<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLIANCE GAMING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 7993 88-0104066
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
6601 SOUTH BERMUDA ROAD
LAS VEGAS, NEVADA 89119
(702) 270-7600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SCOTT D. SCHWEINFURTH
CHIEF FINANCIAL OFFICER
ALLIANCE GAMING CORPORATION
6601 SOUTH BERMUDA ROAD
LAS VEGAS, NEVADA 89119
(702) 270-7600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
------------------------
COPY TO:
LAWRENCE LEDERMAN, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY
ONE CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10005
(212) 530-5732
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================================
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10% Senior Subordinated Notes due 2007, Series
B............................................... $150,000,000 100% $150,000,000 $45,455
- --------------------------------------------------------------------------------------------------------------------------
Guarantees of 10% Senior Subordinated Notes due
2007, Series B.................................. $150,000,000 (2) (2) (2)
==========================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(f) solely for purposes of calculating the
registration fee.
(2) Pursuant to Rule 457(n), no separate fee is payable for the guarantees.
------------------------
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.
------------------------
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
EXACT NAME OF GUARANTOR REGISTRANT JURISDICTION OF I.R.S. EMPLOYER
AS SPECIFIED IN ITS CHARTER ORGANIZATION IDENTIFICATION NO.
- -------------------------------------------------------------------------------------- ---------------- ------------------
<S> <C> <C>
APT Games, Inc........................................................................ Nevada 88-0274702
United Coin Machine Co................................................................ Nevada 88-0085163
Plantation Investments, Inc........................................................... Nevada 88-0359253
Alliance Holding Company.............................................................. Nevada 88-0359253
Bally Gaming International, Inc....................................................... Delaware 88-0274743
Bally Gaming, Inc..................................................................... Nevada 88-0274743
Foreign Gaming Ventures, Inc.......................................................... Nevada 88-0274702
Louisiana Ventures, Inc............................................................... Nevada 88-0359253
United Gaming Rainbow................................................................. Nevada 88-0359253
Native American Investment, Inc....................................................... Delaware 88-0359253
</TABLE>
================================================================================
<PAGE> 2
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.
SUBJECT TO COMPLETION, DATED OCTOBER 7, 1997
PROSPECTUS
[ALLIANCE GAMING LOGO]
ALLIANCE GAMING CORPORATION
OFFER TO EXCHANGE
10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
($150,000,000 PRINCIPAL AMOUNT) FOR
10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
($150,000,000 PRINCIPAL AMOUNT OUTSTANDING)
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED
Alliance Gaming Corporation, a Nevada corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"; together with the Prospectus, the "Exchange Offer"), to
exchange up to an aggregate principal amount of $150,000,000 of its 10% Senior
Subordinated Notes Due 2007, Series B (the "Exchange Notes") for up to an
aggregate principal amount of $150,000,000 of its outstanding 10% Senior
Subordinated Notes Due 2007, Series A (the "Existing Notes"). The Exchange Notes
and the Existing Notes are hereinafter collectively referred to as the "Notes".
The terms of the Exchange Notes are identical in all material respects to those
of the Existing Notes, except for certain transfer restrictions and registration
rights relating to the Existing Notes. The Exchange Notes will be issued
pursuant to, and be entitled to the benefits of, the Indenture (as defined)
governing the Existing Notes.
The Exchange Notes will bear interest at the rate of 10% per annum, payable
semi-annually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998. Interest on the Exchange Notes will accrue from the last
interest payment date on which interest was paid on the Existing Notes
surrendered in exchange therefor or, if no such interest has been paid on the
Existing Notes, from the date of original issue of the Existing Notes. Interest
on the Existing Notes accepted for exchange will cease to accrue upon issuance
of the Exchange Notes in exchange therefor.
The Exchange Notes will not be redeemable at the Company's option prior to
August 1, 2002. Thereafter the Exchange Notes will be subject to redemption at
any time at the option of the Company, in whole in or part, upon not less than
30 or more than 60 days' notice, at the redemption prices set forth herein, plus
accrued and unpaid interest and liquidated damages thereon, if any, to the date
of redemption. In addition, on or before August 4, 2000, the Company may redeem
up to an aggregate of 33 1/3% of the original aggregate principal amount of the
Notes originally issued with the net cash proceeds of one or more public
offerings of capital stock of the Company at the redemption price of 110% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages thereon, if any, to the redemption date. Upon a Change of Control (as
defined herein), the holders of Notes will have the right to require the Company
to repurchase all or any part (equal to $1,000 or an integral multiple thereof)
of such holder's notes at a purchase price of cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
liquidated damages thereon, if any, to the repurchase date. See "Description of
Exchange Notes".
The Exchange Notes will be unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Debt (as defined) of the Company,
including indebtedness under the New Credit Facility (as defined). The Notes
will be unconditionally guaranteed (the "Subsidiary Guarantees") on a senior
subordinated basis by all existing and future domestic Restricted Subsidiaries
(as defined) of the Company (collectively, the "Guarantors"), subject to certain
exceptions including partially-owned entities through which the Company's
Mississippi casino and Louisiana route operations are conducted. The Subsidiary
Guarantees will be general unsecured obligations of the Guarantors, ranking
subordinate in right of payment to all Senior Debt of the Guarantors. The
Company has entered into a New Credit Facility with a group of lenders providing
up to for $140 million of term loans and up to $90 million of revolving credit
loans. The indebtedness under the New Credit Facility is secured by
substantially all the assets of the Company. As of June 30, 1997, on a pro forma
basis after giving effect to the Refinancing (as defined), the Company would
have had approximately $150.7 million of Senior Debt, including approximately
$149.6 million borrowed under the New Credit Facility, and the Notes would have
been effectively subordinate to approximately $58.1 million of other liabilities
(including approximately $9.6 million borrowed under the New Credit Facility) of
the Company's subsidiaries that are not Guarantors.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guarantors contained in the Registration
Rights Agreement dated August 8, 1997 (the "Registration Rights Agreement") by
and among the Company, the Guarantors and Credit Suisse First Boston
Corporation, as the Initial Purchaser (the "Initial Purchaser"), with respect to
the initial sale of the Existing Notes.
------------------------
SEE "RISK FACTORS", WHICH BEGINS AT PAGE 16, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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.
------------------------
The date of this Prospectus is October , 1997.
<PAGE> 3
(continued from cover)
The Company will accept for exchange any and all Existing Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time,
on , 1997, unless extended by the Company in its sole discretion
(the "Expiration Date"). The Expiration Date will not in any event be extended
to a date later than , 1997. Tenders of Existing Notes may be
withdrawn at any time prior to 5:00 p.m. New York City time, on the Expiration
Date. In the event the Company terminates the Exchange Offer, and does not
accept for exchange any Existing Notes with respect to the Exchange Offer, the
Company will promptly return the Existing Notes to the holders thereof. The
Exchange Offer is not conditioned upon any minimum principal amount of Existing
Notes being tendered for exchange, but is otherwise subject to certain customary
conditions. The Existing Notes may be tendered only in integral multiples of
$1,000.
The Company is offering the Exchange Notes in reliance on certain
interpretive letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties in unrelated transactions. Based
upon such interpretive letters, the Company is of the view that holders of
Existing Notes (other than any holder who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act")) who exchange their Existing Notes for Exchange Notes pursuant
to the Exchange Offer generally may offer such Exchange Notes for resale, resell
such Exchange Notes and otherwise transfer such Exchange Notes without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the Exchange Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement with any
person to participate in the distribution of such Exchange Notes and is not
engaged in and does not intend to engage in a distribution of the Exchange
Notes. Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the Exchange Notes received in exchange for Existing Notes if
such Exchange Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. See "Plan of
Distribution". If a holder of Existing Notes does not exchange such Existing
Notes for Exchange Notes pursuant to the Exchange Offer, such Existing Notes
will continue to be subject to the restrictions on transfer contained in the
legend thereon. In general, the Existing Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. Holders of Existing Notes do not have any appraisal or
dissenters' rights under the Delaware General Corporation Law in connection with
the Exchanger Offer. See "The Exchange Offer -- Consequences of Failure to
Exchange" and "-- Resales of Exchange Notes".
Prior to the Exchange Offer, there has been no public market for the
Existing Notes. There can be no assurance as to the liquidity of any markets
that may develop for the Exchange Notes, the ability of holders to sell the
Exchange Notes, or the price at which holders would be able to sell the Exchange
Notes. If a market for the Exchange Notes should develop, such Exchange Notes
could trade at a discount from their principal amount. The Initial Purchaser has
advised the Company that it currently intends to make a market for the Exchange
Notes. However, the Initial Purchaser is not obligated to do so and any market
making may be discontinued at any time without notice.
The Company will not receive any proceeds from the Exchange Offer. Pursuant
to the Registration Rights Agreement, the Company or the Guarantors will pay all
the expenses incident to the Exchange Offer. Tenders of Existing Notes pursuant
to the Exchange Offer may be withdrawn at any time prior to the Expiration Date
(as defined) for the Exchange Offer. In the event that the Company terminates
the Exchange Offer and does not accept for exchange any Existing Notes with
respect to the Exchange Offer, the Company will promptly return such Existing
Notes to the holders thereof. See "The Exchange Offer".
<PAGE> 4
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to the
Exchange Notes. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. For further information
with respect to the Company or the Exchange Notes offered hereby, reference is
made to the Registration Statement, including the exhibits thereto, which may be
inspected without charge at the public reference facility maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
which may be obtained from the Commission at prescribed rates.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information with
the Commission. Such reports, proxy statements, and other information may be
inspected and copied at the Public Reference Room of the Commission, 450 Fifth
Street, N.W., Washington, DC 20549; and at the Commission's regional offices in
Chicago (Northwest Atrium Center, Suite 1400, 500 West Madison Street, Chicago,
IL 60661-2511), and in New York (7 World Trade Center, 13th Floor, New York, NY
10048). Copies of such material may be obtained from the Public Reference
Section of the Commission 450 Fifth Street, N.W., Washington, DC 20549 at
prescribed rates or through the Commission's web site (http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THE COMPANY WILL DELIVER OR CAUSE TO BE DELIVERED
WITH THIS PROSPECTUS, TO EACH PERSON TO WHOM THE PROSPECTUS IS SENT OR GIVEN, A
COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30,
1997, INCORPORATED HEREIN BY REFERENCE. THE COMPANY WILL ALSO PROVIDE WITHOUT
CHARGE TO ANY PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, UPON
WRITTEN OR ORAL REQUEST, A COPY OF ANY OTHER DOCUMENTS INCORPORATED HEREIN BY
REFERENCE (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS). REQUESTS SHOULD BE
DIRECTED TO THE COMPANY AT 6601 SOUTH BERMUDA ROAD, LAS VEGAS, NV 89119,
ATTENTION: SECRETARY (TELEPHONE NUMBER (702) 270-7600). IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY [DATE FIVE
BUSINESS DAYS PRIOR TO THE DATE ON WHICH THE FINAL INVESTMENT DECISION MUST BE
MADE], 1997.
The following document of the Company, which has been filed with the
Commission, is hereby incorporated by reference in this Prospectus:
1. Annual Report on Form 10-K for the fiscal year ended June 30, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Exchange Offer shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective dates
of filing of such documents. Any statement contained in this Prospectus or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the related notes thereto, appearing elsewhere in this Prospectus or
incorporated by reference herein. Unless otherwise indicated or where the
context requires otherwise, all references to the "Company" or "Alliance" mean
Alliance Gaming Corporation and its subsidiaries on a consolidated basis.
References to the Company's fiscal year refer to the 12-month period ending on
June 30 of each year ("Fiscal Year"). Historical financial information for the
periods including June 18, 1996 and thereafter reflects the acquisition of Bally
Gaming International, Inc. ("BGII") by the Company on June 18, 1996 (the
"Acquisition"). "Pro forma" financial information appearing herein is prepared
on the assumption that the Refinancing (as defined) occurred on July 1, 1996 for
statement of operations data, and on June 30, 1997 for balance sheet data.
"EBITDA" means earnings before interest, taxes, depreciation and amortization,
less minority interest, plus direct acquisition costs and unusual items. In the
Company's historical financial statements, "EBITDA" was defined to also be net
of a royalty payable in respect of the Company's Rainbow Casino. As a result of
the Rainbow Royalty Buyout (as defined below), EBITDA presented herein (except
in the historical consolidated financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations") is prior to the
casino royalty deduction. Deutschemarks ("DM") have been translated in text at
the rate of $1.00 = DM 1.75, approximately the rate in effect on June 30, 1997.
THE COMPANY
Alliance is a diversified, worldwide gaming company that (i) designs and
manufactures gaming machines and computerized monitoring systems for gaming
machines, (ii) owns and manages a significant installed base of gaming machines,
(iii) owns and operates two casinos and (iv) in Germany, is a full-service
supplier of wall-mounted gaming machines and amusement games. Operating under
the name Bally Gaming ("Gaming"), the Company is the second largest slot and
video gaming machine manufacturer in North America, with over 85,000 gaming
machines sold during the past five years. Operating under the name Bally Systems
("Systems"), the Company designs, integrates and sells highly specialized
computerized monitoring systems that provide casinos with networked accounting
and security services for their gaming machines. Systems has a leading position
with over 79,000 game monitoring units ("GMUs") installed worldwide. The Company
also owns, operates and services an installed base of over 6,600 slot and video
gaming machines which are located mostly in non-casino venues in Nevada and
Louisiana ("Route Operations"). Alliance is the largest route operator in Nevada
and the largest operator of gaming machines at racetracks in Louisiana. Alliance
owns and operates what management believes is the most profitable riverboat
casino in Vicksburg, Mississippi and owns and operates a small casino in Sparks,
Nevada, which together have 30 table games and 1,100 gaming machines
(collectively, "Casino Operations"). In addition, operating under the Bally
Wulff name ("Bally Wulff"), the Company believes that it is now the leading
supplier of wall-mounted gaming machines and arcade games in Germany. Alliance's
operations are diversified, with each business unit contributing significantly
to the Company's profitability.
According to International Gaming and Wagering Business Magazine, the $46.7
billion U.S. gaming industry has grown since 1982 at a compounded annual growth
rate of 11.5%. The increase in gaming revenues is the result of greater general
acceptance of gaming, easier access to gaming establishments, integration of
gaming with family destination resorts, and local government's drive for
additional revenue sources. For 1996, the domestic market for new casino-style
gaming machines was approximately 387,000 units. While the number of new gaming
jurisdictions such as riverboat and Native American venues increased rapidly
during the early 1990's, management expects future gaming machine demand to be
driven by the opening of new casinos and the expansion of existing casinos in
traditional markets such as Las Vegas and Atlantic City, growth in international
markets and replacement demand. Gaming's experience has been that casino
operators usually replace gaming machines every three to seven years. As a
result of the growth of new jurisdictions in the early 1990's, management
believes replacement demand will increase as operators in these jurisdictions
replace original equipment. These favorable market trends are being complemented
by the development of innovative new products such as progressive networked
games, second feature/multi-level gaming machines and novel player bonusing
systems. Management believes that established gaming companies such as Alliance
4
<PAGE> 6
have a competitive advantage due to well-known brand identities, proprietary
technology and manufacturing know-how, high switching costs (in the case of the
Company's computerized systems product) and stringent licensing requirements and
regulation by gaming authorities.
Founded in 1968, the Company initially engaged exclusively in the route
business and over time acquired several casinos in niche markets. In 1994, the
Company began seeking opportunities to grow and diversify within the gaming
industry through acquisitions. In 1995, the Company acquired control of the
Rainbow Casino in Vicksburg, Mississippi, and in June 1996 the Company completed
the acquisition of BGII. The Company's slot manufacturing operations were
founded over 65 years ago and the Bally name is widely recognized in the gaming
industry. One year following the Acquisition, integration of the two companies
has largely been achieved. The Company has realized cost-saving synergies from
the Acquisition and has implemented a number of policies and practices to take
advantage of interrelationships among its business units.
The principal executive offices of the Company are located at 6601 South
Bermuda Road, Las Vegas, NV 89119 and its telephone number is (702) 270-7600.
BUSINESS UNITS
Through its subsidiaries, the Company operates four business units: (i)
Gaming Equipment and Systems, (ii) Wall Machines and Amusement Games, (iii)
Route Operations and (iv) Casino Operations.
Gaming Equipment and Systems ($134.7 million revenue for the 1997 Fiscal
Year). Alliance is the second largest casino-style gaming equipment
manufacturer in North America. Gaming has significantly increased its
penetration in the gaming machine market with the successful introduction of its
ProSeries(R) slot machine and Game Maker(R) video gaming machine. Gaming
produces upright, bar-top, and slant-top reel-spinning slot machines and video
poker devices, and was the first to introduce a casino-style touch-screen
machine which enables the gaming patron to select up to ten video games. The
Bally name has high brand recognition, and casino customers seek Bally machines
for their innovative designs, reliability and the Company's ability to ensure
quick delivery times and to customize machines for specific casino properties.
As a result, Gaming's machines represent a substantial portion of the casino
floor at such casinos as Caesar's Palace, Casino Niagara and MGM Grand. Gaming's
ten largest customers for the 1997 Fiscal Year include Foxwoods Casino, Harrahs,
Hilton/Bally and Station Casinos, and no one customer accounted for more than
11% of Gaming's revenues for the 1997 Fiscal Year. Gaming also distributes
electronic gaming machines outside North America, mainly in Europe and Latin
America and to a lesser extent in the Far East and the Caribbean. International
sales accounted for 39% of Gaming's revenues for the 1997 Fiscal Year.
The Company's Systems division designs, integrates and sells computerized
player tracking, cash monitoring, accounting and security data systems for
electronic gaming machines. Since the introduction of its newest system platform
(the "SDS 6000(R) system") in 1993, Systems has rapidly expanded its presence in
casino properties. By June 1997, Systems had approximately 79,000 GMUs installed
in 79 casino properties.
Wall Machines and Amusement Games ($131.9 million revenue for the 1997
Fiscal Year). Management believes that Bally Wulff is currently the largest
supplier of coin operated wall-mounted electronic gaming machines to the German
wall machine market. Bally Wulff has been operating in Germany for over 47 years
and has an established brand name. Bally Wulff designs, manufactures and
distributes, through a proprietary distribution system of 23 locations
throughout Germany, wall-mounted gaming machines that allow players to win up to
ten times the player's stake (up to DM 4.00 or approximately $2.30 per game).
Bally Wulff and other wall machine manufacturers sell to approximately 5,000
route operators who place the machines in arcades, taverns, hotels, restaurants
and other locations. Customers purchase Bally Wulff products because of their
quality, dependability, ease of service and proven ability to attract players.
Bally Wulff's shipments for the 1997 Fiscal Year exceeded 17,400 wall machines.
For the quarter ended June 30, 1997, management believes the Company had the
leading market share with an approximately 33% share of the wall machine market.
With a total industry installed base which the Company believes is 220,000
units, and German government regulations that require operators to replace wall
machines every four years, the Company enjoys a significant base of recurring
revenue. Additionally, the Company is a full-service provider of arcade
equipment. For the 1997 Fiscal Year, approximately 25% of Bally Wulff's sales
were derived from
5
<PAGE> 7
the distribution of equipment that is manufactured by third parties such as pool
tables, pinball machines, dart games and wall machines. Bally Wulff can supply
such equipment at relatively low incremental cost because the Company utilizes
its existing wall machine distribution system. For the 1997 Fiscal Year, used
machines, parts and services accounted for 17% of Bally Wulff's sales. No one
customer accounted for more than 3% of Bally Wulff's revenues for the 1997
Fiscal Year.
Route Operations ($127.0 million revenue for the 1997 Fiscal Year). The
Company's Nevada Route Operations (85% of Route Operations revenues for the 1997
Fiscal Year) are the largest in the State and involve the selection, ownership,
installation, operation and maintenance of video poker devices, reel-type slot
machines and other electronic gaming machines in local establishments such as
taverns, restaurants, supermarkets, drug stores and convenience stores
(including 7-11, AM/PM and Circle K stores). The Company enters into long-term
contracts with these parties whereby the Company either receives a portion of
the revenue generated by the machines or pays rent and receives all of the
revenues generated by the machines. As of June 30, 1997, the weighted average
remaining life of the Company's contracts was approximately 3.2 years. As of
June 30, 1997, the Company operated approximately 5,900 units in Nevada (up 11%
over the same period in the prior year) installed in 580 locations. The Company
believes it has a competitive advantage because it is the only route operator
that manufactures its own machines, enabling it to easily equip them with
certain advanced features and systems, such as the Gamblers Bonus system
described below.
Alliance is the only route operator in Nevada that offers a networked group
of gaming machines with player tracking capabilities. In December 1995, the
Company launched Gamblers Bonus, a proprietary system which brings large casino
gaming amenities such as multi-location progressive jackpots, bigger jackpot
payouts and traditional players' club enhancements to small local Nevada
establishments. Gamblers Bonus is also unique in that it does not require
players to use cards and it allows frequent players to earn cash bonuses that
are redeemed at the gaming machine. Since December 1995, over 32,000 members
have enrolled in Gamblers Bonus, and the gaming machines linked to Gamblers
Bonus have experienced an approximate 23% increase in average net win per day
per machine (based on a comparison of the 13-week period before installing
Gambler's Bonus with a recent 13-week period). As of June 30, 1997, the Company
had the Gamblers Bonus system installed in 130 locations encompassing
approximately 1,500 machines.
In 1992, the Company expanded its Route Operations to Louisiana, where it
has an exclusive 10-year contract (five years remaining, plus under certain
circumstances a five-year right of first refusal thereafter) to operate video
poker devices at the only racetrack and 10 associated off track betting parlors
("OTBs") in the greater New Orleans area. As of June 30, 1997, the Company
operated approximately 700 such devices in Louisiana.
Casino Operations ($51.5 million revenue for the 1997 Fiscal Year). The
Company owns and operates two full-service casinos in niche markets. In
Mississippi, the Company's Rainbow Casino (77% of Casino Operations revenues in
the 1997 Fiscal Year) is part of an entertainment complex which opened in July
1994 and is the only casino/family entertainment facility of its kind in
Mississippi. As of June 30, 1997, the Rainbow Casino had approximately 700
electronic gaming machines and 21 table games as well as a 245-seat restaurant.
Management believes the Rainbow Casino generated approximately 21% of the
revenues in the approximately $185 million Vicksburg casino market during the
1997 Fiscal Year. The Company also believes that the Rainbow Casino is the most
profitable casino in that market. Adjacent to the approximately 24,000-square
foot Rainbow Casino, the entertainment complex features an 89-room hotel and a
10-acre indoor/outdoor amusement park that opened in May 1995. Although the
hotel and amusement park are not owned or operated by the Company, management
believes that these facilities coupled with successful direct marketing
campaigns have contributed significantly to the recent strong financial results
of the Rainbow Casino. The Company's Rail City Casino (formerly named the
Plantation Station Casino), located in Sparks, Nevada, in suburban Reno, is a
20,000-square foot casino which, as of June 30, 1997, contained approximately
400 electronic gaming machines, 9 table games and keno as well as a 300-seat
restaurant operated by the Company.
6
<PAGE> 8
COMPANY STRENGTHS
Management believes the Company's core strengths are the following:
Leading Competitive Position. The Company has generally achieved the
first or second market position relative to its competition in its Gaming
Equipment and Systems, Wall Machines and Amusement Games, and Route
Operations business units, and believes the Rainbow Casino is the most
profitable in its market. The Company believes its leading market positions
for Gaming, Systems and Bally Wulff are attributable to its ability to
provide gaming establishments and patrons with innovative and entertaining
gaming products, the long-term association of the Bally name with
reliability and service, its proprietary distribution systems in the United
States and Germany, and its long-term customer relationships with premier
gaming companies. Alliance's Route Operations benefit from vertical
integration, a networked gaming machine system and 19 years of operating
experience and presence in the Nevada route operations industry. In
addition, Alliance's Casino Operations benefit from their convenience,
amenities, strategic locations, and targeted marketing campaigns. The
Company believes its competitive advantages are sustainable and its
strategy for growth is based on leveraging off of these strengths.
Diversified Revenue Stream and Cash Flow. The Company's business is
broadly diversified across different sectors of the gaming industry, in
terms of products and services as well as geographic markets. The
percentage of total revenues and Pro Forma EBITDA before corporate expenses
for the 1997 Fiscal Year from each of the Company's business units was as
follows:
<TABLE>
<CAPTION>
PRO FORMA
EBITDA
BEFORE
CORPORATE
REVENUE EXPENSES
------- ---------
<S> <C> <C>
Gaming Equipment and Systems............................. 30% 20%
Wall Machines and Amusement Games........................ 30% 35%
Route Operations......................................... 28% 24%
Casino Operations........................................ 12% 21%
--- ---
Total.................................................. 100% 100%
=== ===
</TABLE>
Revenues are generated from a geographically diverse group of gaming
jurisdictions. Approximately 41% of the Company's revenues for the 1997
Fiscal Year were generated from outside the United States. Domestically,
the Company services a large group of customers in Nevada, New Jersey,
Louisiana, Mississippi and other gaming jurisdictions across the United
States. The Company also has a diversified customer base within its
business units. The Company's Route Operations service over 590 different
locations pursuant to contracts with owners of local establishments in
Nevada and Louisiana. Bally Wulff services approximately 5,000 route
operators throughout Germany, while Gaming and Systems service a large base
of premier gaming companies worldwide such as Caesars Palace, Harrahs,
Hilton/Bally's, MGM Grand and Station Casinos. No single customer accounted
for more than 3% of the Company's consolidated revenues for the 1997 Fiscal
Year.
Recurring Revenue Base. Three of the Company's business units have a
relatively predictable base of recurring revenues: Wall Machines and
Amusement Games, Route Operations and Casino Operations (which collectively
accounted for approximately 80% of Pro Forma EBITDA before corporate
expenses for the 1997 Fiscal Year). Bally Wulff's revenues are recurring as
a result of the replacement cycle dictated by German laws, which limit a
wall machine's commercial life to four years. Revenues in the Route
Operations in Nevada are based on a diversified foundation of long-term
contracts with location owners. The remaining weighted average life of
these contracts as of June 30, 1997 was 3.2 years. The Casino Operations
and the Louisiana Route Operations generate a predictable revenue stream as
a result of such factors as strategic location and an exclusive contract,
respectively. In the Company's fourth business unit, Gaming Equipment and
Systems, predictability of revenues is enhanced because of customers'
desire to maintain viable alternative sources of supply. Moreover, with
Systems' large installed
7
<PAGE> 9
base, recurring revenues are derived from periodic equipment upgrades of
its installed base and from maintenance fees. The Company believes the
stable revenue and growth prospects of all its business units will continue
to support the Company's efforts to develop innovative proprietary gaming
products that have the potential to produce rapid growth.
Innovative Gaming Products. Management believes that Alliance's
leading market position is attributable to its reputation as a pioneer in
the gaming industry with industry firsts such as the first computerized
monitoring system for gaming machines in 1976, the introduction of Game
Maker, the first multi-game casino-style touch screen interactive machine,
in 1994 and the introduction of the Gamblers Bonus system in 1995 which was
the first cardless player tracking and bonusing system. These innovations
now serve as the platforms for growth as additional innovations and
technologies are added to enhance existing products. In addition, the
Company is continuously developing new systems, gaming devices, and product
designs to increase market demand for its products. Management believes
that the Company's research and development group, the majority of whom
have been with the Company for many years, is one of the best in the
industry. With its market strength, the Company is in a favorable position
to deploy new gaming products and services to a substantial existing base
of gaming patrons.
Experienced Management Team. The Company's business units are led by
skilled senior management teams, many with years of industry experience and
long-term affiliations with the Company. During June 1997, the Company
hired Morris Goldstein as its president and chief executive officer. Mr.
Goldstein was formerly chief executive officer of Thomson Technology
Initiative, a unit of Thomson Corporation, a global publisher and
information services provider. In his past positions, Mr. Goldstein has
successfully implemented new business strategies to enhance financial
strength and enterprise value. Hans Kloss, currently managing director of
the Bally Wulff entities, has been with the Company for over 27 years and
has managed both Bally Wulff and Gaming Equipment and Systems. While in
charge of the Gaming Equipment and Systems operations beginning in
mid-1993, Mr. Kloss oversaw an increase in Gaming's EBITDA from $10.9
million in 1994 to $16.7 million in the 1997 Fiscal Year. Robert Saxton
joined the Company in 1982 and since becoming Senior Vice
President -- Casino Operations in 1993 has been instrumental in the startup
and development of the Rainbow Casino, which generated $15.4 million of
EBITDA in the 1997 Fiscal Year. Since the arrival of Robert Miodunski in
1994 as Senior Vice President -- Route Group (Nevada), Nevada Route
Operations EBITDA has increased from $12.6 million to $16.6 million in the
1997 Fiscal Year. See "Management" and "Principal Stockholders".
BUSINESS STRATEGY
The Company's strategic objective is to build a preeminent gaming
entertainment company. Key elements of the Company's strategy include:
Increase Penetration of Existing Products and Services. The Company
intends to increase penetration of its existing products on casino floors
by enhancing its key account sales and marketing program. The Company also
intends to pursue opportunities in new and existing gaming jurisdictions
where the Company has not previously participated such as Australia and
Japan. In addition, management plans to utilize its manufacturing expertise
and capacity to enter selected video lottery markets. In its Route
Operations, the Company intends to continue to aggressively promote the
Gamblers Bonus brand in Nevada, and at Bally Wulff the Company plans to
pursue selected international opportunities to sell wall-mounted style
gaming machines.
Introduce New Gaming Products and Services. Gaming patrons more than
ever seek novel forms of gaming entertainment. In response to this ongoing
trend, the Company intends to increase its market share by continuing to
develop and implement new gaming entertainment products and enhance and
upgrade its current product and service portfolio. Beginning December 17,
1997, the Company will no longer be contractually restricted from competing
in the progressive gaming segment of the industry. The Company intends to
launch Gaming Equipment and Systems into the proprietary gaming market
(with products currently under development such as networked progressive
systems, second feature/multi-level niche games, network gaming and a new
video product platform). Management believes that continued
8
<PAGE> 10
innovation and investment in research and development will result in the
introduction of new, highly entertaining gaming products and services.
Continue to Realize Synergies Among Business Units. The Company
believes it will be able to enhance its competitive position by continuing
to realize synergies among its business units. The Route Operations' access
to Gaming as a supplier allows it to develop and install gaming machines
with unique, attractive and cost-effective features more rapidly than its
competitors. The Gamblers Bonus and SDS 6000(R) systems each have unique
features and functions that can be exchanged between the two systems.
Gaming and Bally Wulff regularly share engineering, manufacturing and
marketing know-how, and the Casino Operations and Route Operations provide
the Company with a useful testing ground for new product and system ideas.
Pursue Acquisitions and Strategic Alliances. Management intends to
pursue strategic business acquisitions and alliances, particularly in
connection with its new product and service development efforts. Management
believes that these forms of integration have the potential to give it
access to special game and system design expertise and new domestic and
international distribution channels and customer bases. Management believes
its successful implementation of the Acquisition, as well as the Company's
engineering and manufacturing collaboration with other industry partners
like Anchor Gaming and Shufflemaster, demonstrate its ability to implement
this strategy.
