 $ 5,844 $ 6,341
-------- ------- ------- -------- -------- -------- --------
Fixed charges as defined for ratio....... $ 21,148 $21,029 $24,885 $ 29,414 $ 30,163 $ 22,392 $ 23,411
-------- ------- ------- -------- -------- -------- --------
-------- ------- ------- -------- -------- -------- --------
Ratio of earnings to fixed charges........... -- -- -- -- -- -- --
-------- ------- ------- -------- -------- -------- --------
-------- ------- ------- -------- -------- -------- --------
Amounts by which earnings were inadequate to
cover fixed charges......................... $(21,774) $(4,680) $(3,650) $(12,887) $(10,487) $ (6,399) $(14,248)
-------- ------- ------- -------- -------- -------- --------
-------- ------- ------- -------- -------- -------- --------
Pro forma fixed charge for Preferred Stock
dividend....................................
Amount by which pro forma earnings were
inadequate to cover fixed charges and
Preferred Stock
dividend....................................
<CAPTION>
PRO FORMA COMBINED
FINANCIAL INFORMATION
----------------------------------------
NINE MONTH NINE MONTH
YEAR ENDED PERIOD ENDED PERIOD ENDED
JUNE 30, MARCH 31, MARCH 31,
1995 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
Earnings:
Net loss................................... $(3,719) $ (2,255) $(11,329)
Income taxes............................... 2,555 2,055 1,508
Imputed interest on rents(1)............... 21,843 10,945 10,721
Interest and debt discount amortization.... 23,229 17,413 16,922
---------- ------------ ------------
Earnings (loss) as defined for ratio..... $43,908 $ 28,158 $ 17,822
---------- ------------ ------------
---------- ------------ ------------
Fixed Charges:
Imputed interest on rents(1)............... $21,843 $ 10,945 $ 10,721
Interest and debt discount amortization.... 23,229 17,413 16,922
---------- ------------ ------------
Fixed charges as defined for ratio....... $45,072 $ 28,358 $ 27,643
---------- ------------ ------------
---------- ------------ ------------
Ratio of earnings to fixed charges........... -- -- --
---------- ------------ ------------
---------- ------------ ------------
Amounts by which earnings were inadequate to
cover fixed charges......................... $(1,164) $ (200) $ (9,821)
---------- ------------ ------------
---------- ------------ ------------
Pro forma fixed charge for Preferred Stock
dividend.................................... (8,039) (5,916) (5,916)
---------- ------------
Amount by which pro forma earnings were
inadequate to cover fixed charges and
Preferred Stock
dividend.................................... $(9,203) $ (6,116) $(15,737)
---------- ------------
---------- ------------
</TABLE>
- ------------------------
(1) Imputed interest on rents is calculated by taking 33% of total rents in each
period presented.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Alliance Gaming Corp.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the registration statement. As noted
under the captions "Forecast of Operations" and "Experts", KPMG Peat Marwick LLP
has not examined the Forecast presented under "Forecast of Operations" and,
accordingly we do not express an opinion or any other form of assurance with
respect thereto.
KPMG PEAT MARWICK LLP
Las Vegas, Nevada
May 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 Operations" and "Experts," Coopers & Lybrand L.L.P. neither examined nor
compiled nor had any other involvement with the preparation of the accompanying
prospective financial information included in this registration statement and,
accordingly, we do not express an opinion or any other form of assurance with
respect thereto, nor do we assume any responsibility for such prospective
financial information.
COOPERS & LYBRAND L.L.P.
Las Vegas, Nevada
May 24, 1996