THE REFINANCING
In connection with the Acquisition, the Company issued $154.0 million
aggregate principal amount of 12 7/8% Senior Secured Notes due 2003 (the
"12 7/8% Notes") and 15% Non Voting Senior Pay-in-Kind Special Stock Series B
(the "Series B Preferred Stock") with an original liquidation value of $68.5
million. At June 30, 1997, the liquidation value of the Series B Preferred Stock
was approximately $75.4 million. The offering of the Existing Notes was part of
a series of related transactions (as described below, the "Refinancing"), which
included the repurchase of the 12 7/8% Notes and the redemption of the Series B
Preferred Stock, and was designed to reduce the Company's cost of capital and
improve its operating and financial flexibility. Although the Refinancing
replaced substantial amounts of redeemable preferred stock with debt, thereby
increasing the Company's leverage and interest expense, the Company's after-tax
cost of capital and fixed charges (including the charges for preferred stock
dividends) are expected to decline substantially.
Concurrently with the consummation of the offering of the Existing Notes,
the Company entered into a $230.0 million bank credit facility (the "New Credit
Facility") which provided for (i) term loans in the aggregate amount of up to
$140.0 million, comprised of a $75.0 million tranche with a 7 1/2-year term (the
"Tranche B Term Loan"), a $40.0 million tranche with an 8-year term (the
"Tranche C Term Loan", and together with the Tranche B Term Loan, the "Term Loan
Facilities") and a $25.0 million tranche with a 7 1/2-year term (the "Delayed
Draw Term Facility"); and (ii) a $90.0 million revolving credit facility with a
6-year term (the "Revolving Credit Facility").
As part of the Refinancing, the Company used the proceeds of the offering
of the Existing Notes, together with borrowings under the Revolving Credit
Facility, the proceeds of the Term Loan Facilities and the Delayed Draw Term
Facility and cash on hand to fund (a) a cash tender offer (the "Tender Offer")
to purchase at a premium any and all of the Company's 12 7/8% Notes, plus
accrued interest to the date of purchase, (b) the redemption at liquidation
value of all of the Company's Series B Preferred Stock (the "Redemption"), (c)
the purchase from HFS Gaming Corporation ("HFS") of the right to receive royalty
payments based on revenues of the Rainbow Casino (the "Rainbow Royalty Buyout")
and the purchase of related debt owed to an HFS affiliate, National Gaming
Mississippi, Inc. (the "Rainbow Notes Payable"), (d) the repayment of certain
existing lines of credit and other indebtedness and (e) the payment of
transaction fees and expenses. The Refinancing was consummated in August 1997.
9
<PAGE> 11
THE EXCHANGE OFFER
Securities Offered........... $150,000,000 aggregate principal amount of 10%
Senior Subordinated Notes due 2007, Series B. The
terms of the Exchange Notes and Existing Notes
are identical in all material respects, except
for certain transfer restrictions and
registration rights relating to the Existing
Notes.
Registration Rights
Agreement.................... The Company and the Initial Purchasers entered
into a Registration Rights Agreement which grants
the holders of the Existing Notes certain
exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange rights
which terminate upon the consummation of the
Exchange Offer.
The Exchange Offer........... The Company is offering to exchange up to
$150,000,000 aggregate principal amount of 10%
Senior Subordinated Notes due 2007, Series B (the
"Exchange Notes") for up to $150,000,000
aggregate principal amount of its outstanding 10%
Senior Subordinated Notes due 2007, Series A (the
"Existing Notes"). Existing Notes may be
exchanged only in integral multiples of $1,000.
Expiration Date; Withdrawal
of Tenders................... The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1997, or such
later date and time to which it may be extended
by the Company. The tender of Existing Notes
pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. Any
Existing Notes not accepted for exchange for any
reason will be returned without expense to the
tendering holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer.
Certain Conditions to the
Exchange Offer............... The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer".
Procedures for Tendering
Existing Notes............... Each holder of Existing Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Existing Notes
and any other required documentation to the
Exchange Agent (as defined) at the address set
forth herein. By executing the Letter of
Transmittal, each holder will represent to the
Company that, among other things, (i) any
Exchange Notes to be received by it will be
acquired in the ordinary course of its business,
(ii) it has no arrangement or understanding with
any person to participate in the distribution of
the Exchange Notes and (iii) it is not an
"affiliate," as defined in Rule 405 of the
Securities Act, of the Company or, if it is an
affiliate, it will comply with the registration
and prospectus delivery requirements of the
Securities Act to the extent applicable.
Guaranteed Delivery
Procedures................... Holders of Notes who wish to tender their
Existing Notes and whose Existing Notes are not
immediately available or who cannot deliver
10
<PAGE> 12
their Existing Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent, prior to the
Expiration Date, must tender their Existing Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures".
Registration Requirements.... The Company has agreed to use its best efforts to
consummate by January 5, 1998 the registered
Exchange Offer pursuant to which holders of the
Existing Notes will be offered an opportunity to
exchange their Existing Notes for the Exchange
Notes which will be issued without legends
restricting the transfer thereof. In the event
the applicable interpretations of the staff of
the Commission do not permit the Company to
effect the Exchange Offer or in certain other
circumstances, the Company has agreed to file a
Shelf Registration Statement covering resales of
the Existing Notes and to use its best efforts to
cause such Shelf Registration Statement to be
declared effective under the Securities Act and,
subject to certain exceptions, keep such Shelf
Registration Statement effective until two years
after the effective date thereof.
Certain Federal Income Tax
Considerations............. The exchange of Notes pursuant to the Exchange
Offer should not be a taxable event for federal
income tax purposes. See "Certain Federal Income
Tax Considerations".
Use of Proceeds.............. The Company will not receive any proceeds from
the Exchange Offer.
Exchange Agent............... United States Trust Company of New York will act
as Exchange Agent in connection with the Exchange
Offer (the "Exchange Agent"). The address and
telephone number of the Exchange Agent are set
forth in "The Exchange Offer -- Exchange Agent".
The Existing Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
Following commencement of the Exchange Offer but prior to its consummation, the
Existing Notes may continue to be traded in the PORTAL market. Following
consummation of the Exchange Offer, only Existing Notes not exchanged will be
eligible for PORTAL trading.
TERMS OF THE EXCHANGE NOTES
The terms of the Exchange Notes and the Existing Notes are identical in all
material respects, except for certain transfer restrictions and registration
rights relating to the Existing Notes.
Principal Amount............. $150,000,000 million
Maturity..................... August 1, 2007
Interest Payment Dates....... The Exchange Notes will bear interest at the rate
of 10% per annum, payable semiannually on
February 1 and August 1 of each year commencing
February 1, 1998. Holders of the Exchange Notes
will also receive accrued interest from the last
interest payment date on which interest was paid
on the Existing Notes surrendered in exchange
therefor or, if no such interest has been paid on
the Existing Notes, from the date of original
issue of the Existing Notes. Interest on the
Existing Notes accepted for exchange will cease
to accrue upon issuance of the Exchange Notes.
11
<PAGE> 13
Subsidiary Guarantees........ The Exchange Notes will be fully and
unconditionally guaranteed, jointly and
severally, on a senior subordinated basis by each
of the Company's present and future domestic
Restricted Subsidiaries of the Company, subject
to certain exceptions including the
partially-owned entities through which its
Mississippi casino and Louisiana route operations
are conducted. See "Description of Notes --
Subsidiary Guarantees". The Company will be able
to designate other current or future subsidiaries
as Unrestricted Subsidiaries (as defined) under
certain circumstances. Unrestricted Subsidiaries
will not be required to issue a Subsidiary
Guarantee with respect to the Exchange Notes and
will not be subject to many of the restrictive
covenants set forth in the Indenture relating to
the Notes (the "Indenture").
Optional Redemption.......... The Exchange Notes will be redeemable at the
option of the Company, in whole or in part, at
any time on or after August 1, 2002 in cash at
the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated
Damages (as defined) thereon, if any, to the date
of redemption. In addition, at any time prior to
August 1, 2000, the Company may on any one or
more occasions redeem up to 33 1/3% of the
initially outstanding aggregate principal amount
of the Notes at a redemption price equal to 110%
of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages thereon,
if any, to the redemption date, with the net
proceeds of one or more equity offerings, so long
as, in each case, at least 66 2/3% of the
initially outstanding aggregate principal amount
of the Notes remains outstanding immediately
after the occurrence of any such redemption. See
"Description of Exchange Notes -- Optional
Redemption".
Special Redemption........... The Exchange Notes are subject to redemption
requirements imposed by gaming laws and
regulations applicable to the Company's
businesses. See "Description of Exchange Notes --
Gaming Redemption".
Change of Control............ Upon the occurrence of a Change of Control (as
defined), the holders of the Exchange Notes will
have the right to require the Company to purchase
their Exchange Notes at a price equal to 101% of
the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase.
See "Description of Exchange Notes -- Repurchase
at the Option of Holders -- Change of Control"
and "Risk Factors -- Change of Control".
Ranking...................... The Exchange Notes will be general unsecured
obligations of the Company, ranking subordinate
in right of payment to all Senior Debt of the
Company, including indebtedness under the New
Credit Facility. The Subsidiary Guarantees will
be general unsecured obligations of the
Guarantors, ranking subordinate in right of
payment to all Senior Debt of the Guarantors. As
of June 30, 1997, on a pro forma basis after
giving effect to the Refinancing, the Exchange
Notes would have been subordinated to
approximately $150.7 million of Senior Debt of
the Company and its subsidiaries (including
approximately $149.6 million borrowed under the
New Credit Facility), and the Exchange Notes also
would have been effectively subordinated to
approximately $58.1 million of other liabilities
(including approxi-
12
<PAGE> 14
mately $9.6 million borrowed under the New Credit
Facility) of the Company's subsidiaries that are
not Guarantors.
Covenants.................... The Indenture contains certain covenants that,
among other things, will continue to limit the
ability of the Company and certain of its
subsidiaries to incur additional Indebtedness (as
defined in the Indenture) and issue preferred
stock, pay dividends or make other distributions,
repurchase Equity Interests (as defined in the
Indenture) or subordinated Indebtedness, enter
into certain transactions with affiliates, sell
assets of the Company or certain of its
subsidiaries, issue or sell Equity Interests of
the Company's subsidiaries or enter into certain
mergers and consolidations. In addition, under
certain circumstances, the Company will be
required to offer to purchase the Notes at a
price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date
of purchase, with the proceeds of certain Asset
Sales (as defined in the Indenture). See
"Description of Exchange Notes -- Repurchase at
the Option of Holders -- Asset Sales" and
"-- Certain Covenants".
RISK FACTORS
Holders of Existing Notes should consider carefully all of the information
set forth in this Prospectus and, in particular should evaluate the information
set forth under "Risk Factors".
SUMMARY HISTORICAL AND SUPPLEMENTAL DATA
The following table sets forth summary historical consolidated financial
data with respect to the Company. The summary historical consolidated financial
data are derived directly from the audited Consolidated Financial Statements of
the Company included elsewhere in this Prospectus. The financial data for the
fiscal year ended June 30, 1996 reflect the operations of BGII for the 12-day
period following consummation of the Acquisition on June 18, 1996. This
information should be read in conjunction with the Consolidated Financial
Statements of Alliance included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations". See
"Selected Financial Data".
The summary pro forma combined financial data at June 30, 1997 and for the
fiscal year ended June 30, 1997 should be read in conjunction with the Unaudited
Pro Forma Condensed Combined Financial Information included elsewhere in this
Prospectus. Such pro forma combined financial data has been prepared assuming
that the Refinancing occurred on July 1, 1996 for statement of operations data
and on June 30, 1997 for the balance sheet data. The pro forma financial data do
not purport to present the financial position or results of operations of the
Company had the Refinancing and events assumed therein actually been consummated
on that date. See "Unaudited Pro Forma Condensed Combined Financial
Information".
The following table also sets forth certain unaudited financial and
supplemental data of the Company for the periods indicated. Management believes
the presentation of this information is useful to an understanding of the trends
in the Company's results of operations and financial performance. This
information should be read in conjunction with the other financial and
supplemental data included elsewhere in this Prospectus.
13
<PAGE> 15
ALLIANCE GAMING CORPORATION
SUMMARY HISTORICAL AND SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------------------- ----------
FISCAL
FISCAL YEAR ENDED JUNE 30, YEAR ENDED
---------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Gaming equipment and systems(1).......... $ 99 $ 65 -- $ 10,575 $134,734 $134,734
Wall machines and amusement games........ -- -- -- 3,356 131,934 131,934
Route operations......................... 96,282 102,830 106,854 109,938 127,028 127,028
Casino operations........................ 16,710 20,159 25,134 48,509 51,450 51,450
-------- -------- -------- -------- -------- --------
Total revenues............................. 113,091 123,054 131,988 172,378 445,146 445,146
-------- -------- -------- -------- -------- --------
Operating costs
Cost of revenues......................... 84,206 91,307 94,118 115,493 270,907 270,907
Selling, general and administrative...... 20,219 23,334 28,649 31,640 109,474 109,474
Unusual items and direct acquisition
costs(2)............................... -- 6,351 3,962 61,341 700 700
Depreciation and amortization............ 8,718 9,530 9,520 10,988 22,606 23,217
-------- -------- -------- -------- -------- --------
Total operating costs............. 113,143 130,522 136,249 219,462 403,687 404,298
-------- -------- -------- -------- -------- --------
Operating income (loss).................... (52) (7,468) (4,261) (47,084) 41,459 40,848
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to common
shares................................... $ (3,650) $(13,128) $(10,751) $(60,259) $ (6,189) $ 5,227
======== ======== ======== ======== ======== ========
Per common share:
Net income (loss)........................ $ (0.38) $ (1.28) $ (0.95) $ (4.64) $ (0.19) $ 0.16
Book value............................... 2.27 1.44 0.86 2.20 1.68 (0.75)
OTHER FINANCIAL DATA:
Capital expenditures..................... $ 5,092 $ 5,385 $ 8,887 $ 8,101 $ 13,257 $ 13,257
Ratio of earnings to fixed charges(3).... -- -- -- -- 1.6 1.4
Deficiency of earnings to fixed
charges(3)............................. $ (3,650) $(12,887) $(10,486) (59,142) $ -- $ --
SUPPLEMENTAL DATA:
EBITDA(4)
Gaming equipment and systems............. $ -- $ -- $ -- $ 1,938 $ 16,671 $ 16,671
Wall machines and amusement games........ -- -- -- 424 29,719 29,719
Route operations......................... 14,564 15,930 19,124 16,691 20,200 20,200
Casino operations........................ 1,963 2,190 4,677 15,299 17,352 17,352
Corporate expenses....................... (7,861) (9,707) (14,580) (9,107) (19,177) (19,177)
Minority interest........................ -- (506) (397) (963) (1,092) (1,092)
-------- -------- -------- -------- -------- --------
Total EBITDA...................... $ 8,666 $ 7,907 $ 8,824 $ 24,282 $ 63,673 $ 63,673
======== ======== ======== ======== ======== ========
Total interest expense..................... $ 5,046 $ 6,830 $ 8,133 $ 8,897 $ 23,626 $ 29,573
Ratio of EBITDA to total interest
expense.................................. 2.2x
Ratio of net debt to EBITDA................ 4.5x
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------
PRO FORMA
AT JUNE 30, ----------
---------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and securities
available for sale....................... $ 9,580 $ 49,574 $ 37,414 $ 48,057 $ 28,924 $ 16,589
Working capital............................ 7,991 50,926 31,746 111,009 110,795 98,090
Total assets............................... 73,768 119,416 126,348 375,504 352,016 343,838
Total long-term debt, including current
maturities............................... 44,798 90,726 101,397 191,344 173,839 302,610
Series B Preferred Stock................... -- -- -- 51,552 58,981 --
Total stockholders' equity (net capital
deficiency)(5)........................... 22,665 15,099 9,985 69,846 53,555 (23,920)
</TABLE>
- ---------------
(1) In periods prior to the Acquisition, represents sales of gaming machines
manufactured by Alliance and sold to third parties.
14
<PAGE> 16
(2) Includes costs related to the Acquisition of $1.7 million and $55.8 million
(including a $30.1 million charge for the inducement for early conversion of
the Company's 7 1/2% Convertible Debentures Due 2003 ("Old Convertible
Debentures") for the convertible debentures which were converted into equity
securities at the time of the Acquisition) for the fiscal years ended June
30, 1995 and 1996, respectively.
(3) As part of the Refinancing, the Series B Preferred Stock was redeemed. For
purposes of determining the deficiency of earnings to fixed charges,
earnings is defined as net income (loss) before provision for income taxes,
interest on indebtedness and imputed interest on the portion of rent expense
(one-third) deemed to represent interest expense. Fixed charges consist of
interest on indebtedness and imputed interest on the portion of rent expense
(one-third) deemed to represent interest expense, and exclude dividends on
the Series B Preferred Stock and Series E Preferred Stock. When dividends on
preferred stock are included as a fixed charge for the Fiscal Year ended
June 30, 1997, the historical deficiency of earnings to fixed charges was
$4.6 million and on a pro forma basis for the Refinancing, the Company would
have a ratio of earnings to fixed charges of 1.3.
(4) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization, less minority interest plus direct acquisition costs and
unusual items. EBITDA should not be construed as an alternative to net
income or any other GAAP measure of performance as an indicator of the
Company's performance or to cash flows generated by operating, investing and
financing activities as an indicator of cash flows or a measure of
liquidity. Management believes that EBITDA is a useful adjunct to net income
and other measurements under GAAP and is a conventionally used financial
indicator.
(5) Pro forma stockholders' equity (net capital deficiency) reflects a reduction
in paid-in capital of $16.4 million representing the difference between
liquidation value and book value for the Series B Preferred Stock and a
larger accumulated deficit resulting from the Rainbow Royalty Buyout
totaling $19.0 million, the premium on the Tender Offer, write-off of the
deferred financing costs and initial discount related to the 12 7/8% Notes
and expensing a portion of the fees and expenses of the Refinancing.
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RISK FACTORS
Holders of Existing Notes should carefully consider the risk factors set
forth below as well as the other information included in this Prospectus before
deciding to accept the Exchange Offer. The risk factors set forth below are
generally applicable to the Existing Notes as well as the Exchange Notes.
HIGH LEVERAGE; ABILITY TO SERVICE DEBT
After the sale of the Existing Notes and the completion of the Refinancing,
the Company has a substantially increased amount of indebtedness. As of June 30,
1997, after giving effect to the Refinancing, the aggregate outstanding
principal amount of the Company's long-term indebtedness including current
maturities would have been $302.6 million, versus long-term indebtedness
including current maturities prior to the Refinancing of $173.8 million.
Following the Refinancing, the Company also has available to it up to $90.0
million in borrowing capacity under the Revolving Credit Facility, of which $9.6
million was used to repay outstanding indebtedness under existing credit lines.
On a pro forma basis after giving effect to the Refinancing (assuming the
Refinancing occurred July 1, 1996) and the use of proceeds thereof, the
Company's ratio of earnings to fixed charges (excluding the imputed fixed
charges for contingent rental expense related to revenue-sharing agreements in
its Route Operations of approximately $23.0 million annually) would have been
1.4 for the year ended June 30, 1997. On a pro forma basis, the Company would
have had a net capital deficiency at June 30, 1997 of $23.9 million, reflecting
a reduction in paid-in capital of $16.4 million for the difference between
liquidation value and book value for the Series B Preferred Stock and a larger
accumulated deficit resulting from the $19.0 million Rainbow Royalty Buyout, the
premium on the Tender Offer, write-off of the deferred financing costs and
initial discount related to the 12 7/8% Notes and a portion of the fees and
expenses of the Refinancing.
The New Credit Facility and the Indenture contain a number of significant
covenants that, among other things, restrict the ability of the Company and
certain of its subsidiaries to dispose of assets, incur additional Indebtedness
and issue preferred stock, pay dividends or make other distributions, enter into
certain acquisitions, repurchase Equity Interests (as defined in the New Credit
Facility and the Indenture) or subordinated Indebtedness, issue or sell Equity
Interests of the Company's subsidiaries, engage in mergers or consolidations, or
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities. There can be no assurance that such restrictions
will not adversely affect the Company's ability to finance its future operations
or capital needs or engage in other business activities that may be in the
interest of the Company. In addition, the New Credit Facility also requires the
Company to maintain compliance with certain financial ratios. The ability of the
Company to comply with such ratios may be affected by events beyond the
Company's control. A breach of any of these covenants or the inability of the
Company to comply with the required financial ratios could result in a default
under the New Credit Facility. In the event of any such default, the lenders
under the New Credit Facility could elect to declare all borrowings outstanding
under the New Credit Facility, together with accrued interest and other fees, to
be due and payable, to require the Company to apply all of its available cash to
repay such borrowings or to prevent the Company from making debt service
payments on the Notes, any of which would be an Event of Default under the
Notes. If the Company were unable to repay any such borrowings when due, the
lenders could proceed against their collateral. If the indebtedness under the
New Credit Facility or the Notes were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay such
indebtedness in full. See "Description of Exchange Notes" and "The Refinancing
- -- The New Credit Facility".
The Company's obligations to make principal and interest payments on
outstanding indebtedness, and to comply with the covenants in the Indenture and
the agreements governing borrowings under the New Credit Facility, will have
several important effects on its future operations including the following: (i)
the portion of the Company's cash flow from operations which will be dedicated
to the payment of principal and interest on its indebtedness will not be
available for other purposes; (ii) certain of the Company's borrowings are at
variable rates of interest, which could result in higher expense in the event of
increases in interest rates; (iii) the Company may be more vulnerable to
downturns in its business or in the general economy and may be restricted from
making acquisitions, introducing new technologies or exploiting business
opportunities; and (iv) the Company's ability to obtain additional financing in
the future for working capital, capital expendi-
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tures, general corporate or other purposes may be impaired. Additionally, the
Company's ability to meet its debt service obligations and to reduce its total
debt will be dependent upon the Company's future performance, which will be
subject to general economic and regulatory conditions and to financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control.
No assurance can be given that the Company will be able to generate the
cash flow necessary to permit the Company to meet its fixed charges and
repayment obligations. Any inability of the Company to service its fixed charges
and repayment obligations would have a significant adverse effect on the Company
and the market value and marketability of the Notes.
HOLDING COMPANY STRUCTURE; SUBORDINATION
The Company is a holding company, the only material assets of which are
equity interests in its subsidiaries. The ability of the Company to make
interest and principal payments on its obligations, including the Notes and the
New Credit Facility, will depend on the subsidiaries' ability to generate
sufficient cash flow from operations and distribute such amounts to the Company.
Such entities' ability to make these distributions may be restricted by
obligations which may be incurred in the future and by restrictions imposed by
gaming authorities on licensed enterprises.
The payment of the principal of, premium (if any) and interest on the Notes
is unsecured and subordinate in right of payment, as set forth in the Indenture,
to the prior payment in full of all existing and future Senior Debt of the
Company. At June 30, 1997, pro forma for the Refinancing, the Company's Senior
Debt would have been approximately $150.7 million, including indebtedness of the
Company's subsidiaries that are Guarantors. Although the Indenture contains
limitations on the amount of additional indebtedness that the Company may incur,
under certain circumstances additional indebtedness may be incurred, the amount
of which could be substantial and which may be Senior Debt. See "Description of
Exchange Notes -- Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock". Following consummation of the Refinancing, the Company has
up to $80.4 million of additional borrowing availability under the Revolving
Credit Facility, subject to a borrowing base and other borrowing conditions. Any
such amounts, when borrowed, will constitute Senior Debt of the Company.
In the event of the bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay the Notes only after
all Senior Debt of the Company has been paid in full. Sufficient funds may not
exist to pay amounts due on the Notes in such event. In addition, the
subordination provisions of the Indenture provide that no cash payment may be
made with respect to the Notes during the continuance of a payment default under
any Senior Debt of the Company. Furthermore, if certain non-payment defaults
exist with respect to certain Senior Debt of the Company, the holders of such
Senior Debt will be able to prevent payments on the Notes for certain periods of
time. See "Description of Exchange Notes -- Subordination".
The Notes will be fully and unconditionally guaranteed on a joint and
several senior subordinated basis by each present and future domestic Restricted
Subsidiary (as defined) of the Company, subject to certain exceptions including
the partially-owned entities through which its Mississippi casino and Louisiana
route operations are conducted and all foreign subsidiaries (the
"Non-Guaranteeing Subsidiaries"). The Subsidiary Guarantees are subordinated to
Senior Debt of each Guarantor to the same extent that the Notes are subordinated
to Senior Debt of the Company, and the ability to collect under any Subsidiary
Guarantees may therefore be similarly limited. The obligations of the Company
and its Subsidiaries, whether as borrower or guarantor, are collateralized under
the New Credit Facility by substantially all of each such entity's present and
future assets and any default thereunder could effectively permit the holders of
Senior Debt to control the Company's and its subsidiaries' cash and other assets
which could indirectly prevent the Company from servicing its debt service
obligations on other indebtedness, including the Notes. The Notes will be
unsecured and, therefore, do not have the benefit of such collateral. If the
Company becomes insolvent or is liquidated or if the indebtedness under the New
Credit Facility is accelerated, the lenders under the New Credit Facility will
be entitled to payment in full from the proceeds of the collateral prior to any
payment to the Holders of the Notes. In such event, it is possible that there
would be no assets remaining from which claims of the
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Holders of the Notes could be satisfied or, if any assets remain, such assets
may be insufficient to fully satisfy such claims. There may be limitations on
the enforceability of the Subsidiary Guarantees. See " -- Fraudulent Transfer"
below and "Description of Exchange Notes -- Subsidiary Guarantees".
In the case of the Non-Guaranteeing Subsidiaries, the Notes will be
effectively subordinated to all existing and future liabilities, including all
indebtedness of such subsidiaries. For the 1997 Fiscal Year, the
Non-Guaranteeing Subsidiaries accounted for approximately 45.3% of the Company's
revenues. As of June 30, 1997, on a pro forma basis after giving effect to the
Refinancing, the Non-Guaranteeing Subsidiaries would have had liabilities of
approximately $58.1 million (including approximately $9.6 million borrowed under
the New Credit Facility) reflected on the Company's consolidated balance sheet.
Claims of creditors of the Non-Guaranteeing Subsidiaries will generally have
priority as to the assets of such subsidiaries over the claims of the Company
and the holders of the Company's indebtedness, including the Notes.
FRAUDULENT TRANSFER
The Existing Notes were issued to implement the Refinancing and each
present and future domestic Restricted Subsidiary of the Company (other than the
Non-Guaranteeing Subsidiaries) guarantees the Company's obligations under the
Notes. Management believes that the indebtedness of the Company represented by
the Notes was incurred for proper purposes and in good faith, and that, based on
available forecasts, asset valuations and other financial information, following
the Refinancing, each of the Company and its Restricted Subsidiaries
guaranteeing the Notes would be solvent, will have sufficient capital for
carrying on its business and would be able to pay its debts as they mature. See,
however, " -- High Leverage; Ability to Service Debt", " -- Holding Company
Structure; Subordination" and " -- Customer Financing". Notwithstanding
management's belief, however, under federal or state fraudulent transfer laws,
if a court of competent jurisdiction in a suit by an unpaid creditor or a
representative of creditors (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that, at the time of the incurrence of such
indebtedness, any of the Company or the Restricted Subsidiaries guaranteeing the
Notes was insolvent, was rendered insolvent by reason of such incurrence, was
engaged in a business or transaction for which its remaining assets constituted
unreasonably small capital, or intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured and that the
indebtedness was incurred for less than reasonably equivalent value, or that the
Company or such Restricted Subsidiary intended to hinder, delay or defraud its
creditors, then such court could, among other things, (a) void all or a portion
of the Company's or such Restricted Subsidiaries' obligations to the holders of
the Notes, the effect of which would be that the holders of the Notes might not
be repaid in full and/or (b) subordinate the Company's or such Restricted
Subsidiaries' obligations to the holders of the Notes to other existing and
future indebtedness of the Company or such Restricted Subsidiaries to a greater
extent than would otherwise be the case, the effect of which would be to entitle
such other creditors to which the Notes were not previously subordinated to be
paid in full before any payment could be made on the Notes.
OPERATING HISTORY -- RECENT LOSSES
The Company incurred net losses of $10.8 million and $59.9 million
(including $55.8 million of costs related to the Acquisition) for its fiscal
years ended June 30, 1995 and 1996, respectively, and achieved net income of
$5.8 million for the fiscal year ended June 30, 1997. There can be no assurance
that the Company will be profitable, and that there will not be similar or other
unusual or non-recurring charges, in the future.
COMPETITION
Gaming Equipment and Systems. The market for gaming machines is extremely
competitive, and there are a number of established, well-financed and well-known
companies producing machines that compete with each of Gaming's product lines in
each of Gaming's markets. 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 entered or may enter the gaming machine market.
Management believes that some of these competitors have greater capital
resources than the Company. Competition among gaming machine manufacturers,
particularly with respect to
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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 and, to a lesser
extent, Acres Gaming, Inc., Gaming Systems International, Inc. and Mikohn Gaming
Corporation. 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.
Wall Machines and Amusements Games. Germany's wall machine manufacturing
industry is dominated by Bally Wulff and two of its competitors. Management
believes these three entities collectively account for more than 90% of the
entire market for wall machines (which exists almost exclusively in Germany).
Bally Wulff's two major competitors have greater resources than the Company and
own and operate a significant number of arcades, which gives 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, which are not subject to the strict
German licensing requirements governing wall machines.
Route Operations. The competition for obtaining and renewing route
contracts in Nevada is high and continues to intensify. Such competition has,
over time, reduced the Company's gross profit margins for such operations. In
addition, such competition has required the Company to provide financial
incentives to retain or obtain certain 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 the
Company believes that it now has adequate procedures for evaluating and managing
such risks, historically substantial losses have been incurred in connection
with such transactions reflecting, in part, former management's willingness to
accept higher levels of risk to further its policy of emphasizing market share.
Notwithstanding the change in the Company's business strategy to one emphasizing
profitability rather than market share, the future success of the Company's
Route Operations will continue to be dependent to some extent on its ability and
willingness to provide such financial inducements. Although the Company has
historically generated sufficient new route contracts to offset the loss of old
route 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 route contracts
or renew or extend its route contracts upon their expiration or termination, or
that, if renewed or extended, the terms will be favorable to the Company. In
Louisiana, the Company's Route Operations at the racetrack and OTBs compete with
various truckstops 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, Nevada, the principal competition for the Company's
operations comes from larger casinos focusing on the local market. The Company's
Rainbow Casino in Vicksburg, Mississippi faces intense direct competition from
other gaming facilities serving this market. Competition from casinos in nearby
locations may also be reducing the market area from which Vicksburg casinos draw
most of their patrons. Moreover, additional potential gaming sites remain in and
around Vicksburg and Sparks; some of these sites may be closer to larger
population centers and, if developed, might enjoy a competitive advantage over
the Company's casinos.
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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.
However, 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
The Company believes that its working capital needs will increase as a
result of the introduction of new machines, systems and products and expected
increases in production and sales from recent historical levels. The Company
also believes that customer financing terms have become an increasingly
important competitive factor in certain emerging markets. Competitive conditions
sometimes require Gaming Equipment and Systems to grant extended payment terms
on electronic gaming machines, other gaming equipment and computerized
monitoring systems. During the 1997 Fiscal Year, approximately 85% of Gaming's
slot and video gaming machines were sold on terms requiring payment within 90
days or less. Approximately 15% of Gaming's sales, primarily in certain emerging
gaming markets such as riverboat casinos and Native American casinos, are
financed over extended periods as long as 36 months and bear interest at rates
ranging from 8% to 14%. Although domestic 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. International sales by
Gaming Equipment and Systems are generally consummated on a cash basis or
financed over a period of one year or less. However, when such international
sales are financed, such customer financing often is not collateralized. Gaming
Equipment and Systems has greater exposure to the financial condition of its
customers in emerging and international markets than has historically been the
case in established markets like Nevada and Atlantic City.
In the past, several customers have failed to pay guaranteed obligations on
time and, of the two remaining guaranteed obligations, one is currently in
litigation. See " -- Certain Litigation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
For the 1997 Fiscal Year, approximately 10% of Bally Wulff sales were made
under financing agreements that have payment terms of one to three years. Bally
Wulff employs a practice of tracking accounts receivable from the invoice date.
Certain of Bally Wulff's customers with short-term financing arrangements
subsequently elect to enter into long-term financing arrangements. Bally Wulff
intends to further develop its program under which equipment will be leased to
customers.
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.
The Company does not generally enter
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into foreign exchange contracts to hedge its exposure to foreign exchange rate
fluctuations. In addition, the proposed conversion of currency in Germany from
the Deutschemark to the Euro will require the Company to redesign new and,
possibly, existing Bally Wulff wall machines and gaming devices to accept such
new currencies, the financial impact of which is uncertain.
DEPENDENCE ON 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. In December 1996, the Company's Chief
Executive Officer stepped down as the Company's strategic direction changed
after the Acquisition. In June 1997, the Company named Morris Goldstein as its
Chief Executive Officer.
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 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 gaming
operations and the manufacture and distribution of gaming machines as well as
for the officers, directors, major stockholders and key personnel of such
companies. The Company and its 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 its gaming machines in the jurisdictions in which it currently
does 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.
Gaming was previously licensed by the New Jersey Commission as a
gaming-related casino service industry, which is required by the New Jersey
Casino Control Act in order for the Company to sell gaming devices and systems
in New Jersey. Due to the change of ownership of Gaming as a result of the
Acquisition, Gaming's New Jersey license was invalidated. Prior to the change of
ownership of Gaming and in anticipation of same, the Company submitted an
application for casino service industry licensure. The New Jersey Commission
deemed the application complete and, as a result, since the Acquisition the
Company's operations in New Jersey have continued uninterrupted pursuant to
transactional waivers which have been granted by the New Jersey Commission on a
six-month blanket basis for parts and service and on a sale-by-sale basis for
all other products pending final action on the Company's license application.
The Company's business is dependent on regulatory requirements. For
example, recurring demand exists for Bally Wulff's products because German
regulations limit the permissible use of wall machines to a period of four
years. A change in applicable regulations could adversely affect the market for
the Company's products and services.
The Company currently has an agreement with Fair Grounds Corporation,
Jefferson Downs Corporation and Finish Line Management Corporation to be the
exclusive operator of video poker machines at the only racetrack and ten
associated OTBs in the greater New Orleans area. On November 5, 1996 voters in
Louisiana approved a proposition to allow video poker to continue in six of the
seven parishes in which the Company operates off-track betting locations in the
greater New Orleans area. In addition, voters approved video poker in three
parishes in the greater New Orleans area where the Company currently does not
operate. In the one parish in which the Company operates where video poker was
voted down, the Company will be allowed to continue to conduct business through
June 30, 1999. For the year ended June 30, 1997, the two off-track betting
locations in this parish accounted for $2.2 million of revenues and
approximately 10% of operating income of the Company's Route Operations in
Louisiana or less than 2% of the Company's operating income.
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These operations also depend on the financial viability of the racetrack, which
is beyond the control of the Company. See "Business -- Gaming Regulations and
Licensing".
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 Bally Wulff's products in Germany are generally subject to value added taxes
("V.A.T."). The operations of Bally Wulff had benefitted from a special tax
rebate that was phased out from January 1, 1992 to January 1, 1994. During 1995,
Bally 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 Bally Wulff's tax
returns for the years 1988 through 1991. The German tax authorities have
proposed preliminary adjustments which range from approximately $1.4 million
(which has been accrued) to approximately $5.0 million. The German Federal
Constitutional Court recently let stand a regulation that permits local
municipalities to impose additional taxes on gaming machine operators. In the
past, the imposition of such taxes by certain municipalities has adversely
affected Bally Wulff's sales. There can be no assurance that municipalities will
not impose new taxes or raise existing taxes in the future.
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. There can
be no assurance as to future increases in taxation on gaming operations.
UNCERTAIN EFFECT OF NATIONAL GAMBLING COMMISSION
The U.S. Congress has created the National Gambling Impact and Policy
Commission to conduct a comprehensive study of all matters relating to the
economic and social impact of gaming in the United States. The enabling
legislation provides that, not later than two years after the enactment of such
legislation, the commission would be required to issue a report containing its
findings and conclusions, together with recommendations for legislation and
administrative actions. Any such recommendations, if enacted into law, could
adversely affect the gaming industry and have a material adverse effect on the
Company's business, financial condition or results of operations.
From time to time, certain legislators have proposed the imposition of a
federal tax on gross gaming revenues. No specific proposals for the imposition
of such a federal tax are currently pending. However, no assurance can be given
that such a tax will not be imposed in the future. Any such tax could have a
material adverse effect on the Company's business, financial condition or
results of operations.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Company to repurchase the Notes held by such holder at 101% of the
principal amount thereof, plus accrued interest to the date of repurchase. The
New Credit Facility prohibits the Company from purchasing any Notes, and
provides that the occurrence of certain Change of Control events with respect to
the Company would constitute a default thereunder. In the event of a Change of
Control, the Company must offer to repay all borrowings under the New Credit
Facility or obtain the consent of its lenders under the Credit Agreement to the
purchase of Notes. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to repurchase tendered Notes would constitute a
default under the Indenture, which, in turn, would constitute a default under
the New Credit Facility. There can be no assurance that the Company will have
the financial ability to purchase the Notes upon the occurrence of a Change of
Control. There can be no assurance that the Company will be able to comply with
all of its obligations under the New Credit Facility, the Indenture, and its
other indebtedness upon the occurrence of a Change of Control. See "Description
of Exchange Notes -- Repurchase at the Option of Holders -- Change of Control".
Pursuant to a Stockholders Agreement dated as of September 21, 1993 by and
among the Company, Kirkland Investment Corporation ("KIC"), Gaming Systems
Advisors, L.P., Kirkland-Ft. Worth Investment
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Partners, L.P. and Alfred H. Wilms (as amended, the "Stockholders Agreement"),
Mr. Wilms, the beneficial owner of 20.8% of the Common Stock as of September 30,
1997 (including certain shares issuable on exercise of warrants), was
contractually obligated until September 21, 1997 to vote his shares of common
stock in favor of, and otherwise to use his best efforts to elect, four nominees
of KIC to the Board of Directors. Since Mr. Wilms is no longer subject to such
obligations, the probability of the occurrence of a Change of Control is
increased. In addition, after September 21, 1997, KIC is contractually obligated
to use its best efforts to cause the Company's Board of Directors to be
comprised of such number of directors designated by KIC and such number of
directors designated by Mr. Wilms as will be in the ratio of four to three, but
neither KIC nor Mr. Wilms is required to vote for a particular designee at any
regular or special meeting of the Company's shareholders after September 21,
1997. Notwithstanding the foregoing, prior to September 20, 2008, KIC must vote
all of its shares of common stock to cause Mr. Wilms to be elected as a director
of the Company for so long as Mr. Wilms owns shares of common stock of the
Company. See "Certain Transactions".
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 Notes, to file applications, be
investigated and be found suitable to own such securities of the Company. If a
record or beneficial owner of the Notes is required by a Gaming Authority to be
found suitable, such owner will be required to apply for a finding of
suitability within 30 days after request by such Gaming Authority, or within
such earlier time as required by such Gaming Authority. As a general matter,
assuming a passive investment intent, only owners in excess 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. The applicant for a finding of
suitability generally must pay all costs of the investigation for such finding
of suitability. In Nevada and Mississippi, the applicant must provide an initial
deposit as determined by the Gaming Authorities to pay the anticipated costs and
charges incurred in the investigation and deposit such additional sums as are
required by the Gaming Authorities to pay final costs and charges. If a Gaming
Authority determines that a holder is unsuitable to own the Notes or to have any
other relationship with the Company, then the Company can be sanctioned,
including 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. Further, if any Gaming
Authority requires that a holder or beneficial owner of Notes must be licensed,
qualified or found suitable under any applicable gaming law and such holder or
beneficial owner fails to apply for a license, qualification or a finding of
suitability within 30 days after being requested to do so by the Gaming
Authority (or such lesser period that may be required by such Gaming Authority),
or if such holder or such beneficial owner is not so licensed, qualified or
found suitable, the Company will have the right, at its option (i) to require
such holder or beneficial owner to dispose of such holder's or beneficial
owner's Notes within 30 days of receipt of such notice of such finding by the
applicable Gaming Authority or such earlier date as may be ordered by such
Gaming Authority or (ii) to redeem the Notes of such holder or beneficial owner
at the lesser of the principal amount thereof, the fair market value thereof or
the price at which such holder or beneficial owner acquired such Notes, together
with, except in the case of redemption at fair market value, accrued and unpaid
interest and liquidated damages thereon, if any, to the earlier of the date of
redemption or such earlier date as may be required by such Gaming Authority or
the date of the finding of unsuitability by such Gaming Authority, which may be
less than 30 days following the notice of redemption if so ordered by such
Gaming Authority. The holder or beneficial owner of Notes applying for a
license, qualification or a finding of suitability must pay all costs of the
licensure or investigation for such qualification or finding of suitability. The
Company is not required to pay or reimburse any holder or beneficial owner of
Notes who is required to apply for such license, qualification or finding of
suitability for the costs of the licensure or investigation for such
qualification or finding of suitability. Such expenses will, therefore, be
obligations of such holder or beneficial owner.
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Any person who fails or refuses to apply for a finding of suitability
within the period of time required or prescribed by a Gaming Authority may be
found unsuitable. The same restrictions apply to a record owner if the record
owner, after request, fails to identify the beneficial owner. Any holder of the
Notes found unsuitable and who holds, directly or indirectly, any beneficial
ownership of the Notes beyond such period of time prescribed by a Gaming
Authority may be guilty of a criminal offense. See "Business -- Gaming
Regulations and Licensing" and "Description of Exchange Notes -- Gaming
Redemption".
CERTAIN LITIGATION
In an action filed on December 2, 1996, the Company was named as a
defendant in an action brought by Canpartners Investments IV and Cerberus
Partners, pending in the federal district court for the Southern District of New
York. The Company entered into certain loan commitment letters with the
plaintiffs in August 1995, contemplating that the plaintiffs would lend
approximately $30 million to partially fund the Company's then pending hostile
tender offer for BGII. The Company entered into a merger agreement with BGII in
October 1995 and did not use funds provided by the plaintiffs when effecting the
Acquisition in June 1996. The plaintiffs have asserted claims based upon the
Company's alleged breach of loan commitment letters and failure to pay
termination fees in connection with such loan commitment, and seek damages on
various theories, ranging from $2.2 million (breach of contract and fraudulent
concealment) to in excess of $12.0 million (breach of duty of good faith and
fair dealing). The Company believes that it has strong defenses and has filed a
motion to dismiss the complaint. The Company intends to defend the action
vigorously.
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 filed suit against
BGII and approximately 45 other 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 to play 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 $1.0 billion, 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.
In August 1996, the Company received demand notices from a holder of
customer notes receivable which were sold on a recourse basis to a third party
for which payments were in arrears from December 1995. In December 1996 the
holder of the notes filed suit against the Company seeking payment from the
Company of approximately $3.6 million.
LACK OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON RESALE
There is no existing trading market for the Exchange Notes, and there can
be no assurance regarding the future development of a market for the Exchange
Notes or the ability of holders of the Exchange Notes to sell their Exchange
Notes, or the price at which such holders may be able to sell the Exchange
Notes. If such a market were to develop, future trading prices of the Exchange
Notes will depend on many factors, including, among other things, prevailing
interest rates, the Company's operating results and the market for similar
securities. The Initial Purchaser has advised the Company that it intends to
make a market in the Exchange Notes. The Initial Purchaser is not obligated to
do so, however, and any market-making with respect to the Exchange Notes may be
discontinued at any time without notice. Therefore, there can be no assurance as
to the liquidity of any trading market for the Exchange Notes, or that an active
trading market for the Exchange Notes will develop. The Company does not intend
to apply for listing or quotation of the Exchange Notes on any securities
exchange or stock market.
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Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the Exchange Notes
will not be subject to similar disruptions. Any such disruptions may have an
adverse effect on holders of the Exchange Notes.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including without limitation the statements under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", are forward-looking statements. Although management believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's or management's expectations ("Cautionary Statements") are disclosed
in this Prospectus, including without limitation in conjunction with the
forward-looking statements included in this Prospectus and elsewhere under "Risk
Factors". All written and oral forward-looking statements made following the
Exchange Offer which are attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Existing Notes who do not exchange their Existing Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes, as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Existing Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Existing Notes
under the Securities Act. The Company expects that substantially all of the
Existing Notes will be exchanged for Exchange Notes pursuant to the Exchange
Offer, which will negatively affect the market for the Existing Notes. Based on
interpretations by the staff of the Commission, Exchange Notes issued pursuant
to the Exchange Offer may be offered for resale, resold or otherwise transferred
by holders thereof (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such Exchange Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer. Any holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
(i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. The Company has agreed, pursuant to the Registration Rights
Agreement and subject to certain specified limitations therein, to register or
qualify the Exchange Notes for offer or sale under the securities or blue sky
laws of such jurisdictions as any holder of the Exchange Notes reasonably
requests in writing.
USE OF PROCEEDS OF THE EXCHANGE NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive, in exchange, Existing Notes in like principal amount.
The form and terms of the Exchange Notes are identical in all material respects
to the form and terms of the Existing Notes, except as otherwise described
herein under "The Exchange Offer -- Terms of the Exchange Offer". The Existing
Notes surrendered in exchange for the Exchange Notes will be retired and
cancelled and cannot be reissued.
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Accordingly, issuance of the Exchange Notes will not result in any increase in
the outstanding debt of the Company.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement, the Company and the
Subsidiary Guarantors named therein have agreed (i) to file a registration
statement with respect to an offer to exchange the Existing Notes for the
Exchange Notes of the Company with terms substantially identical to the Existing
Notes (except that the Exchange Notes will not contain terms with respect to
transfer restrictions) no later than the 60th day following August 8, 1997 (the
"Closing Date"); (ii) use their best efforts to cause the registration statement
to become effective at the earliest possible time, but in no event later than
150 days after the Closing Date; (iii) file (a) all pre-effective amendments to
the Registration Statement as may be necessary in order to cause the
Registration Statement to become effective, (b) if applicable, a post-effective
amendment to the Registration Statement pursuant to Rule 430A under the
Securities Act and (c) all necessary filings in connection with the registration
and qualification of the Exchange Notes under the Blue Sky laws of such
jurisdictions as are necessary to permit consummation of the Exchange Offer, and
(iv) promptly following the effectiveness of the Registration Statement,
commence the Exchange Offer. In the event that applicable law or interpretations
of the staff of the Commission do not permit the Company file the registration
statement containing this Prospectus or to effect the Exchange Offer, or if
certain holders of the Old Notes notify the Company that they are not permitted
to participate in, or would not receive freely tradeable Exchange Notes pursuant
to, the Exchange Offer, the Company will use its best efforts to cause to become
effective a shelf registration statement pursuant to Rule 415 under the
Securities Act, which may be an amendment to the Registration Statement (in
either event, the "Shelf Registration Statement"), with respect to the resale of
the Existing Notes and to keep the Shelf Registration Statement effective for a
period of two years following the Closing Date. See "Description of Exchange
Notes -- Existing Notes; Registration Rights; Liquidated Damages".
If (a) the Company fails to file any of the registration statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such registration statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Registration Statement, or (d) the Shelf
Registration Statement or the Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of the
Notes during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (a) through (d) above a "Registration
Default"), then the Company will pay Liquidated Damages to each Holder of Notes
with respect to the first 90-day period immediately following the occurrence of
the first Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Notes held by such Holder. The amount of the Liquidated
Damages will increase by an additional $.05 per week per $1,000 principal amount
of Notes with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $.50
per week per $1,000 principal amount of Notes. All accrued Liquidated Damages
will be paid by the Company on each Damages Payment Date (as defined in the
Registration Rights Agreement) to the Global Note Holder (as defined in the
Registration Rights Agreement) by wire transfer of immediately available funds
or by federal funds check and to Holders of certificated securities by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Following the cure
of all Registration Defaults, the accrual of Liquidated Damages will cease. See
"Description of Exchange Notes -- Existing Notes; Registration Rights;
Liquidated Damages".
Each holder of the Existing Notes who wishes to exchange such Existing
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) it is not an "affiliate," as
defined in Rule 405 of the Securities Act, of the Company, (ii) it is not
engaged in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in,
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distribution of the Exchange Notes and (iii) any Exchange Notes to be received
by it will be acquired in the ordinary course of business. See "Description of
Notes -- Existing Notes; Registration Rights; Liquidated Damages".
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that, except as
described below, Exchange Notes issued pursuant to the Exchange Offer in
exchange for Existing Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention or for the purpose of participating in a distribution
of the Exchange Notes cannot rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Unless an exemption from registration is otherwise available, any
such resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K under the Securities Act. This Prospectus may be used for an
offer to resell, resale or other retransfer of Exchange Notes only as
specifically set forth herein. Each broker-dealer that receives Exchange Notes
for its own account in exchange for Existing Notes, where such Existing Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution".
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Existing Notes properly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
outstanding Existing Notes surrendered pursuant to the Exchange Offer. Existing
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Existing Notes except that the Exchange Notes will be registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof. The Exchange Notes will evidence the same debt as the Existing
Notes. The Exchange Notes will be issued under and entitled to the benefits of
the Indenture, which also authorized the issuance of the Existing Notes, such
that both series will be treated as a single class of debt securities under the
Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Existing Notes being tendered for exchange.
As of the date of this Prospectus, $150 million aggregate principal amount
of the Existing Notes is outstanding. This Prospectus, together with the Letter
of Transmittal, is being sent to all registered holders of Existing Notes. There
will be no fixed record date for determining registered holders of Existing
Notes entitled to participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder.
Existing Notes which are not tendered for exchange in the Exchange Offer will
remain outstanding and continue to accrue interest and will be entitled to the
rights and benefits such holders have under the Indenture and the Registration
Rights Agreement.
The Company will be deemed to have accepted for exchange properly tendered
Existing Notes when, as and if the Company gives oral or written notice thereof
to the Exchange Agent and complies with the
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provisions of Section 6 of the Registration Rights Agreement. The Exchange Agent
will act as agent for the tendering holders for the purposes of receiving the
Exchange Notes from the Company. The Company expressly reserves the right to
amend or terminate the Exchange Offer, and not to accept for exchange any
Existing Notes not theretofore accepted for exchange, upon the occurrence of any
of the conditions specified below under "-- Certain Conditions to the Exchange
Offer".
Holders who tender Existing Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Existing Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time on
, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" will mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Existing Notes an announcement thereof, each prior to 9:00 a.m., New
York City time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Existing Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
"-- Certain Conditions to the Exchange Offer" has not been satisfied, by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent or (ii) to amend the terms of the Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders of Existing Notes. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 10% per annum, payable
semi-annually in arrears, on each February 1 and August 1, commencing February
1, 1998. Holders of Exchange Notes will receive accrued interest from the last
interest payment date on which interest was paid on the Existing Notes
surrendered in exchange therefor or, if no such interest has been paid on the
Existing Notes, from the date of original issuance of the Existing Notes.
Interest on the Existing Notes accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any Exchange Notes for, any
Existing Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of any Existing Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the Company's sole judgment, might materially impair the ability
of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission, which, in the Company's sole judgment, might
materially impair the ability of the Company to proceed with the Exchange
Offer; or
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(c) any governmental approval has not been obtained, which approval
the Company, in its sole discretion, deems necessary for the consummation
of the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Existing Notes, by giving oral or
written notice of such extension to the Exchange Agent. During any such
extensions, all Existing Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Existing
Notes not accepted for exchange for any reason will be returned without expense
to the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Existing Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified above. The Company will give oral or written notice of
any extension, amendment, non-acceptance or termination to the holders of the
Existing Notes as promptly as practicable, such notice in the case of any
extension to be issued no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time or
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights will not be deemed a waiver of any such
right and each such right will be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Existing Notes
tendered, and no Exchange Notes will be issued in exchange for any such Existing
Notes, if at such time any stop order is threatened or in effect with respect to
the Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "TIA").
PROCEDURES FOR TENDERING
Only a holder of Existing Notes may tender such Existing Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signature
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, either (i) Existing Notes must be received by the Exchange Agent along
with the Letter of Transmittal, or (ii) a timely confirmation of book-entry
transfer (a "Book-Entry Confirmation") of such Exchange Notes, if such procedure
is available, into the Exchange Agent's account at the Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below must be received by the Exchange Agent on or prior to
the Expiration Date, or (iii) the holder must comply with the guaranteed
delivery procedures described below. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set forth below under "-- Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date.
The tender by a holder which is not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF EXISTING NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR
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RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR OTHER NOMINEES
TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Existing Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of Existing Notes to tender on such beneficial owner's behalf.
If such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and delivering
such owner's Existing Notes, either make appropriate arrangements to register
ownership of the Existing Notes in such owner's name or obtain a properly
completed bond power from the registered holder of Existing Notes. The transfer
of registered ownership may take considerable time and may not be able to be
completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as defined
below) unless the Existing Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter Transmittal or a notice of withdrawal, as the case may be, are required
to be guaranteed, such guarantor must be a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Existing Notes listed therein, such Existing Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Existing
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Existing Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Existing Notes and withdrawal of tendered
Existing Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Existing Notes not properly tendered or any Existing Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Existing Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Existing Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Existing Notes, neither the
Company, the Exchange Agent nor any other person will incur any liability for
failure to give such notification. Tenders of Existing Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Existing Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In all cases, issuance of Exchange Notes for Existing Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of Existing Notes or a timely Book-Entry
Confirmation of such Existing Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Existing Notes are
not accepted for exchange for any reason set forth in the terms
30
<PAGE> 32
and conditions of the Exchange Offer or if Existing Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Existing Notes will be returned without expense to the tendering
holder thereof (or, in the case of Existing Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
nonexchanged Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Existing Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Existing Notes by causing the
Book-Entry Transfer Facility to transfer such Existing Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of the Existing Notes may be effected through book-entry transfer at
the Book-Entry Transfer Facility, the Letter of Transmittal or facsimile
thereof, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at the address set forth below under " -- Exchange Agent" on or prior to
5:00 p.m., New York City time, on the Expiration Date or, if the guaranteed
delivery procedures described below are to be complied with, within the time
period provided under such procedures. Delivery of documents to the Book-Entry
Transfer Facility does not constitute delivery to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Existing Notes and (i) whose Existing
Notes are not immediately available or (ii) who cannot deliver their Existing
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Existing Notes and the principal amount of Existing Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the Existing
Notes or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Existing Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except an otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
" -- Exchange Agent". Any such notice of withdrawal must specify the name of the
person having tendered the Existing Notes to be withdrawn, identify the Existing
31
<PAGE> 33
Notes to be withdrawn (including the principal amount of such Existing Notes),
and (where certificates for Existing Notes have been transmitted) specify the
name in which such Existing Notes were registered, if different from that of the
withdrawing holder. If certificates for Existing Notes have been delivered or
otherwise identified to the Exchange Agent, then prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Existing Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Existing Notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination will be final and binding on all parties. Any
Existing Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Existing Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Existing Notes tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Existing Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Existing Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Existing Notes may be retendered by following
one of the procedures described under " -- Procedures for Tendering" above at
any time on or prior to the Expiration Date.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<S> <C>
By Mail: By Facsimile:
United States Trust Company of New York (212) 780-0592
P.O. Box 843 (For Eligible Institutions Only)
Cooper Station
New York, NY 10276
Attention: Corporate Trust Services
By Overnight Courier or By Hand to 4:30 p.m.:
By Hand after 4:30 p.m.: United States Trust Company of New York
United States Trust Company of New York 111 Broadway
770 Broadway, 13th Floor New York, N.Y. 10006
New York, N.Y. 10003 Attention: Lower Level Corporate Trust
Attention: Corporation Trust
</TABLE>
For Information Call:
(800) 548-6565
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company,
32
<PAGE> 34
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Existing Notes for principal amounts not tendered or accepted for exchange are
to be delivered to, or are to be issued in the name of, any person other than
the registered holder of Notes tendered, or if tendered Notes are registered in
the name of any person other than the person signing the Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the exchange of Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Existing Notes who do not exchange their Existing Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes, as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Existing Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. See
"Risk Factors -- Consequences of Failure to Exchange".
33
<PAGE> 35
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of June 30, 1997 and as adjusted to give effect to the Refinancing. This
table should be read in conjunction with the Unaudited Pro Forma Condensed
Combined Financial Statements, Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Company's Consolidated Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents(1).......................................... $ 28,924 $ 16,589
======= =======
Long-term debt, including current maturities
Revolving Credit Facility(1)(2)..................................... $ -- $ 9,611
Tranche B Bank Term Loan Facility(3)................................ -- 75,000
Tranche C Bank Term Loan Facility(3)................................ -- 40,000
Delayed Draw Term Facility(3)(4).................................... -- 25,000
Senior Subordinated Notes Due 2007 (net of unamortized discount of
$798)............................................................ -- 149,202
12 7/8% Notes (net of unamortized discount of $2,853)............... 151,224 --
7 1/2% Convertible Subordinated Debentures Due 2003(5).............. 1,642 --
Rainbow Notes Payable............................................... 7,565 --
Existing lines of credit(2)......................................... 9,611 --
Other senior debt................................................... 3,797 3,797
------- -------
Total long-term debt including current maturities..................... 173,839 302,610
Series B Preferred Stock(1)........................................... 58,981 --
Stockholders' equity (net capital deficiency):
Series E Preferred Stock(6)......................................... 12,368 12,368
Common stockholders' equity (net capital deficiency)................ 41,187 (36,288)
------- -------
Total stockholders' equity (net capital deficiency)(1)(7)............. 53,555 (23,920)
------- -------
Total capitalization.................................................. $ 286,375 $ 278,690
======= =======
</TABLE>
- ---------------
(1) The as adjusted cash and cash equivalents on the closing date of the
Refinancing differed from the amount shown. On the actual redemption date of
September 8, 1997, the Series B Preferred Stock had an aggregate liquidation
preference of approximately $77.6 million. In addition, at closing of the
Refinancing $2.1 million of interest had accrued on the 12 7/8% Notes. The
additional cash was funded by drawings on the Revolving Credit Facility.
(2) The Revolving Credit Facility was used to repay the balance outstanding
under existing credit lines and is available thereafter for working capital
and general corporate purposes subject to availability under the borrowing
base and other conditions. The balance of the existing lines of credit, and,
correspondingly, the balance drawn on the Revolving Credit Facility on the
closing date of August 8, 1997, was $15.4 million.
(3) The Tranche B and C Term Loans amortize over 7 1/2 years and 8 years,
respectively, and the Delayed Draw Term Facility amortizes over 7 1/2 years.
The weighted average life of the Term Loan Facilities is 6.8 years.
(4) The Delayed Draw Term Facility was utilized to fund the Rainbow Royalty
Buyout and purchase the Rainbow Notes Payable on August 12, 1997.
(5) The 7 1/2% Convertible Subordinated Debentures Due 2003 were redeemed on
July 29, 1997.
(6) The Series E Preferred Stock is not redeemable at the option of the holder,
does not pay cash dividends, accrues pay-in-kind dividends at 11.5% through
June 1999, and is convertible into common stock after June 1998 at $5.88 per
share (representing a conversion rate of approximately 17.004 shares of
common stock per share of Series E Preferred Stock).
(7) As adjusted reflects a reduction in paid-in capital of $16.4 million for the
difference between liquidation value and book value for the Series B
Preferred Stock and a larger accumulated deficit resulting from the Rainbow
Royalty Buyout totaling $19.0 million, the premium on the Tender Offer,
write-off of deferred financing costs and initial issue discount related to
the 12 7/8% Notes and expensing of a portion of the fees and expenses of the
Refinancing.
34
<PAGE> 36
SELECTED FINANCIAL DATA
The following selected consolidated financial data have been derived from
the audited financial statements of the Company for the years ended June 30,
1993, 1994, 1995, 1996 and 1997. The table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto.
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------
1993 1994 1995 1996(1) 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Gaming equipment and systems................ $ 99 $ 65 $ -- $ 10,575 $134,734
Wall machines and amusement games........... -- -- -- 3,356 131,934
Route operations............................ 96,282 102,830 106,854 109,938 127,028
Casino operations........................... 16,710 20,159 25,134 48,509 51,450
-------- -------- -------- -------- --------
Total revenues................................ 113,091 123,054 131,988 172,378 445,146
-------- -------- -------- -------- --------
Costs and expenses
Cost of gaming equipment and systems........ 49 20 -- 7,213 84,496
Cost of wall machines and amusement games... -- -- -- 2,022 68,426
Cost of route operations.................... 72,614 76,332 79,887 84,212 95,716
Cost of casino operations................... 11,543 14,955 14,231 22,046 22,269
Selling, general and administrative......... 19,758 22,629 28,249 30,620 100,415
Provisions for doubtful receivables......... 461 705 400 1,020 9,059
Depreciation and amortization............... 8,718 9,530 9,520 10,988 22,606
Direct acquisition costs(2)................. -- -- 1,669 55,843 --
Unusual items............................... -- 6,351 2,293 5,498 700
-------- -------- -------- -------- --------
Total expenses................................ 113,143 130,522 136,249 219,462 403,687
-------- -------- -------- -------- --------
Operating income (loss)....................... (52) (7,468) (4,261) (47,084) 41,459
Other income (expense)
Interest income............................. 998 2,084 2,798 1,571 1,620
Interest expense............................ (5,046) (6,830) (8,133) (8,897) (23,626)
Rainbow royalty(3).......................... -- -- (810) (4,070) (4,722)
Minority interest........................... -- (506) (397) (963) (1,092)
Other, net.................................. 450 (167) 317 301 139
-------- -------- -------- -------- --------
Income (loss) before income taxes............. (3,650) (12,887) (10,486) (59,142) 13,778
Income tax provision.......................... -- (241) (265) (755) (7,993)
-------- -------- -------- -------- --------
Net income (loss)............................. (3,650) (13,128) (10,751) (59,897) 5,785
Special stock dividends, including repurchase
premium..................................... -- -- -- (362) (11,974)
-------- -------- -------- -------- --------
Net loss applicable to common shares.......... $ (3,650) $(13,128) $(10,751) $(60,259) $ (6,189)
======== ======== ======== ======== ========
Net loss per common share..................... $ (0.38) $ (1.28) $ (0.95) $ (4.64) $ (0.19)
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Operating income (loss) before unusual items
and direct acquisition costs................ $ (52) $ (1,117) $ (299) $ 14,257 $ 42,159
EBITDA(4)..................................... $ 8,666 $ 7,907 $ 8,824 $ 24,282 $ 63,673
Capital expenditures.......................... 5,092 5,385 8,887 8,101 13,257
Ratio of EBITDA to interest expense........... 2.7x
Ratio of earnings to fixed charges............ -- -- -- -- 1.6x
Deficiency of earnings to fixed charges....... $ (3,650) $(12,887) $(10,486) $(59,142) $ --
BALANCE SHEET DATA:
Cash and cash equivalents and securities
available for sale.......................... $ 9,580 $ 49,574 $ 37,414 $ 48,057 $ 28,924
Working capital............................... 7,991 50,926 31,746 111,009 110,795
Total assets.................................. 73,768 119,416 126,348 375,504 352,016
Total long-term debt, including current
maturities.................................. 44,798 90,726 101,397 191,344 173,839
Series B Preferred Stock...................... -- -- -- 51,552 58,981
Total stockholders' equity.................... 22,665 15,099 9,985 69,846 53,555
</TABLE>
35
<PAGE> 37
- ---------------
(1) The Company acquired BGII on June 18, 1996. Therefore, the results of
operations for the year ended June 30, 1996 include the results of
operations of BGII for the last twelve days of the fiscal year. See note 2
to the Company's Consolidated Financial Statements.
(2) Includes non-cash accounting loss of $30.1 million in fiscal year 1996 as a
result of the conversion of the Old Convertible Debentures.
(3) Represents the royalty that is no longer an expense of the Company following
consummation of the Rainbow Royalty Buyout.
(4) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization, less minority interest plus direct acquisition costs and
unusual items. EBITDA should not be construed as an alternative to net
income or any other GAAP measure of performance as an indicator of the
Company's performance or to cash flows generated by operating, investing and
financing activities as an indicator of cash flows or a measure of
liquidity. Management believes that EBITDA is a useful adjunct to net income
and other measurements under GAAP and is a conventionally used financial
indicator. For a breakdown of EBITDA by business unit, see "Summary
Historical and Supplemental Data".
36
<PAGE> 38
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Balance Sheet and
Unaudited Pro Forma Condensed Combined Statement of Operations present the
financial position of the Company assuming the Refinancing occurred on June 30,
1997 and on July 1, 1996, respectively. Adjustments necessary to reflect this
assumption and to restate the historical financial statements of the Company are
presented in the Pro Forma Adjustments column and are further described in the
Notes to Unaudited Pro Forma Condensed Combined Financial Information. The
Unaudited Pro Forma Condensed Combined Statement of Operations does not reflect
approximately $77.5 million in non-recurring charges (and related tax effects)
resulting from the matters discussed in Notes (i) and (j).
The historical unaudited financial information for Alliance is derived from
the consolidated financial statements of the Company for the year ended June 30,
1997 which have been audited by KPMG Peat Marwick LLP, independent accountants.
The Unaudited Pro Forma Supplemental Information presents EBITDA and fixed
charge information and includes related pro forma adjustments as applicable
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 Refinancing and events
associated therewith 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 might have been had the Refinancing 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 Refinancing", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements and related notes thereto of the Company
included elsewhere in this Prospectus.
The Pro Forma Adjustments are based upon preliminary estimates and certain
assumptions that management of the Company believes are reasonable in the
circumstances. Final amounts could differ from those set forth below. In the
opinion of management, all adjustments have been made that are necessary to
present fairly the pro forma financial information.
37
<PAGE> 39
ALLIANCE GAMING CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 28,924 $ (12,335)(a) $ 16,589
Accounts and notes receivable, net.................... 87,701 87,701
Inventories........................................... 37,329 37,329
Other................................................. 9,627 9,627
-------- --------
Total current assets.......................... 163,581 151,246
-------- --------
Leased equipment, net................................... 7,902 7,902
Long-term notes receivable, net......................... 8,981 8,981
Property and equipment, net............................. 74,647 74,647
Excess of costs over net assets of an acquired business,
net................................................... 62,098 62,098
Intangible assets, net.................................. 18,231 18,231
Other, net.............................................. 16,576 4,157(b) 20,733
-------- --------
Total assets.................................. $ 352,016 $ 343,838
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable...................................... $ 14,270 (408)(c) $ 13,862
Accrued liabilities................................... 37,392 (85)(d) 37,307
Current maturities of long-term debt and lines of
credit............................................. 1,124 863(e) 1,987
-------- --------
Total current liabilities..................... 52,786 53,156
-------- --------
12 7/8% Notes, net...................................... 151,224 (151,224)(g) --
New credit facilities................................... -- 148,748(e) 148,748
10% Senior Subordinated Notes Due 2007, net............. -- 149,202(h) 149,202
Other long-term debt.................................... 21,491 (18,818)(f) 2,673
Other liabilities....................................... 12,433 12,433
-------- --------
Total liabilities............................. 237,934 366,212
-------- --------
Minority interests...................................... 1,546 1,546
Series B Special Stock, $.10 par value, $100 liquidation
value................................................. 58,981 (58,981)(i) --
Stockholders' equity (net capital deficiency):
Series E Special Stock, $100 liquidation value........ 12,368 12,368
Common Stock, $.10 par value.......................... 3,185 3,185
Additional paid-in capital............................ 138,590 (16,439)(i) 122,151
Cumulative translation adjustment..................... (11,719) (11,719)
Accumulated deficit................................... (88,869) (61,036)(j) (149,905)
-------- --------
Total stockholders' equity (net capital
deficiency)................................. 53,555 (23,920)
-------- --------
Total liabilities and stockholders' equity
(net capital deficiency).................... $ 352,016 $ 343,838
======== ========
</TABLE>
38
<PAGE> 40
ALLIANCE GAMING CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ALLIANCE PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gaming equipment and systems.......................... $ 134,734 $ 134,734
Wall machines and amusement games..................... 131,934 $ 131,934
Route operations...................................... 127,028 127,028
Casino operations..................................... 51,450 51,450
-------- --------
Total revenues................................ 445,146 445,146
-------- --------
Costs and expenses
Cost of gaming equipment and systems.................. 84,496 84,496
Cost of wall machine and amusement games.............. 68,426 68,426
Cost of route operations.............................. 95,716 95,716
Cost of casino operations............................. 22,269 22,269
Selling, general and administrative................... 109,474 109,474
Unusual items......................................... 700 700
Depreciation and amortization......................... 22,606 611(k) 23,217
-------- --------
403,687 404,298
-------- --------
Operating income........................................ 41,459 40,848
Other income (expenses)
Interest income....................................... 1,620 1,620
Interest expense...................................... (23,626) (5,947)(l) (29,573)
Minority interest..................................... (1,092) (1,092)
Rainbow royalty....................................... (4,722) 4,722(m) --
Other, net............................................ 139 139
-------- --------
Income before income taxes.............................. 13,778 11,942
Provision for income taxes.............................. (7,993) 2,643(n) (5,350)
-------- --------
Net income.............................................. 5,785 6,592
Preferred stock dividends -- Series B................... (10,609) 10,609(o) --
Preferred stock dividends -- Series E................... (1,365) (1,365)
-------- --------
Net income (loss) applicable to common shares........... $ (6,189) $ 5,227
======== ========
Net income (loss) per common share...................... $ (0.19) $ 0.16
======== ========
SUPPLEMENTAL INFORMATION:
Operating income...................................... $ 41,459 $ 40,848
Depreciation and amortization......................... 22,606 23,217
Minority interest..................................... (1,092) (1,092)
Unusual items......................................... 700 700
-------- --------
EBITDA............................................. $ 63,673 $ 63,673
======== ========
Pro forma cash flow information:
Cash flows from operating activities........................................... $ 25,554
========
Cash flows from investing activities........................................... $ (21,577)
========
Cash flows from financing activities........................................... $ (16,999)
========
Pro forma ratio of earnings to fixed charges...................................... 1.4(p)
========
</TABLE>
39
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(a) Represents the pro forma net decrease in cash as a result of the
following:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Proceeds from Term Loan Facilities..................................... $ 140,000(i)
Proceeds from Revolving Credit Facility................................ 9,611(ii)
Proceeds from the Existing Notes....................................... 149,208(iii)
---------
298,819
Purchase 12 7/8% Notes................................................. (154,000)(iv)
Redeem Series B Preferred Stock........................................ (75,420)(v)
Rainbow Royalty Buyout................................................. (19,000)(vi)
Purchase Rainbow Notes Payable, plus accrued interest.................. (7,614)(vii)
Pay existing lines of credit and certain other indebtedness, plus
accrued interest..................................................... (11,289)(viii)
Pay fees and expenses and other costs.................................. (43,831)(ix)
---------
$ (12,335)
=========
</TABLE>
- ---------------
(i) Represents proceeds of $75 million from Tranche B Term Loan, $40 million
from Tranche C Term Loan and $25 million from the Delayed Draw Term
Facility.
(ii) Represents proceeds from the Revolving Credit Facility used to repay
amounts outstanding under existing credit lines. See note (viii) below.
(iii) Represents proceeds of $150 million from the issuance of the Notes, net
of original issue discount of $.8 million.
(iv) Represents the repurchase of the 12 7/8% Notes.
(v) Represents the cash paid to redeem the Series B Preferred Stock at
liquidation value.
(vi) Represents the agreed upon price to effectuate the Rainbow Royalty Buyout.
(vii) Represents the purchase of the Rainbow Notes Payable of $7.6 million plus
accrued interest of $49,000.
(viii) Represents the repayment of existing lines of credit of $9.6 million and
the redemption of the Old Convertible Debentures of $1.6 million plus
accrued interest of $36,000.
(ix) Includes the premium of $27.7 million to be paid to purchase the 12 7/8%
Notes, pay professional and advisors' fees and other costs. See note (j)
below.
(b) Represents the write-off of deferred financing costs of $6.4 million
relating to the Company's 12 7/8% Notes and the Series B Preferred Stock, offset
by capitalization of deferred financing costs of $10.6 million related to the
New Credit Facility and the Notes.
(c) Represents the amount payable at June 30, 1997 in respect of the
Rainbow royalty which was paid from the proceeds of the Delayed Draw Term
Facility.
(d) Represents accrued interest on other indebtedness that was repaid in
the Refinancing.
(e) Represents proceeds of $75 million from the Tranche B Term Loan which
has a term of 7 1/2 years with assumed interest at the LIBOR rate plus 2.75%,
$40 million from the Tranche C Term Loan which has a term of 8 years with
assumed interest at the LIBOR rate plus 3.0%, $25 million from the Delayed Draw
Term Facility which has a term of 7 1/2 years with assumed interest at LIBOR
rate plus 2.75% and approximately $9.6 million borrowed under the Revolving
Credit Facility with an assumed interest rate equal to the LIBOR rate plus
2.25%. Interest rates of 8.38%, 8.63%, 8.38%, and 7.88%, respectively, were used
for purposes of calculating pro forma interest expense. The current portion of
these loans is $.9 million.
(f) Represents cash used to pay off $9.6 million outstanding under existing
credit lines, redeem the Old Convertible Debentures for $1.6 million and
purchase the Rainbow Notes Payable for $7.6 million.
(g) Represents the carrying value of the 12 7/8% Notes that were purchased
in connection with the Refinancing.
(h) Represents proceeds of $150 million from the issuance of the Notes, net
of original issue discount at an effective interest rate of 10.085%.
40
<PAGE> 42
(i) Represents cash paid to redeem the Series B Preferred Stock at
liquidation value, of which $59 million represents the carrying value of the
Series B Preferred Stock and $16.4 million represents the difference between the
carrying value and liquidation value of the Series B Preferred Stock and is
charged against additional paid-in capital.
(j) Represents the net impact of the Pro Forma Adjustments on stockholders'
equity consisting of the following:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Rainbow Royalty Buyout................................................. $ 19,000
Premium paid on repurchase of the 12 7/8% Notes........................ 27,666
Write-off of deferred financing costs and original issue discount
related to the 12 7/8% Notes and the deferred financing costs related
to the Series B Preferred Stock...................................... 9,214
Transaction fees and expenses.......................................... 3,256
Advisory fees (see "Management -- Related Party Transactions")......... 1,900
-------
$ 61,036
=======
</TABLE>
(k) Represents the elimination of the amortization of deferred debt
financing costs related to the 12 7/8% Notes offset by amortization of the new
deferred debt financing costs related to the New Credit Facility and the Notes.
(l) Represents the assumed net incremental interest expense from the
Refinancing as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JUNE 30,
1997
--------------
(IN THOUSANDS)
<S> <C>
Interest on the Notes at 10.085%....................................... $ 15,128
Interest on the New Credit
Facility (LIBOR rate 5.625%):
Revolving Credit Facility (7.88% on $9.6 million).................... 757
Tranche B Term Loan (8.38% on $75.0 million)......................... 6,281
Tranche C Term Loan (8.63% on $40.0 million)......................... 3,450
Delayed Draw Term Facility (8.38% on $25.0 million).................. 2,094
Commitment fee of 1/2% on unused Revolving Credit Facility.......... 452
Elimination of interest expense on the 12 7/8% Notes and other
indebtedness paid in conjunction with the Refinancing............. (22,215)
--------
$ 5,947
========
</TABLE>
For every 0.50% change in the interest rate for the New Credit Facility,
there is a corresponding change in interest expense of $1.2 million per year
assuming the Revolving Credit Facility is fully drawn.
(m) Represents the royalty that will no longer be an expense of the Company
as a result of the Rainbow Royalty Buyout.
(n) Represents the reduction in income taxes due to the additional interest
expense.
(o) Represents the elimination of the dividends on the Series B Preferred
Stock along with loss on repurchase of such stock totaling $10.6 million for the
fiscal year ended June 30, 1997.
(p) The pro forma ratio of earnings to fixed charges excludes the fixed
charge for preferred stock dividends. If the fixed charge for preferred stock
dividends were included as a fixed charge, the deficiency of earnings to fixed
charges for the year ended June 30, 1997 would have been $4.6 million. On a pro
forma basis, if the fixed charge related only to the dividends on the Series E
Preferred Stock were included as a fixed charge, the ratio of earnings to fixed
charges for the year ended June 30, 1997 would have been 1.3.
41
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE REFINANCING
In August 1997 the Company completed the Refinancing. The New Credit
Facility requires term loan amortization payments of $1.2 million, $1.4 million
and $1.4 million during the first three years, respectively, after the
consummation of the Refinancing. The average life of the Term Loan Facilities is
6.8 years. See "The Refinancing -- New Credit Facility".
On a pro forma basis for the year ended June 30, 1997, assuming the
Refinancing had occurred on July 1, 1996, the Company would have reported
earnings before interest, taxes, and depreciation and amortization, less casino
royalty and minority interest plus direct acquisition costs and unusual items
(EBITDA) of $63.7 million, net income available to common shares of $5.2 million
and net income per share of $0.16 or a $0.35 improvement over the reported net
loss per share of $0.19. In conjunction with the Refinancing, the Company
incurred fees and expenses totaling approximately $77.5 million, including the
premium on the repurchase of the 12 7/8% Notes of $27.7 million and $16.4
million for the difference between the carrying value and the liquidation value
of the Series B Preferred Stock, all of which will be recorded in the quarter
ended September 30, 1997. On a pro forma basis as of June 30, 1997, in
comparison to the actual year-end balances, the Refinancing would have resulted
in a decrease in cash and cash equivalents of $12.3 million, a decrease in net
working capital of $12.7 million, an increase in long-term debt of $128.0
million, but the elimination of the 12 7/8% Notes and Series B Preferred Stock.
On an ongoing basis the Company will continue to be highly leveraged and will
have significant interest costs, but in the near term the Company will have only
limited principal payments required on its long-term indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $28.9 million in cash and cash
equivalents and $24.1 million in availability on its former revolving lines of
credit. In addition the Company had working capital of approximately $110.8
million, a decrease of approximately $0.2 million from June 30, 1996 which is
explained below. Consolidated cash and cash equivalents at June 30, 1997
includes approximately $9.0 million of cash which is utilized in Casino
Operations and Route Operations which is held in vaults, cages or change banks.
Management believes that cash flow from operating activities, cash and cash
equivalents held and available borrowings under the new $90.0 million Revolving
Credit Facility will provide the Company with sufficient capital resources and
liquidity for the foreseeable future. At June 30, 1997, the Company did not have
any significant commitments for capital expenditures.
The following table presents the components of consolidated working capital
at June 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997 CHANGE
-------- -------- --------
(IN $000'S)
<S> <C> <C> <C>
Cash and cash equivalents.......................... $ 48,057 $ 28,924 $(19,133)
Accounts and notes receivable, net................. 93,502 87,701 (5,801)
Inventories, net................................... 41,656 37,329 (4,327)
Other current assets............................... 8,354 9,627 1,273
-------- -------- --------
Total current assets..................... 191,569 163,581 (27,988)
Accounts payable................................... 16,240 14,270 1,970
Accrued liabilities................................ 38,543 37,392 1,151
Current maturities of long-term debt............... 25,777 1,124 24,653
-------- -------- --------
Total current liabilities................ 80,560 52,786 27,774
-------- -------- --------
Net working capital................................ $111,009 $110,795 $ (214)
======== ======== ========
</TABLE>
The net change in cash and cash equivalents during the fiscal year ended
June 30, 1997 resulted from EBITDA generated, offset by cash used for capital
expenditures of approximately $13.3 million; cash used for principal payments on
debt including the revolving lines of credit borrowings of approximately $7.5
million in
42
<PAGE> 44
the United States and approximately $4.1 million in Germany and payment of other
debt totaling approximately $6.8 million; and payments made for accrued direct
acquisition costs, the accrued distribution payable to the limited partner in
the Rainbow Casino Vicksburg Partnership, L.P., the payment of the Rainbow
royalty and the payment of a litigation settlement. In addition, approximately
$3.9 million of cash was used to purchase shares of Series B Preferred Stock
during fiscal year 1997. The Company also made its semi-annual interest payments
on the 12 7/8% Notes on December 30, 1996 and June 30, 1997 aggregating $20.5
million. During the fiscal year ended June 30, 1997, current maturities of
long-term debt were reduced primarily due to principal payments and, due to the
Refinancing in August 1997, the current portions of the lines of credit and
certain other debt instruments were reclassified to long-term debt as of June
30, 1997. The primary change to all other working capital components during
fiscal year 1997 resulted from a decrease in the translation rate between the
German mark and the U.S. dollar. During the year ended June 30, 1997, the
Company generated cash flows from operating activities of $24.1 million, an
increase of $23.2 million over the prior year.
The following table presents the Company's EBITDA. For purposes of
comparability the 1996 amounts are further adjusted to include BGII's results
for the entire year.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1996 1997
-------- --------
(IN $000'S)
<S> <C> <C>
EBITDA by business unit:
Gaming Equipment and Systems................................... $ 15,716 $ 16,671
Wall Machines and Amusement Games.............................. 13,376 29,719
Route Operations............................................... 16,691 20,200
Casino Operations(a)........................................... 11,229 12,630
Corporate expenses............................................. (17,300) (19,177)
Minority interest.............................................. (963) (1,092)
-------- --------
EBITDA(a)............................................ $ 38,749 $ 58,951
======== ========
</TABLE>
- ---------------
(a) Presented after deducting the Rainbow royalty.
The Company believes that the above analysis of EBITDA (which excludes
direct acquisition costs and unusual items) is a useful adjunct to net income,
cash flow and other GAAP measurements. However, this 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.
Management believes that customer financing terms and leasing have become
an increasingly important competitive factor for the Gaming Equipment and
Systems and Wall Machine and Amusement Games business units, respectively. See
"Risk Factors -- Customer Financing".
RESULTS OF OPERATIONS
Year Ended June 30, 1997 Compared with Year Ended June 30, 1996
General
To enhance the comparability for the following discussion of the results of
operations, the operating results for 1996 are presented on a pro forma basis
assuming the Acquisition had occurred prior to the start of the 1996 year. The
Acquisition actually occurred on June 18, 1996.
Gaming Equipment and Systems
For the year ended June 30, 1997, Gaming Equipment and Systems reported
revenues of $134.7 million, an increase of 2% compared to revenues of $132.3
million in the prior year. Bally Gaming reported shipments of approximately
18,200 new gaming machines, an increase of 1% compared to shipments of
approximately 18,000 in the prior year. The volume improvement resulted
primarily from a general increase in replacement demand from existing casinos
offset by a lower number of new casino openings in the year ended June 30,
43
<PAGE> 45
1997. By market segment, Bally Gaming's unit sales for the current year
consisted of approximately 8,300 units to the Nevada and Atlantic City markets,
7,600 units to international markets and 2,300 units to riverboats, Native
American and other domestic markets. Bally Gaming reported revenues from the
sale of new gaming machines of $96.7 million, an increase of 6% compared to
$91.3 million in the prior year due to higher unit volume and higher average
selling prices of new machines. Bally Systems reported revenues of $22.3
million, an increase of 22% compared to revenues of $18.2 million in the prior
year period. Bally Systems revenue improvement resulted primarily from increased
shipments to new installations such as New York-New York, Casino Niagara, Casino
Rama, and the Harrah's Riverboat and Players Island Casinos in St. Louis.
For the year ended June 30, 1997, gross profit margins improved to 37% from
35% in the prior year period. The gross margin improvement resulted primarily
from a higher average sales price for new machines and the impact of higher
Bally Systems sales. Gaming Equipment and Systems reported operating income of
$10.6 million, a decrease of 23% compared to operating income of $13.8 million
in the prior year period. The operating income decrease resulted primarily from
greater selling, general and administrative expenses (including higher research
and development costs) and the impact of greater depreciation expense from
amortizing goodwill and other intangibles as a result of the Acquisition,
partially offset by the aforementioned revenue and gross margin increases.
Wall Machines and Amusement Games
For the year ended June 30, 1997, Wall Machines and Amusement Games
reported revenues of $131.9 million, an increase of 23% compared to revenues of
$107.1 million in the prior year. The revenue improvement resulted primarily
from an 87% increase in new wall machine units sold as Wall Machines and
Amusement Games expanded its market share due to popularity of its product
offerings and, to a lesser extent, demand increased as a result of a change in
German regulations effective January 1, 1997 requiring all wall machines to have
internal meters to track play. In addition, Wall Machines and Amusement Games
enhanced its leasing program whereby new wall machines are leased to customers
pursuant to operating leases which provide a stream of revenues and cash flows
over the term of the leases which range from six months to three and one half
years. For the year ended June 30, 1997, Wall Machines and Amusement Games
leased approximately 4,000 new wall machines, which is a 300% increase from the
prior year period. Revenues were unfavorably impacted by a decrease in amusement
game sales as operators weighted their mix of capital expenditures toward new
wall machines. The currency translation impact of the fluctuation of the German
mark versus the U.S. dollar reduced revenues by $12.2 million during the current
year.
For the year ended June 30, 1997, gross profit margin improved to 48% from
39% in the prior year. The gross margin improvement resulted primarily from the
favorable impact of greater production volume in Wall Machines and Amusement
Games' production facility. Wall Machines and Amusement Games reported operating
income of $23.3 million, an increase of 207% compared to $7.6 million in the
prior year period. The operating income improvement resulted primarily from the
aforementioned revenue and gross margin increases, partially offset by an
increased provision for doubtful receivables as well as higher selling, general
and administrative expenses due to increased marketing costs.
Route Operations
For the year ended June 30, 1997, the Route Operations business unit
reported total revenues of approximately $127.0 million, an increase of 16%
compared to revenues of $110.0 million in the prior year. Revenues from Nevada
Route Operations increased approximately $15.0 million (16%) over the prior
year. This increase was attributable to an increase in the average net win per
gaming machine per day of 8% to $52.40 from $48.60 in the prior year and an
increase in the weighted average number of gaming machines during the current
year of 7% to 5,660 units as compared to 5,290 units in the prior year.
Gamblers' Bonus, a cardless club and player tracking system launched in December
1995, had a favorable impact on the net win per day. As of June 30, 1997, the
Gamblers' Bonus product was installed in approximately 1,500 gaming machines at
130 locations statewide. Revenues from Route Operations in Louisiana increased
$2.0 million (12%) primarily as a result of an improvement in the net win per
gaming machine per day of 8% to $74.10
44
<PAGE> 46
from $68.50 in the prior year and a 3% increase in the average number of
machines to 700 from 680 in the prior year.
For the year ended June 30, 1997, cost of revenues for Route Operations
totaled $95.7 million, an increase of $11.5 million (14%) compared to the prior
year. As a percentage of revenues, costs of revenues improved to 75.4% from
76.6% in the prior year. Cost of revenues for Nevada route operations increased
14% as compared to the prior year, but, as a percent of related revenues,
improved to 77.3% from 79.0% in the prior year due primarily to higher revenues
while costs associated with new and renewed contracts remained relatively flat.
Costs of revenues for Route Operations in Louisiana increased 13% primarily as a
result of the increase in revenues. As a percent of related revenues, cost of
revenues for Route Operations in Louisiana increased to 64.2% from 63.3% in the
prior year primarily due to a slight increase in the percentage of revenues paid
to the Fairgrounds Racetrack. Cost of route revenues for Route Operations
includes rents under both space lease and revenue sharing arrangements, gaming
taxes and direct labor, including related payroll taxes and benefits.
In the year ended June 30, 1996, Nevada Route Operations incurred unusual
items totaling $2.1 million. Reserves were increased by $1.4 million for certain
parts inventories which became obsolete and were subsequently disposed of due to
the impact of recent technological changes to gaming devices being deployed as a
result of the new Gambler's Bonus product. In addition an accrual of $0.7
million was established to reserve for the present value of the future lease
payments for one small casino location for which cash flows received under the
participation agreement are currently inadequate to service the building lease
paid by the Company.
For the fiscal year ended June 30, 1997, the Route Operations business unit
reported operating income of $13.1 million, an increase of 41% compared to
operating income of $9.3 million in the prior year. The operating income
improvement resulted from the aforementioned increase in revenues and the
improvement in operating costs as a percentage of revenues and the lack of
unusual items in the current year, partially offset by an increase in selling,
general, and administration expenses, primarily greater marketing costs at both
operations and an increased provision for doubtful receivables for the Nevada
Route Operations.
Casino Operations
For the year ended June 30, 1997, the Casino Operations business unit
reported revenues of $51.5 million, an increase of 13% compared to revenues of
$45.4 million in the prior year excluding revenues from closed casinos and
taverns as described below. This increase is due to a 17% increase at the
Rainbow Casino and a 2% increase at the Rail City Casino. The improvement at the
Rainbow Casino was attributable to the continuing impact of its direct marketing
campaigns and a higher average market share than in the prior year. Revenues
during the current year at the Rail City Casino were adversely impacted by
severe weather in the Reno area during the third quarter and an internal
remodeling project which has now been completed.
For the year ended June 30, 1997, the cost of revenues for Casino
Operations increased 13% to $22.3 million compared to $19.8 million in the prior
year excluding cost of revenues from closed casinos and taverns. As a percentage
of revenues, the costs of revenues improved slightly to 43.3% compared to 43.6%
in the prior year. As a percent of related revenues, cost of revenues for the
Rainbow Casino increased to 37.1% from 36.4% in fiscal 1996 primarily due to
increased costs associated with taking over operations at the newly remodeled
restaurant. Cost of revenues for the Rail City, as a percent of related
revenues, improved to 64.1% from 64.7% in the prior year due primarily to higher
revenues while direct costs remained relatively stable. Cost of casino revenues
includes cost of goods sold, gaming taxes, rent and direct labor including
related taxes and benefits.
For the year ended June 30, 1997, the Casino Operations business unit
reported operating income, net of casino royalty, of $10.7 million, an increase
of 14% compared to operating income of $9.4 million in the prior year. The
operating income improvement resulted from the aforementioned increase in
revenues and reduced operating costs as a percentage of revenues, partially
offset by an increase in selling, general and administrative costs, principally
due to increased marketing efforts at both locations. On August 12, 1997, the
Company purchased from Hospitality Franchise Systems the right to receive
royalty payments based on revenues of the
45
<PAGE> 47
Rainbow Casino. The Rainbow Casino royalty fees incurred during the fiscal year
ended June 30, 1997 totaled $4.7 million.
Revenues and Expenses for Closed Casinos and Taverns
During the year ended June 30, 1996, the Company disposed of or terminated
operations at several small casinos and taverns as these operations were not
deemed to be compatible with the Company's long-term strategy. No revenues or
expenses were reported for these properties in the fiscal year ended June 30,
1997. For the fiscal year ended June 30, 1996, revenues for these properties are
included in Casino Operations revenues and totaled $3.1 million. The related
costs of revenues are included in cost of Casino Operations and totaled $2.3
million. The related selling, general and administrative expenses totaled $1.1
million.
Consolidated
The following discussion of the Company's consolidated results of
operations for the year ended June 30, 1997 is presented in comparison to the
actual consolidated results of operations for the prior year which include the
results of operations of the Gaming Equipment and Systems and Wall Machines and
Amusement Games business units for only the last twelve days of the year ended
June 30, 1996.
Total revenues for the year ended June 30, 1997 were approximately $445.1
million, an increase of $272.7 million (158%) over revenues of $172.4 in prior
year. This increase is primarily due to the incremental revenues of $252.7
million from Gaming Equipment and System sales and Wall Machines and Amusement
Games sales, as well as the aforementioned increases in revenues at both the
Route Operations and Casino Operations business units.
Cost of revenues for the year ended June 30, 1997 were approximately $270.9
million, an increase of $155.4 million (135%) compared to $115.5 million in
prior year. This increase is due to the incremental cost of revenues of $143.7
million from Gaming Equipment and System sales and Wall Machines and Amusement
Games sales, as well as the aforementioned increases in cost of revenues at both
the Route Operations and Casino Operations business units.
Selling, general and administrative expenses for the year ended June 30,
1997 were approximately $100.4 million, an increase of $69.8 million (228%)
compared to costs of $30.6 for the prior year. This increase is due to the
impact of including the Gaming Equipment and Systems and the Wall Machines and
Amusement Games business unit expenses for the entire year and higher legal and
professional fees for fiscal 1997, partially offset by cost savings such as
elimination of certain duplicative costs.
Provision for doubtful receivables for the year ended June 30, 1997 was
$9.1 million, an increase of $8.1 million from the prior year. The increase was
due primarily to the impact of including the provisions related to the Gaming
Equipment and Systems and the Wall Machines and Amusement Games business units
for the entire year, as well as the aforementioned increase in the provision at
the Route Operations. Depreciation and amortization for the fiscal year ended
June 30, 1997 was $22.6 million, an increase of 105% compared to depreciation
and amortization of $11.0 million in the prior fiscal year. This increase is due
to the inclusion of Gaming Equipment and Systems and Wall Machine and Amusement
Game depreciation and amortization in the entire fiscal year, higher
depreciation and amortization in the Route Operations business unit and the
impact of amortizing goodwill and other intangibles resulting from the
Acquisition.
During the year ended June 30, 1996, the Company expensed direct
acquisition costs related to the Acquisition totaling $55.8 million. Such costs
included the $30.1 million non-cash accounting loss on the debenture conversion
portion of the financing for the Acquisition, plus legal, accounting, financial
advisory, printer, SEC filing fees and other related expenses.
During the year ended June 30, 1997, the Company incurred $0.7 million in
unusual items related primarily to separation costs of Alliance personnel
subsequent to the Acquisition. During the year ended June 30, 1996, the Company
incurred $5.5 million in unusual items including a provision of $3.4 million to
fully reserve the net book value of assets that the Company deemed impaired and
the aforementioned unusual items at its Route Operations business unit of $2.1
million.
46
<PAGE> 48
Interest Income and Expense and Income Taxes
Net interest expense in the year ended June 30, 1997 increased to $22.0
million, an increase of 201% compared to the net interest expense of $7.3
million in the prior year. The increase was due primarily to interest on the
12 7/8% Notes which were issued in June 1996, partially offset by lower interest
expense on the Old Convertible Debentures, substantially all of which were
converted into equity as part of the financing of the Acquisition.
The Company recorded an income tax provision of $8.0 million in the year
ended June 30, 1997, compared to a provision of $0.8 million in the prior year.
The current year provision is due primarily to income taxes at Wall Machines and
Amusement Games and domestic state income taxes. The effective tax rate is 58%,
which resulted from taxable income currently being generated in Germany, which
has a higher effective rate than in the U.S. At June 30, 1997, the Company had
net operating loss carryforwards for federal income tax purposes of
approximately $21.5 million which were available to offset future federal
taxable income, if any, expiring in the years 2007 through 2011. At June 30,
1997 the Company had foreign tax credit carryforwards of approximately $11.8
million and alternative minimum tax credit (AMT) carryforwards of approximately
$1.5 million. Foreign tax credits are available to offset future taxes due in
the U.S. on future foreign taxable income and expire between 1998 and 2002
unless utilized prior to such time. AMT credits are available to be carried
forward indefinitely and may be utilized against regular U.S. corporate tax to
the extent it does not exceed computed AMT calculations. In addition, the
Company's annual limitation with respect to net operating losses is limited
pursuant to Section 382 of the Internal Revenue Code.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
The following discussion of the results of operations includes only the
Company's two business units that existed prior to the Acquisition on June 18,
1996. See the "Consolidated" section below for the impact of the BGII results
for the 12 days prior to 1996 year-end.
Route Operations
Total revenues from Route Operations for the year ended June 30, 1996 were
approximately $109.9 million, an increase of $3.1 million (2.9%) over the prior
year. Revenues from Nevada route operations increased approximately $1.8 million
(2.0%) over the prior year. This increase was attributable to an increase in the
average net win per gaming machine per day from $47.70 in the prior year to
$48.60 in the current year and an increase in the weighted average number of
gaming machines during the current year to 5,290 units as compared to 5,260
units in the prior year. During the year ended June 30, 1996 the Company
received regulatory approval for its Gambler's Bonus product, and began
installation into locations in Southern Nevada. The revenues at locations in
which the Gambler's Bonus product has not been installed experienced a slight
decrease in revenues in comparison to the prior year. Revenues from route
operations in Louisiana increased $1.3 million (8.4%) primarily as a result of
an expansion of operations from the opening of a new OTB parlor in October 1995.
In addition, Louisiana revenues increased as a result of an improvement in the
net win per gaming machine per day from $56.40 in the prior year to $68.50 in
the current year, which resulted from higher revenues earned on a lower average
number of machines. The average number of gaming machines in the Louisiana route
operations decreased from 720 for the prior year to 680 for the current year.
Cost of revenues for Route Operations for the year ended June 30, 1996
totaled $84.2 million, an increase of $4.3 million (5.4%) over the prior year.
Cost of revenues for Nevada route operations increased $3.5 million (5.4%) as
compared to the prior year and increased slightly as a percent of related
revenues due primarily to increased costs associated with new and renewed
contracts. Costs of revenues for route operations in Louisiana increased $0.8
million (7.6%) primarily as a result of the increase in revenues. As a percent
of related revenues, cost of revenues for Route Operations in Louisiana remained
relatively constant, at approximately 63.8%. Cost of route revenues for Route
Operations includes rents under both space lease and revenue sharing
arrangements, gaming taxes and direct labor, including related payroll taxes and
benefits.
In the year ended June 30, 1996, Nevada route operations incurred unusual
items totaling $2.1 million. Reserves were increased by $1.4 million for certain
parts inventories which became obsolete and were
47
<PAGE> 49
subsequently disposed of due to the impact of recent technological changes to
gaming devices being deployed as a result of the new Gambler's Bonus product. In
addition an accrual of $0.7 million was established to reserve for the present
value of the future lease payments for one small casino location for which cash
flows received under the participation agreement are currently inadequate to
service the building lease paid by the Company.
For the year ended June 30, 1996, the Route Operations business unit
reported operating income of $13.1 million, an increase of 7% compared to
operating income of $12.2 million in the prior year. The operating income
improvement resulted from the aforementioned increase in revenues partially
offset by a slight increase in operating costs as a percentage of revenues.
Selling, general and administrative expenses related to Route Operations for the
current year remained relatively flat from the prior year.
Casino Operations
Revenues from Casino Operations for the year ended June 30, 1996 were
approximately $45.4 million (excluding revenues of closed casinos and taverns as
discussed below), an increase of $27.1 million or 149.3% from the prior year.
This increase is due primarily to the impact of the Rainbow Casino in Vicksburg,
Mississippi. Due to a change in Rainbow Casino's ownership structure on March
29, 1995, the Company began consolidating the results of the Rainbow Casino and
thus the prior year included only three months of the Rainbow Casino results of
operations. The current year results reflect twelve months of Rainbow Casino
operations plus the impact of having all of the amenities of the facility in
operation for the full year. Rainbow Casino revenues were $33.9 million for the
current year compared to $7.6 million in the prior year. During the
approximately nine-month period ended March 29, 1995, the Company recorded
royalty income from the Rainbow Casino of $0.9 million, and such royalty was
terminated upon the change in ownership referred to above. Revenues from the
Rail City Casino were relatively flat at $11.5 million, resulting from lower
patronage during the first six months of the current year during which there was
significant road construction near the property offset by increased revenues
from improved casino ambiance after the completion of an internal remodeling
project and a successful series of marketing campaigns to attract local patrons
back to the casino after completion of the nearby road construction.
The cost of revenues for Casino Operations for the year ended June 30,
1996, including costs of food and beverage revenues, were approximately $19.8
million, an increase of $9.6 million or 94.6% compared to the prior year. The
increase is primarily due to the aforementioned impact of the Rainbow Casino
operations. The cost of revenues at the Rail City Casino were relatively flat at
$7.4 million. Cost of casino revenues includes cost of goods sold, gaming taxes,
rent and direct labor, including related taxes and benefits.
For the year ended June 30, 1996, the Casino Operations business unit
reported operating income, net of casino royalty, of $9.4 million, an increase
of 261%, compared to operating income of $2.6 million in the prior year. The
operating income improvement resulted from the aforementioned impact of the
Rainbow Casino operations, partially offset by higher selling, general and
administrative costs at the Rail City Casino primarily for the marketing
campaigns to attract local patrons back to the casino after completion of the
nearby road construction. The Rainbow Casino royalty fees incurred during the
year ended June 30, 1996 totaled $4.1 million.
Revenues and Expenses for Closed Casinos and Taverns
During the years ended June 30, 1995 and 1996 the Company disposed of or
terminated operations at several small casinos and taverns, as these operations
were not deemed to be compatible with the Company's long-term strategy. Revenues
for these properties are included in Casino Operations revenues and totaled $6.1
million and $3.1 million for the years ended June 30, 1995 and 1996,
respectively and the related costs of revenues are included in cost of Casino
Operations and totaled $4.1 million and $2.3 million for such periods,
respectively. The related selling, general and administrative expenses totaled
$1.8 million and $1.1 million for the years ended June 30, 1995 and 1996,
respectively.
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<PAGE> 50
Consolidated
Total revenues for the year ended June 30, 1996 were approximately $172.4
million, an increase of $40.4 million (30.6%) over fiscal year 1995. This
increase is due to Gaming Equipment and Systems and Wall Machines and Amusement
Games revenues of $13.9 million during the post-acquisition period as well as
the aforementioned increases in revenues at both the Route Operations and Casino
Operations business units.
Cost of revenues for the year ended June 30, 1996 increased to $115.5
million (22.7%) over the prior year due to Gaming Equipment and Systems and Wall
Machines and Amusement Games cost of revenues of $9.2 million during the
postacquisition period as well as the aforementioned increases in cost of
revenues at both the Route Operations and Casino Operations business units. The
total cost of revenues as a percentage of total revenues, including those of
Gaming Equipment and Systems and Wall Machines and Amusement Games in the
post-acquisition period improved by 4.1% compared to the prior year.
Selling, general and administrative expenses for the year ended June 30,
1996 were approximately $30.6 million, an increase of $2.4 million (8.5%) from
the prior year. After excluding the prior year unusual item of compensation
expense of $1.3 million, the increase was primarily due to Gaming Equipment and
Systems and Wall Machines and Amusement Games selling, general and
administrative expenses of $2.0 million during the post-acquisition period as
well as the aforementioned increases at the Casino Operations business unit.
Provision for doubtful receivables for the year ended June 30, 1996
increased $0.6 million from the prior year. The increase was due primarily to a
$0.4 million provision for specifically identified bad debt accounts in the
Company's Route Operations business unit and the impact of including Gaming
Equipment and Systems and the Wall Machines and Amusement Games business units
provisions in the post-acquisition period of $0.2 million.
During the years ended June 30, 1995 and 1996, the Company expensed direct
acquisition costs of $1.7 million and $55.8 million, respectively. Such costs
for the 1996 year include the $30.1 million non-cash, accounting loss on the
debenture conversion portion of the financing for the Acquisition, plus legal,
accounting, financial advisory, printer, SEC filing fees and other related
expenses.
During the year ended June 30, 1996, the Company incurred $5.5 million in
unusual items, including a provision of $3.4 million to fully reserve the net
book value of assets that the Company deemed impaired and the aforementioned
unusual items at its Route Operations business unit of $2.1 million.
Interest Income and Expense and Income Taxes
In the year ended June 30, 1996, interest income decreased $1.2 million
from the prior year to $1.6 million, resulting from a decline in the level of
cash invested during the 1996 year. In the 1996 year, interest expense increased
$0.8 million from the prior year to $8.9 million. This increase was a result of
the aforementioned impact of consolidating the Rainbow Casino results of
operations for the full twelve months in the 1996 year, plus additional
borrowings at the Rainbow Casino to complete the facility, and, to a lesser
extent, the interest expense associated with the Senior Secured Notes, offset by
the reduction in interest associated with the $83.4 million of the convertible
debentures which converted into equity instruments.
The provision for income taxes in the year ended June 30, 1996 year
increased $0.5 million from the prior year to $0.8 million. This increase was a
result of a provision for alternative minimum tax due to the taxable nature of
the conversion of the Company's old convertible debentures for new convertible
debentures in the exchange offer, increased state income taxes in Louisiana and
the tax effects related to the accounting for unrealized gains and losses on the
BGII stock classified for accounting purposes as available for sale prior to
consummation of the Acquisition.
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<PAGE> 51
BUSINESS
Alliance is a diversified, worldwide gaming company that (i) designs and
manufactures gaming machines and computerized monitoring systems for gaming
machines, (ii) owns and manages a significant installed base of gaming machines,
(iii) owns and operates two casinos and (iv) in Germany, is a full-service
supplier of wall-mounted gaming machines and amusement games. Alliance has
achieved a leading market position for each of its business units. Operating
under the name Bally Gaming, the Company is the second largest slot and video
gaming machine manufacturer in North America, with over 85,000 gaming machines
sold during the past five years. Operating under the name Bally Systems, the
Company designs, integrates and sells highly specialized computerized monitoring
systems that provide casinos with networked accounting and security services for
their gaming machines. Systems has a leading position, with over 79,000 game
monitoring units ("GMUs") installed worldwide. The Company also owns, operates
and services an installed base of over 6,600 slot and video gaming machines
which are located mostly in non-casino venues in Nevada and Louisiana ("Route
Operations"). Alliance is the largest route operator in Nevada and the largest
operator of gaming machines at racetracks in Louisiana. Alliance also owns and
operates what management believes is the most profitable riverboat casino in
Vicksburg, Mississippi and a small casino in Sparks, Nevada, which together have
30 table games and 1,100 gaming machines (collectively, "Casino Operations"). In
addition, operating under the Bally Wulff name, the Company believes that it is
now the leading supplier of wall-mounted gaming machines and arcade games in
Germany.
The Company was incorporated in Nevada on September 30, 1968 under the name
Advanced Patent Technology. The Company changed its name to Gaming and
Technology, Inc. in 1983, to United Gaming, Inc. in 1988 and to Alliance Gaming
Corporation on December 19, 1994. The Company conducts its gaming operations
through directly and indirectly owned subsidiaries. On June 18, 1996 the Company
acquired BGII which includes the Gaming Equipment and Systems and Wall Machines
and Amusement Games business units. The term "Company" as used herein refers to
Alliance Gaming Corporation and subsidiaries unless the context otherwise
requires. The Company's principal executive offices are located at 6601 South
Bermuda Road, Las Vegas, Nevada 89119, telephone (702) 270-7600.
Prior to the Acquisition, BGII had a fiscal year end of December 31 which,
following the Acquisition, was changed to match the Company's fiscal year end of
June 30. Therefore, the financial and operating information presented below for
the Company's Gaming Equipment and Systems and Wall Machines and Amusement Games
business units follows BGII's historical year ends through 1995 and thereafter
conforms to the Company's fiscal periods.
GAMING EQUIPMENT AND SYSTEMS
Bally Gaming
Overview. The Company's primary markets for its gaming machine products
are the United States, Canada and Europe and Latin America, and, to a lesser
extent, the Far East and the Caribbean. The following table sets forth the
percentage of new unit sales by market segment during the periods indicated:
NEW UNITS BY MARKET SEGMENT
<TABLE>
<CAPTION>
PERCENTAGE OF NEW UNITS SOLD
-----------------------------------------
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
----------- JUNE 30, JUNE 30,
1994 1995 1996 1997
--- --- ---------- ----------
<S> <C> <C> <C> <C>
Nevada and Atlantic City........................ 34% 42% 37% 47%
International................................... 21 30 45 40
Riverboats...................................... 31 12 11 5
Native American Gaming.......................... 13 14 7 7
Other (principally VLTs)........................ 1 2 -- 1
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
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United States Markets. Within the United States, Nevada represents the
largest installed base of gaming machines with an installed base of
approximately 180,000 machines as of June 30, 1997. The Company estimates that
Atlantic City, the second largest market, had an installed base of approximately
33,000 machines as of June 30, 1997. Product sales of the Company's casino-style
gaming equipment 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 gaming products 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 June 30, 1997,
riverboat casinos were operating in Indiana, Iowa, Illinois, Mississippi,
Missouri and Louisiana. The estimated installed base of gaming machines on
riverboats is approximately 82,000 machines as of June 30, 1997.
Casino-style gaming continues to expand on Native American lands. Native
American gaming is regulated under the Indian Gaming Regulatory Act of 1988
which permits specific types of gaming. The Company's machines are placed only
with Native American gaming operators who have negotiated a compact with the
state and received approval by the U.S. Department of the Interior. The Company
has, either directly or through its distributors, sold machines for casinos on
Native American 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 has made no deliveries in these jurisdictions. 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 Native American gaming machines as of June 30, 1997
was approximately 70,000 units.
In addition, there are currently casinos in Colorado and South Dakota. The
estimated installed base of machines in these markets as of June 30, 1997 was
approximately 15,000 machines.
The continued growth of domestic emerging markets for gaming machines is
contingent upon the public's acceptance of gaming 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 the Company's participation in any such new markets.
International Markets. In addition to the domestic markets, the gaming
industry is also expanding in international markets. The Company's primary
international markets are Europe, Canada and Latin America, and, to a lesser
extent, the Far East and the Caribbean. The Company has begun, and plans to
continue, expansion into the Australian market, and in 1995 Gaming established
an office in Sydney, Australia. The Company recorded its first sale into the
Australia market in the quarter ended June 30, 1996. One of the Company's
indirect subsidiaries, Bally Gaming International, GmbH ("GmbH"), distributes
gaming machines, manufactured primarily by Gaming, through its sales office in
Hannover, Germany principally to customers in Europe and Russia, and through its
sales office in Johannesburg, South Africa principally to customers on the
African continent.
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The percentage of Gaming's international revenues by geographic area for
the periods indicated are set forth below:
NEW UNITS BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
PERCENTAGE OF NEW UNITS SOLD
-----------------------------------------
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
----------- JUNE 30, JUNE 30,
1994 1995 1996 1997
--- --- ---------- ----------
<S> <C> <C> <C> <C>
Europe.......................................... 56% 51% 40% 33%
Canada.......................................... 17 22 31 26
Latin America................................... 20 20 25 39
Far East........................................ 4 4 2 2
Other........................................... 3 3 2 --
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
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
(i) simulate various live card games and keno through a video display and (ii)
for Game Maker(R) gaming machines, offer the player the chance to play up to ten
games. 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 late 1993
and its multi-game touch screen machine, the Game Maker(R), during late 1994.
The Game Maker(R) can offer up to 10 different video games within one
gaming device. The ten games can be selected by the casino from a game library
that has over 300 games. The games simulate various card games, keno and popular
reel-spinning games. The Game Maker(R) machines contain bill acceptors and many
other features believed to be popular with casinos and their customers. The Game
Maker(R) machines are available in upright, bar top and slant top cabinets.
Revenues from sales of Game Maker(R) machines were approximately $6.7 million
and $27.4 million during the years ended December 31, 1994 and 1995,
respectively, $12.9 million for the six months ended June 30, 1996 and $34.9
million for the year ended June 30, 1997.
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. Revenues from sales of ProSeries(TM) machines were approximately $86.2
million and $57.1 million during the years ended December 31, 1994 and 1995
respectively, $38.5 million for the six months ended June 30, 1996 and $66.6
million the year ended June 30, 1997.
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, field service support programs and spare parts
programs. Gaming's historical warranty expense as a percentage of revenues has
been less than 1%.
In addition, Gaming sells and services used gaming machines and sells parts
for existing machines. 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. Some used equipment is reconditioned for direct sale, but much is sold
in container lots on an "as is" basis through independent brokers. Sales of used
equipment were $4.2 million and $9.2 million during the
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<PAGE> 54
years ended December 31, 1994 and 1995, respectively, $2.0 million for the six
months ended June 30, 1996 and $5.4 million for the year ended June 30, 1997.
The following table sets forth the percentages of revenues provided by each
of its major product lines for the periods indicated:
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
------------- JUNE 30, JUNE 30,
1994 1995 1996 1997
---- ---- ---------- ----------
<S> <C> <C> <C> <C>
Slot machines................................... 74% 53% 63% 55%
Video gaming machines........................... 16 31 24 30
Other (primarily used machines, parts and
services)..................................... 10 16 13 15
--- --- --- ---
100% 100% 100% 100%
=== === === ===
</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.
In the past, Gaming had designed, manufactured and distributed video
lottery terminals ("VLTs"), which are generally operated by, or under the
regulation of, state or provincial lottery commissions. The VLT business was
less than 2% of revenues during the years ended December 31, 1994 and 1995, and
less than 1% during the six months ended June 30, 1996 and the year ended June
30, 1997.
Product Development. The Company believes that technological enhancements
are key to meeting the demands of casinos for new 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. Total spending on product research and
development by Gaming was $3.5 million, $3.7 million, $1.8 million and $4.0
million during the years ended December 31, 1994 and 1995, the six months ended
June 30, 1996 and the year ended June 30, 1997, respectively.
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
receive the approval of the appropriate gaming regulatory agency based on
substantially 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.
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<PAGE> 55
However, no assurance can be made with respect to the rate of new model
introductions or the obtaining of regulatory approvals in respect thereof.
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 25 people, which operates offices in Nevada, New Jersey,
Mississippi, Illinois, Colorado and Florida, generated approximately 78% of new
machine sales over the calendar years 1994 and 1995 and 81% and 89% of new
machine sales for the six months ended June 30, 1996 and the year ended June 30,
1997, respectively. On a limited basis, Gaming uses distributors for sales to
certain specific markets in the United States as well as certain international
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 for the calendar years 1994 and 1995 and 2% and 4% for the
six months ended June 30, 1996 and the year ended June 30, 1997, respectively,
were generated through independent distributors (including foreign
distributors). Approximately 8% of new gaming machine unit sales for the
calendar years 1994 and 1995 and 2% and 7% for the six months ended June 30,
1996 and the year ended June 30, 1997, respectively, were 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 can
require completion of a successful trial period for the machines in the casino.
For the year ended June 30, 1997, approximately 85% of Gaming's slot and
video gaming machine sales were on terms of 90 days or less. Approximately 15%
of Gaming's sales, primarily in certain emerging markets such as riverboat and
Native American 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 two years 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 is an important
factor in certain emerging markets.
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 as well as the replacement of existing machines
(which have an average replacement cycle of three to seven years). For the year
ended December 31, 1995, the six months ended June 30, 1996 and the year ended
June 30, 1997, Gaming's largest customer accounted for approximately 5%, 8% and
11% respectively of Gaming's revenues, while Gaming's ten largest customers
accounted for approximately 25%, 42% and 45% of Gaming's revenues during such
periods, respectively.
Assembly Operations. Gaming's Las Vegas facility was completed in 1990
specifically for the design, manufacture and distribution of gaming equipment.
The 150,000-square foot facility was designed to meet fluctuating product design
demands and volume requirements, and management believes the facility enables
Gaming to increase production without significant capital expenditures.
Management believes that its assembly operations allow for rapid generation
of different models to fill orders quickly and efficiently. Another major
advantage of the existing plant operation is the system by which machines can be
altered in many ways including the size, type and color of glass, sound and
payoff patterns to produce a "customized" product for each customer. Gaming
keeps an inventory of parts that allow machines to be altered quickly to conform
with a particular customer's design/feature request. Gaming produces products
for individual customer orders and therefore finished goods inventories are kept
low. Gaming designs all of the major assemblies that are incorporated into the
final machine configuration.
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<PAGE> 56
Competition. The market for gaming machines in North America is dominated
by a single competitor, IGT. Management believes based on industry estimates
made by analysts that Bally Gaming has the second largest market share in North
America. 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., Video Lottery Technologies, Inc., Sigma Games, Inc., WMS
Industries, Inc. ("WMS"), and in the international and in some instances
domestic marketplaces, companies that market gaming machines under the brand
names of Aristocrat, Atronic, Cirsa, Novomatic and Sega Enterprises Ltd. Certain
companies have developed niche products such as Anchor Gaming, Mikohn Gaming
Corporation, Casino Data Systems ("CDS"), and Shuffle Master, Inc. In addition,
other technology-oriented companies, such as Silicon Gaming, have entered or may
enter the gaming machine business. 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.
Systems
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 predominantly in Nevada and
Atlantic City, Native American casinos and riverboats and dockside casinos.
Domestically, the market for computerized 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.
Products. Bally Systems designs, integrates, and sells a computerized
monitoring system ("SDS 6000(R)") for slot and video gaming machines which
provide casino operators with on-line real time data relative to a machine's
accounting, security and cash monitoring functions. The SDS 6000(R) 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(R) 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 with 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 achieving greater functionality, product reliability and ease
of maintenance for the casino operator and achieving greater visual appeal and
ease of use for the slot customer. Development cycles for hardware can vary
between a few months for minor revisions to more than a year for major design
changes or for changes made by various slot manufacturers with which Systems'
product must communicate and be physically integrated. Software development
results in (1) periodic product releases that include new features which extend
and enhance the SDS 6000(R) 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(R) system. Testing and
regulatory
55
<PAGE> 57
approval is being pursued by Bally Systems in anticipation of release to casino
operators. Gaming and Systems development groups continue to direct development
efforts towards other forms of cashless wagering for use on Bally Gaming's slot
machines and the SDS 6000(R) system.
Systems spent $1.7 million and $1.9 million during the years ended December
31, 1994 and 1995, respectively, and spent $1.1 million during the six months
ended June 30, 1996 and $2.7 million during the year ended June 30, 1997,
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 gaming machine and computerized monitoring system purchase
decisions at the same time. At June 30, 1997, worldwide, Systems had over 79,000
game monitoring units installed, or in the process of being installed, of which
approximately 69,000 are in the United States. At June 30, 1997, Systems had 79
installed locations. During calendar years 1994 and 1995, Systems' own sales
force generated approximately 78% of its sales. During the six months ended June
30, 1996 and the year ended June 30, 1997, Systems' own sales force generated
approximately 93% and 92% of its sales, respectively.
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
by regulatory requirements in a given jurisdiction and/or by a casino operator's
competitive need to properly track machine and player activity and establish and
compile individual machine and player profitability and other demographic
information, all of which is of particular importance to casinos in developing
marketing strategies. Systems' revenues are derived approximately equally from
selling to new installations and to existing customers who are either expanding
their casino floors or upgrading their hardware to a new product release. For
the year ended December 31, 1995, the six months ended June 30, 1996 and the
year ended June 30, 1997, Systems' ten largest customers (which include certain
multi-site casino operators that have corporate agreements with Systems)
accounted for approximately 92%, 84% and 70% of Systems' revenues, respectively.
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 penetration of
the international markets and 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. Systems' main competition currently consists of IGT, CDS, and
to a lesser extent Gaming Systems International, Mikohn Gaming Corporation and
Acres Gaming. Competition is keen in this market due to the number of providers
and the limited number of casinos and jurisdictions in which they operate.
Pricing, product feature and function, accuracy, and reliability are all key
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 while maintaining its base of
loyal existing customers.
WALL MACHINES AND AMUSEMENT GAMES
Industry Overview
Management believes that the German wall machine market consists of
approximately 220,000 wall machine units. In addition, management believes there
are 50,000 token machine units in Germany. German regulations limit the useful
life of wall machines to a period of four years. As a result, annual market
demand
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for wall machines in Germany approximates 55,000 units with fluctuations
resulting primarily from economic conditions and regulatory changes and new
product development. 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 was approximately 47,000 units in calendar 1995. All wall
machines manufactured since 1992 have meters that monitor the amount inserted by
players and paid out by the machine. Wall machines without meters were required
to be removed from service by the end of 1996. This led to an increase in demand
for metered wall machines in the quarter ending December 31, 1996 which carried
through the quarter ended March 31, 1997.
Wall machine sales into the arcade market account for approximately 30% of
the total wall machine sales in Germany. A significant number of arcades
(approximately 10%) are owned by Bally Wulff's two largest competitors,
Gauselmann AG and NSM AG. Generally these competitors do not purchase wall
machines from Bally Wulff for their arcades. Management believes Bally Wulff's
share of the German wall machine market was approximately 25% for each of the
last three years ended December 31, 1996, and was 33% for the year ended June
30, 1997. The German legislative authorities regulate and monitor the wall
machine industry on an ongoing basis to ensure conformance with certain
manufacturing standards and the fairness of each machine to users. 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.
Operations of Bally Wulff
Products. Bally Wulff's manufacturing operations were founded in Berlin
in 1950 and sold to BGII's former parent company in 1972. Bally 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
$0.23) 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 $2.30
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 somewhat higher rates to encourage play. Bally Wulff has also
manufactured token machines for operation in arcades, hotels, restaurants and
taverns in Germany and may continue to do so in the future on a selective basis.
In addition to manufacturing wall machines, Bally 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.
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The following table sets forth the percentage of Bally Wulff's revenues by
product line for the periods indicated:
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
----------- JUNE 30, JUNE 30,
1994 1995 1996 1997
--- --- ----------- ----------
<S> <C> <C> <C> <C>
Wall machines manufactured by Wulff............. 48% 39% 42% 52%
Recreational and amusement machines and third
party wall machines distributed............... 21 23 22 25
Other (primarily used machines, parts and
service)...................................... 31 38 36 23
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
Product Development. Management believes that Bally 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. Bally Wulff
designs its machines to appeal to each of the three categories of participants
in the distribution process: Bally 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.
Bally 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 Bally Wulff's headquarters. The teams analyze machines currently being
marketed by Bally 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. Bally 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 Bally Wulff's machines and
their continued acceptance and success in the marketplace. Because the machines
have a reputation for quality, Bally 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 the years ended December 31, 1994 and 1995, the six months ended
June 30, 1996 and the year ended June 30, 1997, Bally Wulff spent approximately
$3.5 million, $3.6 million, $1.8 million and $3.3 million, respectively, on
product research and development.
Sales and Marketing. Bally Wulff sells approximately 83% of its products
through its own sales force of 56 people located in its 23 regional sales
offices. Independent German distributors account for approximately 17% of sales.
Approximately 98% 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.
Bally Wulff devotes substantial time, money and effort to marketing and
promoting its products. Bally Wulff takes an active part in the annual Amusement
Game Fair which is traditionally held each January in Frankfurt, Germany, at
which Bally Wulff introduces new products. The next Amusement Game Fair will be
held in November 1998 rather than January 1998.
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The wall machines manufactured and sold by Bally Wulff generally sell for
prices ranging from DM 5,700 to DM 7,700 (approximately $3,300 to $4,400). A
majority of machines distributed by Bally Wulff are paid for in full within 90
days after the sale. Remaining sales of machines are financed by Bally Wulff
generally over a 12-month period, with interest rates of up to 12%. For this
reason, Bally Wulff establishes an internal credit rating and credit limit for
each customer. Under Bally Wulff's conditions of sale, title to a machine is
retained by Bally Wulff until the machine has been paid for in full. In
addition, Bally Wulff demands security. Currently, Bally Wulff provides customer
financing for approximately 10% of its sales, and management expects this
practice to increase during the latter half of 1997 and thereafter. Leasing
machines to customers accounted for 6% of total revenues for the year ended June
30, 1997 compared to 2%, 3% and 4% during the years ended December 31, 1994 and
1995 and the six months ended June 30, 1996, respectively. The leasing market is
the fastest growing revenue segment and management expects a substantial
increase for the months ahead. In approximately 75% of its sales, Bally 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 Bally Wulff's top ten customers in 1997 has maintained
its relationship with Bally Wulff for over three years. For the year ended June
30, 1997, no single customer accounted for more than 3% of Bally Wulff's
revenues, while Bally Wulff's ten largest customers accounted for approximately
12% of revenues. For the year ended December 31, 1995 and the six months ended
June 30, 1996, Bally Wulff's ten largest customers accounted for approximately
10% and 15% of Bally Wulff's revenues, respectively, while no single customer
accounted for more than 3% and 6% of Bally Wulff's revenues for such periods,
respectively.
Bally Wulff's customer base for wall machines may be divided into two
categories which differ based on the preferences of their clientele. Operators
who place wall machines in arcades are generally interested in purchasing the
newest products in the hopes that an innovation will result in a high level of
public demand to play the new "hot" product. Street location operators serving
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. Bally 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. Bally 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 exist no
formal long-term contract commitments to any single supplier, Bally Wulff has
placed certain standing orders with suppliers to help assure the availability of
specific quantities on an as-needed basis. These orders are cancelable by Bally
Wulff at any time without penalty. Most of the component parts are standard on
all models of all Bally 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, Bally 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, Bally Wulff is capable of
substantially increasing its wall machine output without significant capital
expenditures. Bally 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
Bally 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. Bally Wulff competes with many companies in the distribution of
coin-operated amusement games, some of which are larger and have greater
resources than Bally Wulff. Bally 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 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
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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.
ROUTE OPERATIONS
Nevada Operations
Overview. The Company's Nevada Route Operations involve the selection,
ownership, installation, operation and maintenance of video poker devices,
reel-type slot machines and other electronic gaming machines in local
establishments such as taverns, restaurants, supermarkets, drug stores and
convenience stores operated by third parties ("local establishments"). The
Company's Route Operations target local residents who generally frequent local
establishments close to their homes.
The following table sets forth certain historical data concerning the
Company's Nevada Route Operations for the years ended June 30:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Average number of gaming machines owned.................. 5,260 5,290 5,660
Average number of locations.............................. 514 524 562
Average win per day per gaming machine................... $47.70 $48.60 $52.40
</TABLE>
In July 1997 the Company added to its Nevada route through the addition of
contracts with the Scolari's supermarket chain, the Westronics route, and
several smaller locations, which added a total of approximately 650 games,
bringing the total games on the Nevada route to over 6,300 for the first time.
The Company enters into long-term agreements with local establishments
through either space leases or revenue-sharing arrangements. Under
revenue-sharing arrangements, most common with taverns, restaurants and
convenience stores, the Company does not pay rent, but rather receives a
percentage of the revenues from the gaming machines. Under revenue-sharing
arrangements, both the owner of the local establishment and the Company must
have a gaming license. Under space lease arrangements, most common with
supermarkets and drug stores, the Company pays a fixed rental to the owner of
the local establishment and the Company receives all of the revenues derived
from the gaming machines. Under space lease arrangements, only the Company (and
not the establishment owner) is required to hold a gaming license. Most of the
local establishments serviced by the Company are restricted by law to operating
no more than 15 gaming machines.
Revenue-sharing arrangements accounted for approximately 86%, 85%, and 85%
of revenues and 78%, 77%, and 77% of installed machines, respectively, in the
Company's Nevada Route Operations for the years ended June 30, 1995, 1996, and
1997. At June 30, 1997, the weighted average remaining term of the Company's
revenue-sharing arrangements was approximately 3.4 years. Space lease
arrangements accounted for approximately 14%, 15%, and 15% of revenues and 22%,
23%, and 23% of installed machines, respectively, in the Company's Nevada Route
Operations for the years ended June 30, 1995, 1996, and 1997. At June 30, 1997,
the weighted average remaining term of the Company's space leases was 2.7 years.
The Company has historically been able to renew or replace revenues from
expiring agreements with revenues generated by renewal or replacement contracts.
The Company has emphasized return on investment rather than increasing market
share in renewing or entering into new contracts 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 route operator in Nevada, the Company
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. The
Company has developed and is currently implementing a new system called
"Gamblers Bonus". Gamblers Bonus is designed as a cardless slot players' club
and player tracking system, which allows multiple local establishments to be
linked together into a distributed gaming environment. Through this technology,
the Company is able to provide its players and customers with many of the same
gaming choices otherwise available only in a larger scale casino environment
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such as multi-location progressive jackpots, bigger jackpot payouts and
traditional players' club enhancements. Additionally, the Company is offering a
series of new and unique games available only to members of the Gamblers Bonus.
Since launching Gamblers Bonus, the gaming machines linked to Gamblers
Bonus have experienced an increase in net win per day per machine. As of June
30, 1997, the Company had the Gamblers Bonus system installed in 130 locations
representing approximately 1,500 gaming machines. The Company believes Gamblers
Bonus will continue to improve both the revenues and operating efficiencies of
its Nevada Route Operations and has the potential to create additional
opportunities in the Route Operations segment of the gaming industry.
Additionally, the Company has been updating its installed base of gaming
machines with bill-acceptor equipped electronic gaming machines which are also
expected to improve revenues and operating efficiencies.
Customers. The Company believes it has a diversified customer base with no
one customer accounting for more than 10% and 6% of the Company's revenues
generated from Nevada route operations during the years ended June 30, 1996 and
1997, although approximately 14% and 13% of such revenues were generated through
an affiliated group of such customers for such periods, respectively. The
affiliated group consists of eight partnerships each having one individual
partner who is common to all such partnerships. For the years ended June 30,
1996 and 1997, the ten largest customers accounted for approximately 26% and 23%
of Nevada Route Operations revenues, respectively.
Assembly Operations. In previous years, the Company manufactured
electronic gaming machines for use in the Nevada Route Operations. The Company
manufactured approximately 73% of the electronic gaming machines currently used
in the Nevada Route Operations. The Company is currently using a third party to
perform assembly operations of the electronic gaming machines used in the Nevada
Route Operations. The Company will soon combine this operation with Gaming's
assembly operation.
Competition. The Company is subject to substantial direct competition for
its revenue-sharing and space lease locations from several large route operators
and numerous small operators, located principally in Las Vegas, Reno and the
surrounding areas. The Company and Jackpot Enterprises, Inc. are the dominant
route operators in Nevada. The principal method of competition for route
operators includes the economic terms of the revenue sharing or space lease
arrangement, the services provided and the reputation of the route operator.
Price competition is intense and until 1997 had reduced the Company's gross
margin on such operations as the percentage of the gaming machine revenues
retained by local establishment owners had increased.
Louisiana Operations
Overview. On the basis of its Nevada Route Operations expertise, in March
1992 the Company obtained a contract to operate video poker gaming machines in
the greater New Orleans, Louisiana area through a subsidiary, Video Services,
Inc. ("VSI"). The Company entered into an operating agreement which runs through
May 2002 (with a five-year renewal option under certain conditions) with Fair
Grounds Corporation, Jefferson Downs Corporation and Finish Line Management
Corporation (collectively, "Fair Grounds") for the Company to be the exclusive
operator of video poker machines at the only racetrack and ten associated
off-track betting parlors in the greater New Orleans area. The Company operates
the game rooms where the video poker machines are located at each of the eleven
facilities owned by Fair Grounds, for which it receives a percentage of the
revenue generated by the machines. As of June 30, 1997 the Company had
approximately 700 video poker machines in Louisiana.
Under the Louisiana gaming laws and regulations, the majority stockholder
of any entity operating video poker machines in Louisiana must be a domiciled
resident of the State of Louisiana. As a result, the Company owns 49% of the
capital stock of VSI and three prominent members of the Louisiana business and
legal community own the remaining 51%. The Company, however, owns all the voting
stock of VSI and the majority of its officers and directors are Company
employees. The Company has a 71% interest in dividends of VSI in the event
dividends are declared. The Company also formed two other Louisiana
subsidiaries, Southern Video Services, Inc. ("SVS") and Video Distributing
Services, Inc. ("VDSI"). Both SVS and
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VDSI are structured in a manner similar to VSI except that the Company is
entitled to receive 60% of any SVS dividends. Under the terms of its contract
with Fair Grounds, the Company must conduct any additional video poker
operations in Louisiana other than gaming at racetracks or OTB parlors through
SVS. To date, SVS and VDSI have not engaged in business in Louisiana.
The Company is prohibited by the Louisiana Act from engaging in both the
manufacture and operation of video poker gaming in Louisiana and, therefore, the
Company does not manufacture its own video poker machines for use in Louisiana.
On November 5, 1996 voters in Louisiana approved a proposition to allow
video poker to continue in six of the seven parishes in which the Company
operates OTBs in the greater New Orleans area. In addition, voters approved
video poker in three parishes in the greater New Orleans area where the Company
currently does not operate. In the one parish in which the Company operates
where video poker was voted down, the Company will be allowed to continue to
conduct business through June 30, 1999. The two OTBs in this parish accounted
for $2.2 million of revenues and approximately 10% of operating income for VSI
during the year ended June 30, 1997.
Sales and Marketing. VSI has developed an extensive marketing program
under the names "The Players Room" and "Rockin' Horse Lounge" which are 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.
The Company intends to selectively expand its operations in the greater New
Orleans area by increasing the number of video poker machines 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 machines while
truckstops and taverns may install only limited numbers of such machines.
Competition. The Company is subject to extensive competition for contracts
to operate video poker machines and the Company's racetrack and OTB parlors
compete with various riverboats and truckstops and locations with liquor
licenses throughout the New Orleans area. Each truckstop is permitted to operate
up to 50 video poker machines and each tavern is permitted to operate up to
three video poker machines. Louisiana has riverboat gaming statewide and four
riverboats are currently 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. At present it is not
known whether the land-based casino will reopen.
CASINO OPERATIONS
Rainbow Casino. On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. The project includes the Rainbow
Casino, a 24,000-square foot casino owned and operated by the Company which as
of June 30, 1997 operated approximately 700 gaming machines and 21 table games
as well as a 245-seat restaurant. The facility 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 owned and operated by third parties. The
property is the only destination of its kind in Mississippi containing a
casino/hotel/family entertainment complex. Rainbow Casino draws its customers
principally from within a 75-mile radius of Vicksburg. The Vicksburg casino
market generated approximately $185.0 million in gaming revenue in the twelve
months ended June 30, 1997.
The Company is the general partner of the partnership ("RCVP") that owns
the Rainbow Casino. Pursuant to transactions consummated in March 1995, Rainbow
Casino Corporation, the former owner of 55% of the Rainbow Casino, is now a
limited partner entitled to receive 10% of the net available cash flows after
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debt service and other items, as defined (which amount increases to 20% of such
amount when revenues exceed $35.0 million but 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. The Company holds
the remaining economic interest in the partnership. As part of the refinancing
completed in August 1997, the Company purchased the Rainbow Notes Payable and
consummated the Rainbow Royalty Buyout.
Rail City Casino. In April 1990, the Company purchased, for an aggregate
purchase price of $9.5 million, substantially all of the assets of the Rail City
Casino (formerly the Plantation Station Casino) located near the border of the
cities of Reno and Sparks in northern Nevada. Rail City is a 20,000 square-foot
casino which as of June 30, 1997 operated approximately 400 gaming machines, 9
table games, including blackjack, craps, roulette and poker, and keno. In
addition, Rail City Casino includes a 300-seat restaurant and offers a race and
sports book which is leased to an independent race and sports book operator.
Rail City Casino is convenient to both Reno and Sparks and caters to the local
market.
Sales and Marketing. The Company's casinos target mid-level gaming
customers in the market. The Company promotes its casinos primarily through
special promotional events and by providing quality food at reasonable prices.
Competition. Gaming of all types is available throughout Nevada and
Mississippi in numerous locations, including many locations which may compete
directly or indirectly with the Company's casino operations. 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. Many of Rail City Casino's competitors
include large casino-hotels which offer more amenities and may be perceived to
have more favorable locations than the Company. The Rainbow Casino is the fourth
gaming facility to open in Vicksburg and as such faces substantial direct
competition for gaming customers in the region. In August 1997 it was announced
at Lady Luck Gaming Corporation and Horseshoe Gaming, LLC had formed a joint
venture to develop a project that would include a dockside casino, hotel and
related amenities in Vicksburg. The project is contingent on several factors
including regulatory approval and financing.
PATENTS, COPYRIGHTS AND TRADE SECRETS
Gaming 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.
Gaming and Systems are 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 Bally Entertainment
Corporation ("BEC") dated May 10, 1996, BGII is obligated to pay BEC a royalty
on new machines sold of $35 per machine beginning on June 18, 1996 with a
minimum annual royalty payment of $1.0 million for the initial five-year term of
the amended agreement, which is subject to annual renewals by the Company
thereafter. Royalty expense for BGII for the years ended December 31, 1994 and
1995, the six months ended June 30, 1996 and the year ended June 30, 1997 was
$2.9 million, $3.0 million, $1.1 million and $3.0 million, respectively.
In connection with a settlement agreement entered between BEC, Bally
Gaming, Inc., 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. The Company reserved certain rights in the sale,
including the rights to continue to market the Progressive System (i) within
Europe, (ii) for use in single locations and (iii) worldwide in lottery
applications. This agreement is binding on all successors and assigns of the
Company.
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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 June 30, 1997, the Company employed approximately 1,200 persons in
Nevada, VSI employed 70 persons in Louisiana, RCVP employed 450 persons in
Mississippi, the Company employed approximately 40 persons in various other
states and Bally Wulff employed 450 persons in Germany. None of such employees
is covered by a collective bargaining agreement. Bally 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.
GAMING REGULATIONS AND LICENSING
General. 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.
Nevada. The ownership and operation of casino gaming facilities in 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 route operations
(herein referred to as "gaming machine 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.
The Company is registered with the Nevada Commission as a publicly traded
corporation (a "Registered Corporation"). The Company's direct and indirect
subsidiaries which conduct gaming operations at various
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locations, conduct gaming machine operations and manufacture and distribute
gaming devices (collectively, the "Nevada Subsidiaries") are required to be
licensed by the Nevada Gaming Authorities. The licenses held by the Nevada
Subsidiaries require the periodic payments of fees, or fees and taxes, and are
not transferable. The Company, through registered intermediary companies
(individually, the "Intermediary Company" and collectively, the "Intermediary
Companies"), has been found suitable to own the stock of the Nevada
Subsidiaries, each of which is a corporate licensee (individually, a "Corporate
Licensee" and collectively, the "Corporate Licensees") under the terms of the
Nevada Act. As a Registered Corporation, the Company is 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. The Company, the Intermediary Companies and the
Corporate Licensees have obtained from the Nevada Gaming Authorities the various
registrations, findings of suitability, approvals, permits and licenses required
in order to engage in gaming activities, gaming machine operations, and in the
manufacture and distribution of gaming devices for use or play in Nevada or for
distribution outside of Nevada.
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 (as defined in the Nevada Act) 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, the
Intermediary Companies 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 and the
Intermediary Companies 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 and in addition to their authority to
deny an application for a finding of suitability or licensure, the Nevada Gaming
Authorities 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, the Intermediary Companies 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, the
Intermediary Companies 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
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regulatory procedures. In addition, the Company, the Intermediary Companies, the
Corporate Licensees and the persons involved could be subject to substantial
fines for each separate violation of the Nevada Act at the discretion of the
Nevada Commission. Further, a supervisor could be appointed by the Nevada
Commission to operate any nonrestricted gaming establishment operated by a
Corporate Licensee and, under certain circumstances, earnings generated during
the supervisor's appointment (except for reasonable rental of the casino) could
be forfeited to the State of Nevada. Limitation, conditioning or suspension of
the gaming licenses of the Corporate Licensees or the appointment of a
supervisor could (and revocation of any gaming license would) materially
adversely affect the gaming-related operations of the Company.
The Gaming Authorities may, at their discretion, require the holder of any
security of the Company, such as the Notes, 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 for the Company's Series E Preferred Stock, it 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 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, the Intermediary Companies or the Corporate
Licensees, the Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities, including, if necessary, the
immediate purchase of said voting securities for cash at fair market value.
Additionally, the Clark County Board has taken the position that it has the
authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.
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The Nevada Commission may in its discretion, require the holder of any debt
securities of a Registered Corporation, such as the Notes, to file applications,
be investigated and be found suitable to own the debt security if the Nevada
Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if, without the prior approval of the
Nevada Commission, it (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 a current stock ledger 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 without the
prior approval of the Nevada Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. The
Exchange Offer will constitute a public offering (as defined in the Nevada Act)
and will require the prior approval of the Nevada Commission upon the
recommendation of the Nevada Board. In addition, (i) a Corporate Licensee may
not guarantee a security issued by a Registered Corporation pursuant to a public
offering without the prior approval of the Nevada Commission; and (ii)
restrictions on the transfer of an equity security issued by a Corporate
Licensee or Intermediary Company and agreements not to encumber such securities
(collectively, "Stock Restrictions") are ineffective without the prior approval
of the Nevada Commission. In connection with the approval of the Exchange Offer,
the Subsidiary Guarantees will also require the prior approval of the Nevada
Commission. The Nevada Commission has also imposed a requirement on the Company
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.
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 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 on 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 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 affects 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
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Board of Directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purposes of acquiring control of the
Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada, and to the
counties and cities in which the Licensees' respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based upon either (i) a
percentage of the gross revenues received, (ii) the number of gaming devices
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 under common control with such persons (collectively, the
"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 is subject to licensing, control and regulation by applicable
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"). Until May 1, 1996 licensing and regulatory
control was maintained 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 passed a bill which
created a single gaming control board for the regulation of gaming in Louisiana.
This Board is called the Louisiana Gaming Control Board (the "Louisiana Board")
which oversees all licensing for all forms of legalized gaming in Louisiana
(including gaming on Native American lands). 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.
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. The other indirect subsidiary of the Company, VDSI, has
been granted a license as a distributor by the Division. These gaming
subsidiaries are Louisiana Licensees under the terms of the Louisiana Act. The
licenses held by the 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,
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denial, suspension or revocation is deemed 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. These investigations have extended to information regarding a
prospective licensee's and his or her spouse'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 distributor of
video poker gaming devices 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 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 in New Orleans was pending before the Louisiana Economic
Development and Gaming Corporation ("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 and effective closure of the LEDGC
regulatory operations. The authority and duties of LEDGC regarding licensing and
regulation of the land-based casino will now fall within the jurisdiction of the
Louisiana Board. The Louisiana Board has recently promulgated regulations
governing its operation and the Company has been in contact with representatives
of the Louisiana Board to coordinate the submission of all materials required
for the Louisiana Board to issue the Company such licenses, permits or approvals
as may be required.
Mississippi. The manufacture and distribution of gaming and associated
equipment and the ownership and operation of casino facilities in Mississippi
are subject to extensive state and local regulation, primarily the licensing and
regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission") and the Mississippi State Tax Commission.
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although
not identical, the Mississippi Act is similar to the Nevada Gaming Control Act.
The Mississippi Commission has adopted regulations which are also similar in
many respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and making periodic reports to the Mississippi Commission; (iv) prevent cheating
and fraudulent practices; (v) provide a source of state and local revenues
through taxation and licensing fees; and (vi) ensure that gaming licensees, to
the extent practicable, employ Mississippi residents. The regulations are
subject to amendment and interpretation by the Mississippi Commission. Changes
in Mississippi law or regulations may limit or otherwise materially affect the
types of gaming that may be conducted and could have an adverse effect on the
Company and the Company's Mississippi gaming operations.
The Mississippi Act provides for legalized dockside gaming at the
discretion of the 14 counties that either border the Gulf Coast or the
Mississippi River but only if the voters in such counties have not voted to
prohibit gaming in that county. As of July 1997, dockside gaming was permissible
in nine of the 14 eligible counties in the state and gaming operations had
commenced in Adams, Hancock, Harrison, Tunica, Warren and
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Washington counties. Under Mississippi law, gaming vessels must be located on
the Mississippi River or on navigable waters in eligible counties along the
Mississippi River, or in the waters of the State of Mississippi lying south of
the state in eligible counties along the Mississippi Gulf Coast. Litigation is
pending with respect to the expansion of eligible gaming sites in which a
landowner and a license applicant have appealed a finding of suitability by the
Mississippi Commission of a site on the Big Black River in Warren County near
Interstate 20 between Jackson and Vicksburg, Mississippi, where the Rainbow
Casino, operated by RCVP, is located. The law permits unlimited stakes gaming on
permanently moored vessels on a 24-hour basis and does not restrict the
percentage of space which may be utilized for gaming. There are no limitations
on the number of gaming licenses which may be issued in Mississippi.
The Company, RCVP, Gaming and their affiliates are subject to the licensing
and regulatory control of the Mississippi Commission. The Company is registered
under the Mississippi Act as a publicly traded holding company of RCVP and
Gaming is required to periodically submit detailed financial and operating
reports to the Mississippi Commission and furnish any other information which
the Mississippi Commission may require. If the Company is unable to continue to
satisfy the registration requirements of the Mississippi Act, the Company and
its affiliates cannot own or operate gaming facilities or continue to act as a
manufacturer and distributor in Mississippi. RCVP must maintain a gaming license
from the Mississippi Commission to operate a casino in Mississippi and Gaming
must maintain a manufacturer and distributor license from the Mississippi
Commission to manufacture and distribute gaming products. Such licenses are
issued by the Mississippi Commission subject to certain conditions, including
continued compliance with all applicable state laws and regulations.
Gaming and manufacturer and distributor licenses are not transferable, are
issued for a two-year period and must be renewed periodically thereafter. RCVP
was granted a renewal of its gaming license by the Mississippi Commission in
1996 and such license must be renewed in June 1998. Gaming was granted a renewal
of its manufacturer and distributor license in April 1997 and such license must
be renewed in April 1999. No person may become a stockholder of, or receive any
percentage of profits from, a licensed subsidiary of a holding company without
first obtaining licenses and approvals from the Mississippi Commission. The
Company and its affiliates have obtained such approvals from the Mississippi
Commission.
Certain officers and employees of the Company and the officers, directors
and certain key employees of the Company's licensed subsidiaries must be found
suitable or be licensed by the Mississippi Commission. The Company believes it
has obtained, applied for, or is in the process of, applying for all necessary
findings of suitability with respect to such persons affiliated with the
Company, RCVP or Gaming, although the Mississippi Commission, in its discretion,
may require additional persons to file applications for findings of suitability.
In addition, any person having a material relationship or involvement with the
Company may be required to be found suitable, in which case those persons must
pay the costs and fees associated with such investigation. The Mississippi
Commission may deny an application for a finding of suitability for any cause
that it deems reasonable. Changes in certain licensed positions must be reported
to the Mississippi Commission. In addition to its authority to deny an
application for a findings of suitability, the Mississippi Commission has
jurisdiction to disapprove a change in a licensed position. The Mississippi
Commission has the power to require the Company and its registered or licensed
subsidiaries to suspend or dismiss officers, directors and other key employees
or sever relationships with other persons who refuse to file appropriate
applications or whom the authorities find unsuitable to act in such capacities.
Employees associated with gaming must obtain work permits that are subject
to immediate suspension under certain circumstances. The Mississippi Commission
must refuse to issue a work permit to a person convicted of a felony and it may
refuse to issue a work permit to a gaming employee if the employee has committed
certain misdemeanors or knowingly violated the Mississippi Act or for any other
reasonable cause.
At any time, the Mississippi Commission has the power to investigate and
require the finding of suitability of any record or beneficial stockholder of
the Company. Mississippi law requires any person who acquires more than 5% of
the common stock of a publicly traded corporation registered with the
Mississippi Commission to report the acquisition to the Mississippi Commission,
and such person may be required to be found suitable. Also, any person who
becomes a beneficial owner of more than 10% of the common stock of
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such a company, as reported to the Securities and Exchange Commission, must
apply for a finding of suitability by the Mississippi Commission and must pay
the costs and fees that the Mississippi Commission incurs in conducting the
investigation. The Mississippi Commission has generally exercised its discretion
to require a finding of suitability of any beneficial owner of more than 5% of a
public company's common stock. However, the Mississippi Commission has adopted a
policy that permits certain institutional investors to own beneficially up to
10% of a registered public company's common stock without a finding of
suitability. If a stockholder 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.
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 Mississippi
Commission may be found unsuitable. Management believes that compliance by the
Company with the licensing procedures and regulatory requirements of the
Mississippi Commission will not affect the marketability of the Company's
securities. Any person found unsuitable and who holds, directly or indirectly,
any beneficial ownership of the securities of the Company beyond such time as
the Mississippi Commission prescribes may be guilty of a misdemeanor. The
Company is subject to disciplinary action if, after receiving notice that a
person is unsuitable to be a stockholder or to have any other relationship with
the Company or its licensed subsidiaries, the Company: (i) pays the unsuitable
person any dividend or other distribution upon the voting securities of the
Company; (ii) recognizes the exercise, directly or indirectly, of any voting
rights conferred by securities held by the unsuitable person; (iii) pays the
unsuitable person any remuneration in any form for services rendered or
otherwise, except in certain limited and specific circumstances; or (iv) fails
to pursue all lawful efforts to require the unsuitable person to divest himself
of the securities, including, if necessary, the immediate purchase of the
securities for cash at a fair market value.
The Company may be required to disclose to the Mississippi Commission upon
request the identities of the holders of any debt securities, including the
holders of the Notes or any other debt securities. In addition, under the
Mississippi Act, the Mississippi Commission may in its discretion, (i) require
holders of debt securities of registered corporations to file applications, (ii)
investigate such holders and (iii) require such holders to be found suitable to
own such debt securities. Although the Mississippi Commission generally does not
require the individual holders of obligations such as notes to be investigated
and found suitable, the Mississippi Commission retains the discretion to do so
for any reason, including but not limited to a default, or where the holder of
the debt instrument exercises a material influence over the gaming operations of
the entity in question. Any holder of debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Commission in connection with such an investigation.
RCVP and Gaming must maintain in Mississippi a current ledger with respect
to the ownership of their equity securities and the Company must maintain a
current list of stockholders in the principal office of RCVP which must reflect
the record ownership of each outstanding share of any equity issued by the
Company. The ledger and stockholder lists must be available for inspection by
the Mississippi Commission at any time. If any securities of the Company 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 Mississippi Commission. A
failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company must also render maximum assistance in determining the
identify of the beneficial owner.
The Mississippi Act requires that the certificates representing securities
of a registered publicly traded corporation bear a legend to the general effect
that such securities are subject to the Mississippi Act and the regulations of
the Mississippi Commission. The Company has received from the Mississippi
Commission an exemption from this legend requirement. The Mississippi Commission
has the power to impose additional restrictions on the holders of the Company's
securities at any time.
Substantially all loans, leases, sales of securities and similar financing
transactions by a licensed gaming subsidiary must be reported to or approved by
the Mississippi Commission. A licensed gaming subsidiary may not make a public
offering of its securities, but may pledge or mortgage casino facilities if it
obtains the prior approval of the Mississippi Commission. The Company may not
make a public offering of its securities without the prior approval of the
Mississippi Commission if any part of the proceeds of the offering is to be
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used to finance the construction, acquisition or operation of gaming facilities
in Mississippi or to retire or extend obligations incurred for one or more such
purposes. Such approval, if given, does not constitute a recommendation or
approval of the investment merits of the securities subject to the offering. The
Company obtained a waiver from the approval requirement with respect to the
Notes.
Changes in control of the Company through merger, consolidation,
acquisition of assets, management or consulting agreements or any form of
takeover cannot occur without the prior approval of the Mississippi Commission.
The Mississippi 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 part
of the approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to: (i) assure the financial
stability of corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi
Commission before the Company may make exceptional repurchases of voting
securities above the current market price of its common stock (commonly called
"greenmail") or before a corporate acquisition opposed by management may be
consummated. Mississippi's gaming regulations will also require prior approval
by the Mississippi Commission if the Company adopts a plan or recapitalization
proposed by its Board of Directors opposing a tender offer made directly to the
stockholders for the purpose of acquiring control of the Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-state
gaming operations of the Company and its affiliates. The Company has previously
obtained a waiver of foreign gaming approval from the Mississippi Commission for
operations in Nevada and will be required to obtain the approval or a waiver of
such approval from the Mississippi Commission prior to engaging in any
additional future gaming operations outside of Mississippi.
If the Mississippi Commission decides that a licensed gaming subsidiary
violated a gaming law or regulation, the Mississippi Commission could limit,
condition, suspend or revoke the license of the subsidiary. In addition, the
licensed subsidiary, the Company and the persons involved could be subject to
substantial fines for each separate violation. Because of such a violation, the
Mississippi Commission could attempt to appoint a supervisor to operate the
casino facilities. Limitation, conditioning or suspension of any gaming license
or the appointment of a supervisor could (and revocation of any gaming license
would) materially adversely affect the Company's and RCVP's gaming operations
and/or Gaming's manufacturer and distributor operations.
License fees and taxes, computed in various ways depending on the type of
gaming involved, are payable to the State of Mississippi and to the countries
and cities in which a licensed gaming subsidiary's 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 (i) a
percentage of the gross gaming revenues received by the casino operation, (ii)
the number of slot machines operated by the casino or (iii) the number of table
games operated by the casino. The license fee payable to the State of
Mississippi is based upon "gaming receipts" (generally defined as gross receipts
less payouts to customers as winnings) and equals 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and less than
$134,000 per month, and 8% of gaming receipts over $134,000. The foregoing
license fees are allowed as a credit against the Company's Mississippi income
tax liability for the year paid. The gross revenue fee imposed by the City of
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<PAGE> 74
Vicksburg, Mississippi, where RCVP's casino operations are located, equals
approximately 4% of gaming receipts.
The Mississippi Commission has adopted a regulation requiring as a
condition of licensure or license renewal that a gaming establishment's plan
include a 500-car parking facility in close proximity to the casino complex and
infrastructure facilities which will amount to at least 25% of the casino cost.
Management of the Company believes it is in compliance with this requirement.
The sale of alcoholic beverages by the Rainbow Casino operated by RCVP is
subject to the licensing, control and regulation by both the City of Vicksburg
and the Alcoholic Beverage Control Division (the "ABC") of the Mississippi State
Tax Commission. The Rainbow Casino area has been designated as a special resort
area, which allows the Rainbow Casino to serve alcoholic beverages on a 24-hour
basis. The ABC has the full power to limit, condition, suspend or revoke any
license for the serving of alcoholic beverages or to place such a licensee on
probation with or without conditions. Any such disciplinary action could (and
revocation would) have a material adverse effect upon the Rainbow Casino's
operations. Certain officers and managers of the Rainbow Casino must be
investigated by the ABC in connection with its liquor permits, and changes in
certain positions must be approved by the ABC.
New Jersey. Gaming has previously been 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"). Due to the
change of ownership of Gaming as a result of the Acquisition, Gaming's CSI
license was invalidated. Prior to the change of ownership of Gaming and in
anticipation of same, the Company submitted an application for CSI licensure.
The New Jersey Commission deemed the application complete and, as a result,
since the Acquisition the Company's operations in New Jersey continue
uninterrupted pursuant to transactional waivers which have been granted, and
which the Company believes should continue to be granted, by the New Jersey
Commission on a six-month blanket basis for parts and service and on a sale-by-
sale basis for all other products pending final action on the Company's
application for CSI licensure.
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.
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.
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. Bally 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
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<PAGE> 75
for manufacturers, any person or entity which intends to operate a licensed wall
machine must apply to local regulatory authorities for a license, which will not
be granted by the authorities if facts justify the assumption that the applicant
does not possess the requisite reliability. In this proceeding, the applicant
must furnish a police certificate of conduct.
German legislation prohibits the public play of wall machines by
individuals under age 18. Voluntary agreements among manufacturers and certain
amusement game trade associations, among other things, restrict wall machine
advertising and the ability of a player to play more than two machines at once,
require all machines to carry visible warning notices and provide that every
wall machine is automatically switched off for three minutes after one hour of
continuous play.
The Spielverordnung (gaming ordinance) specifically governs wall machines.
These regulations limit game payouts to DM 4.00 (approximately $2.30) 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
had a transition period through December 31, 1995 to comply with the revised
regulations. Such facilities were allowed to keep the number of wall machines
used in operations in 1985 until December 31, 1990. During the period January 1,
1991 to December 31, 1995 they were entitled to two-thirds of such total number,
but had to be in compliance with the new limits by January 1, 1996. In taverns,
restaurants, hotels and certain other establishments, no more than two gaming
machines are permitted.
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%. The basis for taxation is 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 $344).
The German tax court recently let stand a regulation that permits local
municipalities to impose additional taxes on gaming machine operators.
The business conducted by Bally Wulff had benefitted from the Berlin
Promotion Act, a special tax statute which was intended to support the economy
of West Berlin in various ways. With the reunification of Germany, the need for
benefits provided by the law is perceived to have decreased. Consequently, the
German government has enacted amendments to the Berlin Promotion Act which are
designed to phase out, over a number of years, most of the tax benefits and
incentives provided by the law. This phaseout is now complete.
During fiscal 1996, Bally Wulff increased the amount of tax reserves by
$1.0 million (to a total reserve of $1.4 million) as a result of developments in
an ongoing quadrennial audit of Wulff's tax returns for the years 1988 through
1991. The German tax authorities have proposed preliminary adjustments which
range from $1.4 million (which has been accrued) to $5.0 million.
Additional Jurisdictions. The Company, in the ordinary course of its
business, routinely considers business opportunities to expand its gaming
operations into additional jurisdictions. Although the laws and
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<PAGE> 76
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.
The Company and its 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 the Company
currently does business. The Company and the holders of its securities may be
subject to the provisions of the gaming laws of each jurisdiction where the
Company 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. As a result of the consummation of the
Acquisition, the Company and its officers and directors have been 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. ln 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.
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MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE OFFICE
- --------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Morris Goldstein................. 52 President and Chief Executive Officer
Scott Schweinfurth............... 43 Senior Vice President -- Chief Financial Officer and
Treasurer
David D. Johnson................. 45 Senior Vice President -- General Counsel and Secretary
Hans Kloss....................... 55 Director and Managing Director -- Alliance Automaten &
Co. KG
Robert L. Miodunski.............. 46 Senior Vice President -- Route Group (Nevada)
Robert L. Saxton................. 43 Senior Vice President -- Casino Operations
Mark Lerner...................... 47 Assistant General Counsel
Paul Lofgren..................... 36 Vice President -- Regulatory Affairs
Robert A. Woodson................ 47 Vice President -- Regulatory Compliance and Government
Affairs
Jacques Andre(1)(4).............. 59 Director
Anthony L. DiCesare(2)(3)........ 34 Director
Michael Hirschfeld............... 47 Director
Joel Kirschbaum(3)............... 46 Director
Alfred H. Wilms(1)(2)(3)(4)...... 52 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Executive Committee
(3) Member of the Nominating Committee
(4) Member of the Compensation Committee
Morris Goldstein joined the Company in June 1997 as President and Chief
Executive Officer. Mr. Goldstein previously was Chief Executive Officer of
Thomson Technology Initiative, a unit of Thomson Corporation, a global publisher
and provider of information services. For six months in early 1994, Mr.
Goldstein served as President and Chief Operating Officer of ImagiNation
Network. Prior to that he had been President of Information Access Company
("IAC") since 1982. In late 1994, Mr. Goldstein also assisted in the sale of IAC
to Thomson Corporation.
Scott Schweinfurth joined the Company in June 1996 as Senior Vice
President, Chief Financial Officer and Treasurer. Prior to joining the Company,
Mr. Schweinfurth had served as Senior Vice President, Chief Financial Officer
and Treasurer of BGII since March 1995. Prior to joining BGII, Mr. Schweinfurth
had been a partner at the accounting firm of Ernst & Young LLP since October
1988, having joined the audit staff of its predecessor, Arthur Young & Company,
in September 1976. Mr. Schweinfurth is a Certified Public Accountant.
David D. Johnson joined the Company as Senior Vice President, General
Counsel and Secretary in March 1995. Previously, Mr. Johnson developed extensive
gaming industry experience representing a diverse group of casino clients as a
Senior Partner at Schreck, Jones, Bernhard, Woloson & Godfrey, a Nevada law firm
where he was employed from January 1987 to April 1995. Prior to joining Schreck,
Jones, Bernhard, Woloson & Godfrey, Mr. Johnson served as Chief Deputy Attorney
General for the gaming division of the Nevada Attorney General's Office. Mr.
Johnson serves as Vice Chairman of the Executive Committee of the Nevada State
Bar's Gaming Law Section and is an officer and founding member of the Nevada
Gaming Attorneys Association.
Hans Kloss joined the Company in June 1996 and serves as the Managing
Director of Alliance Automaten GmbH & Co. KG and Co-Managing Director of Bally
Wulff Automaten and Bally Wulff Vertriebs. Mr. Kloss was a director of BGII from
August 1991 to June 1996 and President and Chief Operating Officer of BGII from
May 1993 to August 1997. Mr. Kloss had been the Managing Director of Bally Wulff
since 1981 and has been employed by those companies since 1970. He was appointed
to the Company's Board of Directors in September 1997.
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<PAGE> 78
Robert L. Miodunski joined the Company as Senior Vice President -- Route
Group (Nevada) in March 1994. From January 1991 to March 1994, Mr. Miodunski 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 L. Saxton joined the Company in 1982 as Corporate Controller and was
elected Vice President-Casino Operations in December 1993 and Senior Vice
President -- Casino Operations in June 1996. Since joining Alliance, Mr. Saxton
has held various management positions with the Gaming Machine operations
business unit and is currently responsible for casino operations. He also serves
as President of Alliance's Louisiana subsidiaries.
Mark Lerner joined the Company in December 1996 as Assistant General
Counsel. A former deputy attorney general for the Nevada Gaming Commission and
State Control Board, Mr. Lerner has been practicing law since 1980. Before
joining Alliance he was general counsel to Becker Gaming, Inc., a Las Vegas
gaming company. From 1987 through 1989 Mr. Lerner practiced law at Jones, Jones,
Close & Brown, a Las Vegas commercial and litigation law firm.
Paul Lofgren joined the Company in November 1996 as Vice President of
Regulatory Compliance and Governmental Affairs and directs all the Company's
regulatory applications and compliance issues. He also serves as the Company's
liaison to governments in new emerging jurisdictions. Prior to joining the
Company, Mr. Lofgren worked as vice president of regulatory compliance for Video
Lottery Technologies from December 1992 until November 1996. He was previously
employed for nearly ten years in the Corporate Securities Division of the Nevada
State Gaming Control Board.
Robert A. Woodson joined the Company in 1988 as Director of Gaming
Compliance and was promoted to Vice President -- Regulatory Compliance in
September 1993. Prior to joining Alliance, Mr. Woodson was with the
Investigation Division of the Nevada Gaming Control Board for 10 years.
Jacques P. Andre was appointed a director in August 1996. Mr. Andre has
been a partner with Ray & Berndtson, Inc., an international executive search
firm, from 1975 to the present. He also serves on its Board of Directors.
Anthony L. DiCesare was employed by KIC, which was the sole general partner
of Kirkland-Ft. Worth Investment Partners, L.P. ("KFW"), an investment
partnership, from April 1991 to July 1994 and served the Company as Executive
Vice President -- Development from July 1994 through June 1997. He is currently
a part-time employee of the Company. He has been a director since 1994.
Michael Hirschfeld was appointed a director in September 1997. Mr.
Hirschfeld has been a partner of Milbank, Tweed, Hadley & McCloy, a New York law
firm, from April 1995 to the present. From December 1990 to April 1995, Mr.
Hirschfeld was a partner of Kelly Drye & Warren, a New York law firm.
Joel Kirschbaum was appointed a director in July 1994 and served as
Chairman of the Board of Directors from July 1994 to March 1995. Mr. Kirschbaum
is the sole stockholder, director and officer of KIC. He has been engaged in
operating the businesses of KIC and KFW since January 1991 when KIC and KFW were
established, and GSA, Inc. ("GSI"), the general partner of Gaming Systems
Advisors, L.P. ("GSA"), a financial advisory firm, 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 KFW, 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. Mr. Kirschbaum is also a
part-time employee of the Company.
Alfred H. Wilms has served as a director of the Company since November
1983. He served as chief executive officer of the Company from December 1984 to
July 1994 and as Chairman of the Board of Directors of the Company from August
1986 to July 1994. 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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 30, 1997
with respect to the beneficial ownership of the Common Stock, which constitutes
the Company's only outstanding class of voting securities, by (i) each person
who, to the knowledge of the Company, beneficially owned more than 5% of the
Common Stock, (ii) each director of the Company, (iii) certain executive
officers and (iv) all executive officers and directors of the Company as a
group. Except as indicated, beneficial ownership includes the sole power to vote
and to dispose of the securities in question. No director or executive officer
of the Company owned any other equity securities of the Company.
<TABLE>
<CAPTION>
PERCENT
AMOUNT OF OF
SHARES(1) CLASS(1)
---------- --------
<S> <C> <C>
Alfred H. Wilms.............................................. 7,034,082(2) 20.8%
FMR Corp..................................................... 2,966,078(3) 9.3%
82 Devonshire Street
Boston, MA 02109
Jacques Andre................................................ 50,500(4) *
Anthony L. DiCesare.......................................... 474,233(5) 1.5%
Joel Kirschbaum.............................................. 1,033,476(6) 3.2%
Michael Hirschfeld........................................... 30,000(7) *
Hans Kloss................................................... 822,654(8) 2.6%
Morris Goldstein............................................. 72,500(9) *
David D. Johnson............................................. 200,000(10) *
Robert L. Miodunski.......................................... 111,000(11) *
Robert L. Saxton............................................. 94,000(12) *
Scott Schweinfurth........................................... 62,500(13) *
All executive officers and directors as a group.............. 10,025,245(14) 28.0%
</TABLE>
- ---------------
* Less than 1%.
(1) Excludes the effect of the issuance of (i) 2,750,000 shares subject to
warrants originally issued to KFW and (ii) 1,250,000 shares subject to
warrants originally issued to GSA pursuant to an agreement (the "GSA
Advisory Agreement") and 2,500,000 shares subject to additional warrants
originally issued to GSA pursuant to the GSA Advisory Agreement upon
consummation of the Acquisition. All of these warrants have an exercise
price of $1.50 per share and become exercisable in equal one-third tranches
only when the Common Stock price reaches $11, $13 and $15, respectively.
Pursuant to an amendment to Schedule 13D filed on October 31, 1996, as part
of a distribution of assets from KFW and GSA to KIC and GSI on the one hand
and to Kirkland Investors, L.P. on the other hand, approximately 62% of
such warrants were distributed to Kirkland Investors, L.P. and are no
longer owned by Mr. Kirschbaum, KIC, KFW, GSI or GSA.
(2) Includes 2,000,000 shares subject to warrants issued to Mr. Wilms at $2.50
per share. Mr. Wilms' mailing address is c/o the Company, 6601 South
Bermuda Road, Las Vegas, Nevada 89119.
(3) Information provided by a representative of FMR Corp.
(4) Includes 5,500 shares owned and 45,000 shares subject to options that are
currently exercisable or will become exercisable within 60 days.
(5) Includes 99,233 shares owned and 375,000 shares subject to options that are
currently exercisable or will become exercisable within 60 days, but
excludes certain additional shares referred to in Note (1) above.
(6) Includes 483,476 shares owned and 550,000 shares subject to options that
are currently exercisable or will become exercisable within 60 days, but
excludes the shares referred to in Note (1). Based upon information
contained in a Schedule 13D filed by Mr. Kirschbaum on June 23, 1994, as
amended from
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<PAGE> 80
time to time and most recently on October 31, 1996. Of such shares owned,
certain amounts have been or will be sold or distributed to other persons,
as set forth in the Schedule 13D.
(7) Represents shares subject to options that are currently exercisable or will
become exercisable within 60 days.
(8) Includes 816,736 shares owned and 5,918 shares subject to options that are
currently exercisable or will become exercisable within 60 days.
(9) Includes 10,000 shares owned and 62,500 shares subject to options that are
currently exercisable or will become exercisable within 60 days but
excludes options exercisable at $3.875 per share for 250,000 shares which
become exercisable in equal one-third tranches only when the Common Stock
price reaches $11, $13 and $15, respectively.
(10) Represents shares subject to options that are currently exercisable or will
become exercisable within 60 days.
(11) Includes 2,000 shares owned and 109,000 shares subject to options that are
currently exercisable or will become exercisable within 60 days.
(12) Represents shares subject to options that are currently exercisable or will
become exercisable within 60 days.
(13) Includes 2,500 shares owned and 60,000 shares subject to options that are
currently exercisable or will become exercisable within 60 days.
(14) Includes 3,926,718 shares subject to options that are currently exercisable
or will become exercisable within 60 days.
CERTAIN TRANSACTIONS
Pursuant to a Stockholders Agreement dated as of September 21, 1993 by and
among Alliance, KIC, GSA, KFW and Mr. Wilms (as amended, the "Stockholders
Agreement"), KIC has agreed to use its best efforts to cause the Company's Board
of Directors, from and after September 21, 1997, to initially be comprised of
such number of directors designated by KIC and such number of directors
designated by Mr. Wilms as will be in the ratio of four to three, but neither
KIC nor Mr. Wilms is required to vote for a particular designee at any regular
or special meeting of the Company's stockholders after September 21, 1997.
Notwithstanding the foregoing, prior to September 20, 2008, KIC must vote all of
its shares of common stock to cause Mr. Wilms to be elected a director of the
Company for so long as Mr. Wilms owns shares of common stock of the Company.
Pursuant to the Stockholders Agreement, Mr. Wilms designated Mr. Hans Kloss as
one of his three directors.
Pursuant to a letter agreement dated June 25, 1993 among Gaming Systems
Advisors, L.P. ("GSA"), the Company and Mr. Wilms (the "GSA Advisory
Agreement"), the Company 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, the Company issued to GSA pursuant to the GSA
Advisory Agreement warrants to purchase 1.25 million shares of common stock with
an exercise price of $1.50 per share which become exercisable in equal one-third
tranches only when the common stock price reaches $11, $13 and $15,
respectively. Upon consummation of the Acquisition pursuant to the GSA Advisory
Agreement, GSA received additional warrants to purchase 2.5 million shares of
common stock on the same terms. Joel Kirschbaum, a director and consultant to
the Company, is the sole stockholder, director and officer of GSA, Inc. ("GSI"),
the sole general partner of GSA. Mr. DiCesare, a director, has received a
portion of the warrants distributed to GSI.
In March 1992, Mr. Wilms committed to provide a loan to the Company's
Louisiana subsidiary, Video Service, Inc. (the "VSI Loan"). As consideration for
Mr. Wilms' commitment, the Company issued to Mr. Wilms a warrant to purchase
200,000 shares of the Company's 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. The exercise price of the warrants was determined based on
an analysis of, and a fairness opinion with respect to, the transaction and on
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<PAGE> 81
the price range of the common stock during a period prior to announcement of the
Company's expansion into Louisiana. The VSI Loan required quarterly interest and
principal payments with an interest rate equal to 2% above the London Inter-Bank
Offered Rate, adjusted quarterly. The VSI Loan was held by a Belgian corporation
owned by Mr. Wilms and members of his family. During fiscal years 1993 and 1994,
a total of $6.5 million was funded under the VSI Loan. All scheduled principal
and interest payments on the VSI Loan were made through September 1996, at which
time the Board of Directors unanimously approved (except that Mr. Wilms
abstained from voting) the early repayment of the remaining principal balance
and accrued interest totaling $2.7 million. Such payments were made in September
1996.
The Stockholders Agreement contains certain registration rights running in
favor of KIC, Mr. Wilms and certain of their respective affiliates and
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.
The Company has hired Ray & Berndtson, Inc., an international executive
search firm, of which Mr. Andre is a partner, to perform certain personnel
searches. The Company paid fees of $150,000 and out-of-pocket expenses of
$72,000 during fiscal year 1997 for the searches currently being conducted by
this firm. The final fee for the searches will be based on a percentage of the
first-year compensation paid to certain personnel if and when hired.
The Company has entered into employment agreements (the "Agreements") with
Mr. Kirschbaum and Mr. DiCesare (each an "Employee" and collectively the
"Employees") pursuant to which each Employee will be a part-time New York-based
employee and will work on major strategic transactions involving the Company or
its affiliates, including mergers, acquisitions, divestitures, joint ventures,
the negotiation of strategic alliances or relationships and financings and
refinancings. The Employees are not expected to be involved in the day-to-day
operations of the Company. The Company acknowledges that the Employees may
engage in outside activities although they may not directly compete with the
Company. The Agreements, which have an initial term extending through July 1,
2002 (the "Term") and may be terminated by either party on notice thereafter,
provide for each Employee to receive a base salary of $150,000 (with inflation
increases each year) and annual performance bonuses (each a "Bonus") based upon
annual performance goals determined by the Board of Directors and the Employee
(which goals will generally relate without limitation to transactions of the
type mentioned above) involving the Company (and/or one or more of its
affiliates) and a target Bonus amount (and/or an appropriate minimum amount).
More than one Bonus may be paid with respect to each employment year. If the
Board of Directors and the Employee cannot agree upon reasonable annual
performance goals and minimum and/or target Bonuses with respect to such goals
for any year, the performance goals and Bonus amounts set forth in clauses (ii)
and (iii) of the next paragraph will be the goals and Bonus for such year. If a
goal is only partially achieved within a year, the Board of Directors will
determine what amount, if any, will be paid to the Employee with respect to such
goal. If a goal is achieved, the Bonuses will be payable regardless of the level
of the Employee's involvement in the transaction. Upon termination of any
Employee's Agreement for any reason (including for "cause" (as such term is
defined in the Agreements)), the Company may be required to pay Bonuses to such
Employee following such termination upon achievement of performance goals within
specified periods ending up to 21 months after the Term. In addition, if the
Company terminates an Employee without "cause", or an Employee leaves the
Company's employ for "good reason" (as these terms are defined in the
Agreements), the Employee will be entitled to receive for each remaining year of
the Term an amount equal to the highest aggregate Bonuses paid in any previous
year as well as the base salary and other compensation provided for by the
Agreements.
For the year beginning July 1, 1997, the performance goals for each
Employee are: (i) the completion by the Company (and/or one or more of its
affiliates) of the Refinancing or a substantially similar transaction, (ii) the
closing of at least one "significant merger" with a value of at least $60
million and (iii) the closing of a "significant financing" with a value of at
least $50 million. Upon the achievement of the performance goal set forth in
clause (i), each Employee received a Bonus of $950,000. Upon the achievement of
the performance goal set forth in clause (ii), each Employee will receive a
minimum Bonus of $200,000. Upon the achievement of the performance goal set
forth in clause (iii), each Employee will receive a minimum Bonus
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of at least $125,000. In addition to the Bonuses, the Agreements provide that
the Board of Directors, in its sole discretion, may grant further discretionary
bonuses to the Employees.
Pursuant to the Agreement, an Employee may elect to restructure his
relationship with the Company into that of a financial consultant or independent
advisor, with compensation arrangements reflecting the nature of such
relationship and the services to be provided in amounts reasonably consistent
with the compensation and Bonuses payable over the term of the Agreement as
contemplated therein, as determined reasonably and in good faith by the Board of
Directors, but calculated and payable in a manner customary for financial
consultant or independent advisor arrangements. The Company and the Employee
will negotiate in good faith to establish a restructured agreement with respect
to the services to be provided hereunder.
At any time prior to January 1, 1999, an Employee may opt to forgo any
Bonuses to which the Employee may thereafter become entitled and in lieu thereof
to extend the expiration date of certain warrants currently beneficially owned
by such Employee from September 21, 1999 to June 18, 2002. The rate at which
such extension will occur will be not more than three warrants for each dollar
of Bonuses forgone. At the election of the Employee, all or a portion of this
option to extend may also be effected by a direct cash payment by the Employee
to the Company on or prior to September 21, 1999 at the rate set forth in the
immediately preceding sentence, rather than by the application of Bonuses.
In addition, the Company has agreed (the "KIC Agreement") to pay KIC over
the term of the Agreements $950,000 (subject to annual inflation increases)
annually plus the cost of reasonable employee benefits to its support staff and
reasonable out-of-pocket expenses incurred by KIC and its officers and employees
to the extent related directly to the Company's business or potential business.
The Company will have the right to terminate the KIC Agreement upon 12 months'
notice if Mr. Kirschbaum's employment under his Agreement is terminated for any
reason other than by the Company without "cause" or by the Employee "for good
reason" (as such terms are defined in the Agreements).
Milbank, Tweed, Hadley & McCloy, of which Mr. Hirschfeld is a partner,
performs and is expected to continue to perform legal services for the Company.
THE REFINANCING
In connection with the Acquisition, the Company issued the 12 7/8% Notes
and the Series B Preferred Stock. The Refinancing consisted of a series of
related transactions including the repurchase of the 12 7/8% Notes and the
redemption of the Series B Preferred Stock, and which was designed to reduce the
Company's cost of capital and improve its operating and financial flexibility.
Although the Refinancing replaced substantial amounts of redeemable preferred
stock with debt, thereby increasing the Company's leverage and interest expense,
the Company's after-tax cost of capital and fixed charges (including the charges
for preferred stock dividends) is expected to decline substantially.
The Company used the proceeds of the offering of the Existing Notes,
together with borrowings under the Revolving Credit Facility, the proceeds of
the Term Loan Facilities and the Delayed Draw Term Facility and cash on hand, to
fund (a) the Tender Offer, (b) the Redemption, (c) the Rainbow Royalty Buyout
and the purchase of the Rainbow Notes Payable, (d) the repayment of certain
existing lines of credit and other indebtedness and (e) the payment of
transaction fees and expenses.
THE TENDER OFFER
On August 8, 1997, the Company consummated the Tender Offer and purchased
for cash over 99.9% of its $154 million aggregate principal amount of
outstanding 12 7/8% Notes for a total of $183.7 million including accrued
interest. The Company intends to repurchase or defease the 12 7/8% Notes
remaining outstanding.
THE REDEMPTION
The Company redeemed the Series B Preferred Stock on September 8, 1997.
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THE NEW CREDIT FACILITY
The following is a summary of the New Credit Facility. This description
does not purport to be complete and is qualified in its entirety by reference to
such documents, which are available upon request from the Company.
Concurrently with the consummation of the offering of the Existing Notes
(the "Offering"), the Company and two German subsidiaries of the Company
(collectively, the "Borrowers") entered into the New Credit Facility with a
syndicate of financial institutions for which Credit Suisse First Boston acts as
administrative agent (the "Administrative Agent") and Scotiabank acts as
documentation agent. The New Credit Facility provides up to a maximum aggregate
amount of $230.0 million of financing. The following is a summary of the
material terms and conditions of the New Credit Facility and is subject to the
detailed provisions of the credit agreement (the "Credit Agreement") and various
related documents entered into in connection with the New Credit Facility.
General. The New Credit Facility consists of (i) the senior term facility
in an aggregate principal amount of $140.0 million, composed of three tranches:
the $25.0 million Delayed Draw Term Facility, the $75.0 million Tranche B Term
Loan and the $40.0 million Tranche C Term Loan and (ii) the $90.0 million
Revolving Credit Facility.
The proceeds of the New Credit Facility are available in U.S. dollars,
except that portions of the loans incurred under the Revolving Credit Facility
are available in Deutschemarks and other currencies if, and to the extent,
agreed upon by the Company and the Administrative Agent.
The proceeds of the Tranche B Term Loan and Tranche C Term Loan, obtained
on the date of consummation of the offering of the Existing Notes, were used, in
part, to finance a portion of the Refinancing and to pay related transactions
costs. The Delayed Draw Term Loan was used to fund the Rainbow Royalty Buyout
and purchase of the Rainbow Notes Payable on August 12, 1997. Proceeds of the
Revolving Credit Facility were and will be used to (i) repay a line of credit at
Bally Wulff, (ii) fund the Company's general corporate and working capital
requirements and (iii) finance acquisitions consummated by the Company and its
wholly-owned subsidiaries, subject to certain limitations set forth in the
Credit Agreement. The Revolving Credit Facility is also available for the
issuance of standby and trade letters of credit (collectively, the "Letters of
Credit") to support the obligations of the Company and its subsidiaries.
Interest Rates; Fees. Loans incurred under the New Credit Facility may be
maintained from time to time, at the respective Borrower's option, as (i) Base
Rate Loans which bear interest at the Base Rate (defined in the Credit Agreement
as the higher of (x) 1/2 of 1% in excess of the overnight federal funds rate and
(y) the Administrative Agent's announced prime lending rate, each as in effect
from time to time) plus the "Applicable Margin" (as defined below) or (ii)
Eurodollar Loans bearing interest at the Eurodollar Rate (adjusted for maximum
reserves) as determined by the Administrative Agent for the applicable interest
period plus the Applicable Margin. With respect to Eurodollar Loans, only
one-month interest periods may be selected prior to the earlier of the 90th day
following the date of consummation of the Offering and the date on which the
primary syndication is completed, although during such period interest periods
of less than one month's duration shall be allowed to the extent available to
all the lenders. "Applicable Margin" means a per annum rate equal to a floating
rate that will vary depending on the ratio of the Company's Consolidated
Indebtedness to Consolidated EBITDA (each as defined in the Credit Agreement)
and which rate shall range (x) in the case of the Revolving Credit Facility, (A)
from 0.0% to 1.25% for Base Rate Loans and (B) from 1.0% to 2.25% for Eurodollar
Loans, (y) in the case of the Delayed Draw Term Facility and the Tranche B Term
Loan, (A) from 1.25% to 1.75% for Base Rate Loans and (B) from 2.25% to 2.75%
for Eurodollar Loans and (z) in the case of the Tranche C Term Loan, (A) from
1.50% to 2.00% for Base Rate Loans and (B) from 2.50% to 3.00% for Eurodollar
Loans.
Loans in currencies other than U.S. dollars under the New Credit Facility
will bear interest at the applicable interbank rate for the relevant currency
(if traded over interbank markets) for the applicable interest periods of 1, 2,
3 or 6 months and/or the all-in cost of funds for such currency plus in either
case the Applicable Margin.
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Eurodollar Loans may have 1-, 2-, 3- and 6-month interest periods. Interest
on Eurodollar Loans will be payable in arrears at the end of the applicable
interest period and every three months where the applicable period exceeds three
months. Interest on Base Rate Loans will be payable quarterly in arrears on the
last business day of each quarter.
Overdue amounts will bear interest at a rate per annum equal to the greater
of (i) the rate which is 2% in excess of the rate otherwise applicable to Base
Rate Loans and (ii) the rate which is 2% in excess of the rate then borne by the
applicable borrowings. Default interest is payable on demand.
The Company will pay a commitment fee calculated at a rate per annum equal
to a floating rate that will vary depending upon the ratio of the Company's
Consolidated Indebtedness to Consolidated EBITDA, which rate will range from
0.2% to 0.5% of the unutilized commitments of each lender under the New Credit
Facility. This fee will accrue from the date of consummation of the Offering,
to, and including, the date of termination of the New Credit Facility, and will
be payable quarterly in arrears.
The Company will pay a letter of credit fee equal to the Applicable Margin
then in effect for revolving loans maintained as Eurodollar Loans and a facing
fee of 1/4 of 1% per annum, in each case calculated on the daily average stated
amount of each Letter of Credit for its stated duration. Such fees will be
payable in arrears at the end of each quarter. In addition, the Company will pay
customary administrative charges in connection with the issuance and amendment
of, and draws under, Letters of Credit.
Amortization; Prepayments. The Delayed Draw Term Facility is scheduled to
mature 7 1/2 years from the date of the consummation of the Offering. The
Delayed Draw Term Facility will amortize in limited amounts for each of the 4
years following the first anniversary of the date of consummation of the
Offering. The remaining aggregate principal amount of Delayed Draw Term Facility
will amortize in quarterly amortization payments, with the first such payment to
be made 6 years and 3 months after the date of consummation of the Offering. The
Tranche B Term Loan is scheduled to mature 7 1/2 years from the date of
consummation of the Offering. The Tranche B Term Loan will amortize in limited
amounts for each of the 5 years following the date of the consummation of the
Offering. The remaining aggregate principal amount of the Tranche B Term Loan
will amortize in quarterly amortization payments, with the first such payment to
be made 6 years and 3 months after the date of the consummation of the Offering.
The Tranche C Term Loan is scheduled to mature 8 years from the date of
consummation of the Offering. The Tranche C Term Loan will amortize in limited
amounts for each of the 6 years following the date of the consummation of the
Offering. The remaining aggregate principal amount of the Tranche C Term Loan
will amortize in quarterly amortization payments, with the first such payment to
be made 7 years and 3 months after the date of the consummation of the Offering.
The Revolving Credit Facility is scheduled to mature 6 years from the date of
consummation of the Offering and all loans incurred thereunder will be repaid in
full on such date.
Voluntary prepayments. Voluntary prepayments on the Term Loan Facilities
and the Delayed Draw Term Facility may be made in whole or in part without
premium or penalty (other than the payment of breakage costs for Eurodollar
Loans prepaid on a day other than the last day of an interest period). Payments
on the Term Loan Facilities and the Delayed Draw Term Facility must be applied
to reduce the scheduled amortizations of all then-outstanding Term Loan
Facilities and the Delayed Draw Term Facility on a pro rata basis across the
respective maturities thereof, although the Company may apply voluntary
prepayments of the Term Loan Facilities and the Delayed Draw Term Facility
against scheduled amortizations of the Term Loan Facilities and the Delayed Draw
Term Facility which will be due and payable within one year of the respective
voluntary prepayment, in order of maturity. The holders of the Delayed Draw Term
Facility, the Tranche B Term Loan and Tranche C Term Loan may decline such
prepayments.
The Company will be required to make mandatory prepayments of the Term Loan
Facilities and the Delayed Draw Term Facility from (i) 50% of the net cash
proceeds from certain issuances of debt or equity by the Company or any of its
direct or indirect subsidiaries, (ii) 100% of the after-tax net proceeds from
asset dispositions by the Company or any of its direct or indirect subsidiaries,
(iii) 50% of annual excess cash flow of the Company and (iv) 100% of certain
insurance proceeds, in each case subject to such baskets and exceptions as may
be agreed upon by the Company and the Administrative Agent. Applications of
payments to the Term Loan Facilities and the Delayed Draw Term Facility will
apply to reduce the scheduled
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amortizations of all then outstanding Term Loan Facilities and the Delayed Draw
Term Facility on a pro rata basis across the respective maturities thereof. The
holders of the Delayed Draw Term Facility, the Tranche B Term Loan and Tranche C
Term Loan may decline such prepayments. In addition, revolving loans will be
required to be prepaid (and letters of credit cash collateralized) if at any
time the aggregate principal amount thereof exceeds the total Revolving Credit
Facility commitments, with such prepayment (and/or cash collateralization) to be
in an amount equal to such excess.
Guarantees. All obligations owing by the Company under the New Credit
Facility will be unconditionally guaranteed by each of its domestic subsidiaries
(the "U.S. Guarantees"). In addition, all obligations owing by the German
borrowers affiliate will be unconditionally guaranteed by the Company, each
domestic subsidiary of the Company and (to the extent permitted under German
Law) each German subsidiary of the German borrowers (with the guarantees
delivered pursuant to this sentence being herein called the "German Guarantees";
together with U.S. Guarantees, the "Guarantees"; each entity which executes and
delivers a U.S. Guaranty being herein called a "U.S. Guarantor"; each entity
which executes and delivers a Germany Guaranty a "German Guarantor", together
with the U.S. Guarantors herein called the "Guarantors"). Certain subsidiaries
will not provide guarantees, including: (i) non-wholly-owned subsidiaries so
long as such subsidiaries are not direct or indirect wholly-owned subsidiaries
of the Company and (ii) certain non-material subsidiaries.
Security. All obligations of the Borrowers and Guarantors under the New
Credit Facility and under the Guarantees will be secured by (i) all capital
stock and promissory notes owned by (x) in the case of obligations of the
Company and the U.S. Guarantors, the Company and the U.S. Guarantors and (y) in
the case of obligations of the German Borrowers and the German Guarantors, the
respective German borrower and the German Guarantors, except that, in any case,
no Guarantor organized under the laws of the United States or of a state thereof
will be required to pledge more than 65% of the total combined voting equity of
any foreign subsidiary owned by it in respect of its obligations as the Company
or as a U.S. Guarantor and (ii) a first priority perfected security interest in
all other assets (including, without limitation, receivables, inventory,
equipment, real estate, leases, copyrights, patents and trademarks) owned by (x)
in the case of obligations of the Company and the U.S. Guarantors, the Company
and the U.S. Borrower and (y) in the case of obligations of the German borrowers
and the German Guarantors, the respective German borrower and the German
Guarantors with such exceptions as are acceptable to the Administrative Agent in
its reasonable discretion. The pledge of the shares of certain of the Company's
subsidiaries will be provided subject to approval by relevant gaming
authorities.
Covenants. The obligations of the lenders under the New Credit Facility
are subject to the satisfaction of certain conditions precedent customary in
credit facilities or otherwise appropriate under the circumstances. The Company
and each of its subsidiaries will be subject to certain affirmative and negative
covenants contained in the New Credit Facility, including without limitation
covenants that restrict, subject to specified exceptions, (i) the incurrence of
additional indebtedness and other obligations and the granting of additional
liens, (ii) mergers, acquisitions, investments and dispositions of assets, (iii)
the incurrence of capitalized lease obligations, (iv) dividends, (v) prepayment
or repurchase of the 12 7/8% Notes or the Notes and amendments thereto, (vi)
engaging in transactions with affiliates and formation of subsidiaries, (vii)
capital expenditures, (viii) the use of proceeds of the New Credit Facility and
(ix) changes of lines of business. There are also covenants relating to
compliance with ERISA and environmental and other laws, payment of taxes,
maintenance of corporate existence and rights and maintenance of insurance and
financial reporting. Certain of these covenants are more restrictive than those
set forth in the Indenture. In addition, the New Credit Facility requires the
Company to maintain compliance with certain specified covenants, including
covenants relating to minimum interest coverage, minimum fiscal charge coverage,
minimum EBITDA and maximum leverage.
Events of Default. The New Credit Facility also includes events of default
which are typical for similar types of credit facilities including, without
limitation, (i) a cross-default and (ii) a default in the event of a change of
control of the Company. The occurrence of any of such events of default could
result in acceleration of the Company's and the Guarantors' obligations under
the New Credit Facility and foreclosure on the collateral securing such
obligations, which could have material adverse results to holders of the Notes.
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued and the Existing Notes were issued
pursuant to the Indenture between the Company, the Guarantors and United States
Trust Company of New York, as trustee (the "Trustee"). The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The
Notes are subject to all such terms, and Holders of Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The terms of the
Exchange Notes are identical in all material respects to those of the Existing
Notes, except for certain transfer restrictions and registration rights relating
to the Existing Notes. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. A copy of the Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The definitions of certain terms
used in the following summary are set forth below under "-- Certain
Definitions". For purposes of this summary, the term "Company" refers only to
Alliance Gaming Corporation and not to any of its Subsidiaries.
At present, all the Company's Subsidiaries are Restricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set forth
in the Indenture.
The Exchange Notes will be unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Debt of the Company.
The Exchange Notes will be issued in denominations of $1,000 and integral
multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar
for the Exchange Notes. The Exchange Notes may be presented for registration or
transfer and exchange at the offices of the Registrar, which initially will be
the Trustee's corporate trust office. The Company may change any Paying Agent
and Registrar without notice to holders of the Exchange Notes (the "Holders").
The Company will pay principal (and premium, if any) on the Exchange Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered address of Holders. Any Existing Notes that remain outstanding
after the completion of the Exchange Offer, together with the Exchange Notes
issued in connection with the Exchange Offer, will be treated as a single class
of securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will be limited in aggregate principal amount to
$150,000,000 and will mature on August 1, 2007. Interest on the Exchange Notes
will accrue at the rate of 10% per annum and will be payable semi-annually in
arrears on February 1 and August 1, commencing on February 1, 1998, to Holders
of record on the immediately preceding January 15 and July 15, respectively.
Interest on the Exchange Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Holders whose Existing Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Existing Notes accrued after the issuance of the Exchange Notes. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal, premium, if any, interest and Liquidated Damages, if any, on
the Notes will be payable at the office or agency of the Company maintained for
such purpose within the City and State of New York or, at the option of the
Company, payment of interest and Liquidated Damages, if any, may be made by
check mailed to the Holders of the Notes at their respective addresses set forth
in the register of Holders of Notes; however, all payments of principal,
premium, interest and Liquidated Damages with respect to Notes the Holders of
which have given wire transfer instructions to the Company will be required to
be made by wire transfer of immediately available funds to the accounts
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specified by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Exchange Notes will be
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis by each of the Company's present and future domestic Restricted
Subsidiaries (collectively, the "Guarantors") that has $100,000 or more of
outstanding Indebtedness (owed to any Person other than the Company or any
Restricted Subsidiary), except RCVP, VSI, SVS and VDSI. See "-- Certain
Covenants -- Additional Subsidiary Guarantees". The Notes will not be guaranteed
by any present or future foreign Subsidiary. The obligations of each Guarantor
under its Subsidiary Guarantee will be limited so as not to constitute a
fraudulent conveyance under applicable law (after giving effect to the
guarantees of the New Credit Facility). See, however, "Risk
Factors -- Fraudulent Transfer".
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
(other than mergers with or into 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 in form and substance reasonably satisfactory to the Trustee, under
the Notes and the Indenture; and (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee. The
foregoing will not limit the Company's obligation to apply the Net Available
Cash of such sale or other disposition in accordance with the applicable
provisions of the Indenture. See "Repurchase at Option of Holders -- Asset
Sales".
SUBORDINATION
The payment of principal of, premium, if any, and interest on, and all
other Obligations with respect to, the Notes and all payments under or with
respect to each Subsidiary Guarantee will be subordinated in right of payment,
as set forth in the Indenture, to the prior payment in full in cash of all
Obligations with respect to Senior Debt of the Company or the relevant
Guarantor, as the case may be, whether outstanding on the date of the Indenture
or thereafter incurred, including the obligations of the Company and the
Guarantors under the New Credit Facility.
As of June 30, 1997, on a pro forma basis giving effect to the Refinancing,
the Senior Debt of the Company and the Guarantors would have been approximately
$150.7 million (including approximately $149.6 million borrowed under the New
Credit Facility), all of which would have been secured Indebtedness under the
New Credit Facility, and the Company's Subsidiaries that are not Guarantors
would have had approximately $58.1 million of Indebtedness (including
approximately $9.6 million borrowed under the New Credit Facility) and $48.5
million of trade payables and other liabilities outstanding.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. The Notes will
be effectively subordinated to all Indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of the Company's
Subsidiaries. Any right of the Company to receive assets of any of its
Subsidiaries upon the latter's liquidation or reorganization (and the consequent
right of the Holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of that Subsidiary's creditors, except to
the extent that such Subsidiary has issued a Subsidiary Guarantee or the Company
is itself otherwise recognized as a creditor of such Subsidiary, in which case
the claims of the Company would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of
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such Subsidiary senior to the relevant Subsidiary Guarantor or that is otherwise
held by the Company. For the fiscal year ended June 30, 1997 the Company's
Subsidiaries that are not Guarantors accounted for approximately 45.3% of the
Company's revenues. See "Risk Factors -- Holding Company Structure;
Subordination".
Upon any payment or distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities, in each case whether voluntary or involuntary,
the holders of Senior Debt will be entitled to receive payment in full in cash
of all Obligations in respect of such Senior Debt (including all interest
accruing after the commencement of any such proceeding at the rate specified in
the applicable Senior Debt, whether or not such interest is an allowed claim
under applicable law) before the Holders of Notes will be entitled to receive
any payment or distribution with respect to the Notes, and until all Obligations
with respect to Senior Debt are paid in full in cash, any payment or
distribution to which the Holders of Notes would be entitled but for the
subordination provisions of the Indenture must be made to the holders of Senior
Debt (except that Holders of Notes may receive payments made from the trust
described under "-- Legal Defeasance and Covenant Defeasance" so long as, at the
time of the deposit thereof in such trust, such payment did not violate the
subordination provisions of the Indenture and otherwise complied with the
requirements set forth below under "-- Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment (in cash, property or other
assets) upon or in respect of the Notes (except from the trust described under
"-- Legal Defeasance and Covenant Defeasance" so long as, at the time of the
deposit thereof in such trust, such payment did not violate the subordination
provisions of the Indenture and otherwise complied with the requirements set
forth below under "-- Legal Defeasance and Covenant Defeasance") if (i) any
Obligations with respect to Senior Debt are not paid when due or (ii) any other
default occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Representative of the holders of such
Designated Senior Debt. Payments on the Notes may and must resume (a) in the
case of a payment default, upon the date on which such default is cured or
waived and (b) in case of a nonpayment default, 179 days after the date on which
the applicable Payment Blockage Notice is received (or earlier if the respective
payment blockage period is terminated (i) by written notice to the Trustee and
the Company from the person or persons who gave the respective Payment Blockage
Notice or (ii) because no defaults continue in existence which would permit the
acceleration of maturity of any Designated Senior Debt at such time) unless the
maturity of any Designated Senior Debt has been accelerated. No new period of
payment blockage may be commenced pursuant to clause (ii) of the second
preceding sentence unless and until 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice. No nonpayment
default which existed or was continuing (it being acknowledged that any
subsequent action that would give rise to a default pursuant to any provision
under which a default previously existed or was continuing, and any failure to
comply with a financial covenant for a subsequent period, will constitute a new
default for this purpose) on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior Debt initiating such
Payment Blockage Period may be the basis of the commencement of a subsequent
Payment Blockage Period by the Representative of such Designated Senior Debt,
even if not within a period of 360 consecutive days, unless such default has
been cured or waived for a period of not less than 90 consecutive days.
The Indenture further requires that the Company promptly notify holders of
Designated Senior Debt of the Company if payment of the Notes is accelerated
because of an Event of Default.
The obligations of a Guarantor under its Subsidiary Guarantee are senior
subordinated obligations. Therefore, the rights of the Holders of the Notes to
receive payment by a Guarantor pursuant to a Subsidiary Guarantee will be
subordinated in right of payment to the rights of holders of Senior Debt of such
Guarantor. The terms of the subordination provisions described above with
respect to the Company's obligations under the Notes apply equally to a
Guarantor and the obligations of such Guarantor under the Guarantee.
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As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company and the Guarantors who are holders of Senior Debt. The
Indenture will limit, subject to certain financial tests, the amount of
additional Indebtedness, including Senior Debt, that the Company and its
Subsidiaries can incur. See "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock".
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to August 1,
2002. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on August 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------------------------------------------------------------------ ----------
<S> <C>
2002.............................................................. 105.000%
2003.............................................................. 103.333%
2004.............................................................. 101.667%
2005 and thereafter............................................... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to August 9, 2000, the Company may
redeem up to an aggregate of 33 1/3% of the original aggregate principal amount
of the Notes at a redemption price of 110% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings, in
each case so long as at least 66 2/3% of the original aggregate principal amount
of the Notes remain outstanding immediately after the occurrence of such
redemption and such redemption occurs within 45 days of the date of the closing
of each such Equity Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; however,
no Notes of $1,000 or less may be redeemed in part. Notices of redemption must
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note must
state the portion of the principal amount thereof to be redeemed. A new Note of
the same series in principal amount equal to the unredeemed portion thereof will
be issued in the name of the Holder thereof upon cancellation of the original
Note. Notes called for redemption become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on Notes or portions
of them called for redemption.
GAMING REDEMPTION
Notwithstanding any other provisions hereof, if any Gaming Authority
requires that a Holder or beneficial owner of Notes must be licensed, qualified
or found suitable under any applicable gaming law and such Holder or beneficial
owner fails to apply for a license, qualification or a finding of suitability
within 30 days after being requested to do so by the Gaming Authority (or such
lesser period that may be required by such Gaming Authority), or if such Holder
or such beneficial owner is not so licensed, qualified or found suitable, the
Company will have the right, at its option, (i) to require such Holder or
beneficial owner to dispose of such Holder's or beneficial owner's Notes within
30 days of receipt of such notice of such finding by the applicable Gaming
Authority or such earlier date as may be ordered by such Gaming Authority or
(ii) to redeem the Notes of such Holder or beneficial owner at the lesser of (a)
the price at which such Holder or beneficial owner acquired such Notes, without
accrued interest or Liquidated Damages, if any, unless the
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<PAGE> 90
payment of such interest or Liquidated Damages, if any, is permitted by the
applicable Gaming Authority, in which case such interest and Liquidated Damages,
if any, will be paid through the date of redemption, (b) the fair market value
of such Notes on such redemption date and (c) the principal amount of such Notes
without accrued interest or Liquidated Damages, if any, thereon, unless the
payment of such interest or Liquidated Damages, if any, is permitted by the
applicable Gaming Authority, in which case such interest and Liquidated Damages,
if any, will be paid through the date of redemption. The Holder or beneficial
owner of Notes applying for a license, qualification or a finding of suitability
must pay all costs of the licensure or investigation for such qualification or
finding of suitability. The Company is not required to pay or reimburse any
Holder or beneficial owner of Notes who is required to apply for such license,
qualification or finding of suitability for the costs of the licensure or
investigation for such qualification or finding of suitability. Such expense
will, therefore, be the obligation of such Holder or beneficial owner. See "Risk
Factors -- Strict Regulation by Gaming Authorities" and "Business -- Gaming
Regulations and Licensing".
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders", the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Subject to compliance with the immediately
succeeding paragraph, within ten days following any Change of Control, the
Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice.
If the terms of the New Credit Facility prohibit the Company from making
the foregoing offer upon a Change of Control or from purchasing any Notes
pursuant thereto, prior to the mailing of the notice to Holders described in the
preceding paragraph, but in any event within 30 days following any Change of
Control, the Company covenants to (i) repay in full all indebtedness outstanding
under the New Credit Facility or offer to repay in full all such indebtedness
and repay the indebtedness of each lender who has accepted such offer or (ii)
obtain the requisite consent under the New Credit Facility to permit the
purchase of the Notes as described above. The Company must first comply with the
covenant described in the preceding sentence before it will be required to
purchase Notes in the event of a Change of Control; however, the Company's
failure to comply with the covenant described in the preceding sentence or to
make a Change of Control offer because of any such failure will constitute a
Default described in clause (iv) under "-- Events of Default and Remedies" below
(and not under clause (ii) or (iii) thereof). As a result of the foregoing, a
holder of the Notes may not be able to compel the Company to purchase the Notes
unless the Company is able at the time to refinance all indebtedness outstanding
under the New Credit Facility or obtain requisite consents under the New Credit
Facility. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by
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<PAGE> 91
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to the unpurchased portion of
the Notes surrendered, if any; each such new Note must be in a principal amount
of $1,000 or an integral multiple 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 Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The New Credit Facility will prohibit the Company from purchasing any Notes
prior to the termination thereof and the repayment in full of all Obligations
outstanding thereunder and also provides that certain asset sales or change of
control events with respect to the Company would constitute a default
thereunder. Any future credit agreements or other agreements relating to Senior
Debt to which the Company becomes a party may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when the Company
is prohibited from purchasing Notes, the Company could seek the consent of its
lenders to the purchase of Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing Notes.
In such case, the Company's failure to purchase tendered Notes would constitute
an Event of Default under the Indenture which would, in turn, constitute a
default under the New Credit Facility. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all", there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents; the amount of (x) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) or Indebtedness of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the Company
or such Restricted Subsidiary from further liability and (y) any securities,
notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash (to the extent of the cash received) will
be deemed to be cash for purposes of this paragraph.
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<PAGE> 92
Within 360 days after the receipt of any Net Available Cash from any Asset
Sale, the Company or any Restricted Subsidiary must apply such Net Available
Cash, at its option, (a) to repay Senior Debt (and to correspondingly reduce
commitments with respect thereto in the case of revolving borrowings) of the
Company or any Restricted Subsidiary or, in the case of any Asset Sale involving
assets of any Restricted Subsidiary that is not a Guarantor, to repay any
Indebtedness of such Restricted Subsidiary, or (b) to invest in assets and
property (other than notes, bonds, obligations and securities) which in the good
faith judgment of the Board of Directors of the Company will constitute or be a
part of a Gaming Business immediately following such transaction. Pending the
final application of any such Net Available Cash, the Company may temporarily
reduce Senior Debt or otherwise invest such Net Available Cash in any manner
that is not prohibited by the Indenture. Notwithstanding the foregoing
provisions of this paragraph, the Company and its Restricted Subsidiaries will
not be required to apply any Net Available Cash in accordance with this
paragraph except to the extent that the aggregate Net Available Cash from all
Asset Sales which is not applied in accordance with this paragraph exceeds $5.0
million. Any Net Available Cash (other than Net Available Cash not so applied
pursuant to the preceding sentence) from Asset Sales that is not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company will be required to make an offer to all
Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase, in accordance with the procedures set forth in the Indenture. To
the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company and any Restricted
Subsidiary may use any remaining Excess Proceeds for general corporate purposes.
If the aggregate principal amount of Notes surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee will select the Notes to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds will be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries, directly or indirectly, to: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation)
or to the direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than dividends
or distributions payable in Equity Interests (other than Disqualified Stock) of
the Company and dividends and distributions payable solely to the Company or to
a Restricted Subsidiary); (ii) purchase, redeem or otherwise acquire or retire
for value (including without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or any
direct or indirect parent of the Company; (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is subordinated to the Notes, except a payment of
interest or principal at Stated Maturity; or (iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"); unless at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default has occurred and is continuing or
would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Consolidated Coverage Ratio test set forth in the first paragraph of
the covenant described below under caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock"; and
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<PAGE> 93
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii) and (viii) of the next succeeding
paragraph and excluding 50% of Restricted Payments made to holders of
Equity Interests not held by the Company or any of its Restricted
Subsidiaries to the extent permitted by clause (iv) of the next succeeding
paragraph), is less than the sum of (i) 50% of the Consolidated Net Income
of the Company for the period (taken as one accounting period) from the
date of the Indenture to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the
time of such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds, or the GAAP purchase accounting valuation of
assets or property (determined on the date of issuance or conversion),
received by the Company from the issue or sale since the date of the
Indenture of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company that have
been converted into or exchanged for such Equity Interests (other than
Equity Interests, Disqualified Stock or convertible debt securities sold to
a Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (iii) the amount by which Indebtedness or Disqualified Stock
of the Company is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Restricted Subsidiary of the
Company) subsequent to the date of the Indenture of any Indebtedness or
Disqualified Stock of the Company convertible or exchangeable for Capital
Stock of the Company (less the amount of any cash, or other property,
distributed by the Company upon such conversion or exchange), plus (iv) the
amount equal to the net reduction in Investments (other than Permitted
Investments) made by the Company or any of its Restricted Subsidiaries in
any Person resulting from (a) dividends or distributions on or repurchases
or redemptions of such Investments by such Person, proceeds realized upon
the sale of such Investment to an unaffiliated purchaser, reductions in
amounts guaranteed, and repayments of loans or advances or other transfers
of assets by such Person to the Company or any Restricted Subsidiary of the
Company or (b) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued as provided in the second succeeding paragraph);
however, no amount may be included under this clause (iv) to the extent it
is already included in Consolidated Net Income.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof if, at said date of
declaration, such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Indebtedness that is subordinated to the Notes or Equity
Interests of the Company out of the Net Cash Proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of other Equity
Interests of the Company (other than any Disqualified Stock) issued after the
date of the Indenture or any exchange of Equity Interests of the Company (other
than Disqualified Stock) issued after the date of the Indenture for any
Indebtedness that is subordinated to the Notes or Equity Interests of the
Company (but the amount of any such Net Cash Proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition must be
excluded from clause (c) (ii) of the preceding paragraph); (iii) the defeasance,
redemption, repurchase or other acquisition of Indebtedness that is subordinated
to the Notes with the Net Cash Proceeds from an incurrence of or exchange for
Permitted Refinancing Indebtedness; (iv) the payment of any dividend or
distribution on account of Equity Interests by a Restricted Subsidiary of the
Company to the holders of its respective Equity Interests on a pro rata basis;
(v) the repurchase, redemption or other acquisition or retirement for value of
any Equity Interests of the Company or any Subsidiary of the Company held by
employees of the Company (or any of its Subsidiaries) pursuant to any stock
ownership or option plan in effect from time to time; however, the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests may not exceed $1.0 million in any twelve-month period; (vi) loans and
advances to officers and directors of the Company or any of its Restricted
Subsidiaries made in the ordinary course of business the aggregate of which
shall not exceed $1.5 million outstanding at any time; (vii) the redemption by
the Company or any Restricted Subsidiary of any subordinated debt or Equity
Interest if (A) 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
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the Company) or is required to preserve a Gaming License and (B) the Company
determines (as evidenced by a resolution of the Board of Directors of the
Company 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; and (viii)
payments that would otherwise be Restricted Payments in an aggregate amount not
to exceed $7.5 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries in the Subsidiary so designated will be
deemed to be Restricted Payments at the time of such designation and will reduce
the amount available for Restricted Payments under the first paragraph of this
covenant. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such designation. Such designation will be permitted only if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. Upon a
redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the
Company will be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary in an amount (if positive) equal to (x) the Company's
"Investment" in such Unrestricted Subsidiary at the time of such redesignation
less (y) the portion (proportionate to the Company's equity interest in such
Unrestricted Subsidiary) of the fair market value of the net assets of such
Unrestricted Subsidiary at the time that such Subsidiary is so redesignated a
Restricted Subsidiary.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment will be determined by the Board
of Directors whose resolution with respect thereto must be delivered to the
Trustee. Not later than ten business days following the end of each fiscal
quarter, the Company must deliver to the Trustee an Officers' Certificate
identifying each Restricted Payment made by the Company during such fiscal
quarter and stating that each such Restricted Payment is permitted and setting
forth the basis upon which the calculations required by the covenant "Restricted
Payments" were computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company and the Guarantors
will not issue any Disqualified Stock and the Company will not permit any of its
Restricted Subsidiaries which are not Guarantors to issue any shares of
preferred stock; however, the Company and any Guarantor may incur Indebtedness
(including Acquired Debt and Indebtedness under the New Credit Facility) or
issue shares of Disqualified Stock if the Consolidated Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been at least 2.0 to 1, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, and such net proceeds been applied, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company or any of its Restricted
Subsidiaries of term Indebtedness under the New Credit Facility, so long as
the aggregate principal amount of all term Indebtedness outstanding under
the New Credit Facility after giving effect to each such incurrence does
not exceed an amount equal to $115.0 million plus an additional $25.0
million of deferred term Indebtedness which was utilized to effect the
Rainbow Royalty Buyout and to repurchase the Rainbow Note Payable, less the
aggregate amount of all principal repayments actually made from time to
time after the date of the Indenture with
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respect to such Indebtedness (other than principal payments made from any
permitted refinancings thereof);
(ii) the incurrence by the Company or any of its Restricted
Subsidiaries of revolving credit Indebtedness (inclusive of letters of
credit, which will be deemed to have a principal amount equal to the
maximum potential liability of the Company and its Restricted Subsidiaries
thereunder) under the New Credit Facility, so long as the aggregate
principal amount of all revolving credit Indebtedness outstanding under the
New Credit Facility after giving effect to such incurrence, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (ii), does not
exceed the greater of (x) $90.0 million and (y) the sum of (A) 75% of the
book value of the accounts receivable of the Company and its Restricted
Subsidiaries and (B) 40% of the book value of the inventory of the Company
and its Restricted Subsidiaries;
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company and the Guarantors of Indebtedness
represented by the Notes;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, so long as the
aggregate principal amount of such Indebtedness that is not Non-Recourse
Debt (except as to the property, plant or equipment being financed) does
not exceed $20.0 million at any time outstanding (including any Permitted
Refinancing Indebtedness relating thereto);
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
or Disqualified Stock that was permitted by the Indenture to be incurred
(other than pursuant to clause (i) or (ii) of this paragraph);
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; however, (A) if the Company is the
obligor on such Indebtedness and the payee is not a Guarantor, such
Indebtedness must be expressly subordinated to the prior payment in full in
cash of all Obligations with respect to the Notes and (B)(1) any subsequent
issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or a Restricted
Subsidiary or (2) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Restricted Subsidiary will be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Restricted Subsidiary, as the case may be;
(viii) the incurrence by the Company of Interest Swap and Hedging
Obligations;
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of (A) Indebtedness in respect of performance, completion,
guarantee, surety or similar bonds provided by the Company or any
Restricted Subsidiary in the ordinary course of business, or (B)
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;
(x) the incurrence by the Company or any of its Restricted
Subsidiaries of reimbursement obligations with respect to letters of credit
in respect of workers' compensation claims consistent in character and
amount with customary industry practice;
(xi) the guarantee by the Company or any of its Restricted
Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of
the Company that was permitted to be incurred by another provision of this
covenant;
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(xii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by liabilities for jackpots
payable for progressive games in a manner consistent with industry
practice;
(xiii) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness (which may, but need not, be
incurred under the New Credit Facility) in an aggregate principal amount
(or accreted value, as applicable) not to exceed $20.0 million at any time
outstanding (including any Permitted Refinancing Indebtedness relating
thereto).
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company will, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Neither the accrual of interest nor the accretion
of accreted value will be deemed to be an incurrence of Indebtedness for
purposes of this covenant. The maximum amount of Indebtedness that the Company
or a Restricted Subsidiary may incur pursuant to this covenant will not be
deemed to be exceeded with respect to any outstanding Indebtedness due solely to
the result of the fluctuations in the exchange rates of currencies.
Limitation on Senior and Secured Subordinated Debt
Notwithstanding the provisions described above under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock", the Company may
not, and may not permit any Guarantor to, incur (i) any Indebtedness if such
Indebtedness is expressly subordinate or junior in right of payment to any
Senior Debt of the Company or such Guarantor and senior in any respect of right
of payment to the Notes, or (ii) any Secured Indebtedness (other than
Indebtedness described under clause (xii) of "-- Limitation of Indebtedness and
Issuance of Preferred Stock") that is not Senior Debt unless contemporaneously
therewith effective provision is made to secure the Notes or the relevant
Subsidiary Guaranty, as applicable, equally and ratably with such Secured Debt
for so long as such Secured Debt is secured by a Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) the New Credit
Facility as in effect on the date of the Indenture and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, so long as the dividend and other payment
restrictions contained therein are no more restrictive than those contained in
the New Credit Facility as in effect on the date of the Indenture, (b) any
agreement in effect at or entered into on the date of the Indenture, (c) the
Indenture and the Notes, (d) any instrument or agreement of a Person acquired by
the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such instrument or agreement was entered
into in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, so long as, in the case of Indebtedness, such Indebtedness
was permitted by the terms of the Indenture to be incurred, (e) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (f) purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, (g) Permitted Refinancing Indebtedness, so long as the restrictions
contained in the agreements governing
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such Permitted Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced, (h)
restrictions contained in security agreements or mortgages to the extent such
restrictions restrict the transfer of the property or assets subject to such
security agreements or mortgages, (i) any restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into for the sale
or disposition of all or substantially all of the capital stock or assets of
such Restricted Subsidiary pending the closing of such sale or disposition, (j)
any restriction in any agreement that is not more restrictive than the
restrictions under the terms of the New Credit Facility as in effect on the date
of the Indenture and (k) in the case of clause (iii) above, encumbrances and
restrictions in the ordinary course of business that do not individually or in
the aggregate detract from the value of property or assets of the Company or a
Restricted Subsidiary in a material manner.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition has been made is a
corporation organized or existing under the laws of the United States, any state
thereof or the District of Columbia; (ii) the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company) or the
entity or Person to which such sale, assignment, transfer, lease, conveyance or
other disposition has been made assumes all the obligations of the Company under
the Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after such transaction
no Default or Event of Default exists; (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Consolidated Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock"; and (v)
any such transaction would not require the Holders of Notes generally to obtain
a Gaming License or be qualified under the laws of any applicable gaming
jurisdiction in the absence of such transactions; however, a transaction
involving a jurisdiction that does not require the licensing or qualification of
any of the Holders of the Notes, but reserves the discretionary right to require
the licensing or qualification of any Holder of Notes, will not be prohibited
pursuant to the terms of this clause (v).
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to enter into any transaction (including the
purchase, sale, lease or exchange of property or the rendering of services) with
any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms that are no less favorable to the Company
or the relevant Restricted Subsidiary than those that would have been obtained
in a comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the Trustee (a) with respect
to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $1.0 million, a resolution of the
Board of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of the
Board of Directors and (b) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the Company of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing; however, (w) any
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Exempt Affiliate Transaction, (x) any compensation or indemnity arrangement with
any officer or director of the Company (pertaining to his or her duties as an
officer or director) entered into in the ordinary course of business, (y)
transactions between or among the Company and/or its Restricted Subsidiaries and
(z) Restricted Payments that are permitted by the provisions of the Indenture
described above under the caption "-- Restricted Payments", in each case, will
not be deemed Affiliate Transactions.
Limitation on Issuances and Sales of Capital Stock of Wholly Owned
Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of the Company or RCVP, VSI, SVS or VDSI
to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of
any Wholly Owned Restricted Subsidiary of the Company, RCVP, VSI, SVS or VDSI to
any Person (other than the Company or a Wholly Owned Restricted Subsidiary of
the Company), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Capital Stock of such Wholly Owned Restricted
Subsidiary, RCVP, VSI, SVS or VDSI and (b) the Net Available Cash from such
transfer, conveyance, sale, lease or other disposition are applied in accordance
with the covenant described above under the caption "Repurchase at the Option of
Holders -- Asset Sales," and (ii) will not permit any Wholly Owned Restricted
Subsidiary of the Company or RCVP, VSI, SVS or VDSI to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to the Company or a
Wholly Owned Restricted Subsidiary of the Company; however, the Company may sell
or cause to be issued to a third party Equity Interests of Alliance Automaten
GmbH & Co, KG or any other Wholly Owned Restricted Subsidiary into which the
Company consolidates or transfers its Bally Wulff operations in advance of such
offering of Equity Interests, so long as the Equity Interests sold to a third
party represent no more than 20% of the Equity Interests of such entity
outstanding immediately after such sale if such sale complies in all respects
with the provisions described under the caption "Repurchase at the Option of
Holders -- Asset Sales".
Limitation on Issuances of Guarantees of Indebtedness
The Indenture provides that the Company will not permit any domestic
Restricted Subsidiary that is not a Guarantor, directly or indirectly, to
Guarantee or pledge any assets to secure the payment of any other Indebtedness
of the Company unless such Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for the Subsidiary Guarantee
of the payment of the Notes by such Restricted Subsidiary, which Subsidiary
Guarantee will be senior to or pari passu with such Restricted Subsidiary's
Guarantee of or pledge to secure such other Indebtedness (except in the case of
Guarantees issued in respect of Senior Debt, which will be senior to any
Subsidiary Guarantee of the payment of the Notes). Notwithstanding the
foregoing, (i) RCVP will not be required to issue such a Guarantee as a result
of RCVP providing a Guarantee of the Company's Obligations under the New Credit
Facility or in respect of any similar Credit Facility and (ii) any Guarantee of
the Notes by a Restricted Subsidiary pursuant to this covenant will provide by
its terms that it will be automatically and unconditionally released and
discharged upon any sale, exchange or transfer, to any Person not an Affiliate
of the Company, of all of the Company's stock in, or all or substantially all
the assets of, such Subsidiary, which sale, exchange or transfer is made in
compliance with the applicable provisions of the Indenture. The form of such
Guarantee is attached as an exhibit to the Indenture which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Gaming Business, except to such extent as
would not be material to the Company and its Subsidiaries taken as a whole.
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries acquires or creates another Subsidiary after the date of the
Indenture, then such newly acquired or created Subsidiary must
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execute a Subsidiary Guarantee and deliver an opinion of counsel relating to the
enforceability and authorization of such Subsidiary Guarantee in accordance with
the terms of the Indenture, pursuant to which such Subsidiary will become a
Guarantor, on a senior subordinated basis (pursuant to subordinated provisions
substantially similar to those described above under the caption
"-- Subordination"), of the Company's payment obligations under the Notes and
the Indenture; however, this covenant will not apply to any Subsidiary during
such period as such Subsidiary (w) is organized in any jurisdiction outside the
United States, (x) is organized in any jurisdiction in which the issuance of a
Subsidiary Guarantee requires regulatory approval by a Gaming Authority, the
Company or such Subsidiary has made a good faith effort to obtain such approval
and such approval is denied, (y) has been properly designated as an Unrestricted
Subsidiary in accordance with the Indenture for so long as it continues to
constitute an Unrestricted Subsidiary or (z) has less than $100,000 of
outstanding Indebtedness owed to any Person other than the Company or any
Restricted Subsidiary. Notwithstanding the foregoing, each of RCVP, VSI, SVS and
VDSI will become subject to the terms of this covenant upon becoming a Wholly
Owned Restricted Subsidiary.
Designation of an Unrestricted Subsidiary as a Restricted Subsidiary
Any Unrestricted Subsidiary may be designated by the Company as a
Restricted Subsidiary, so long as (i) at the time of such designation after
giving pro forma effect thereto as if such designation had occurred and as if
any Non-Recourse Debt previously incurred by such Unrestricted Subsidiary had
been incurred at the beginning of the Company's most recently completed four
fiscal quarters for which internal financial statements are available preceding
the date of such designation, (a) the Company would be permitted to incur $1.00
of additional Indebtedness pursuant to the Consolidated Coverage Ratio test
contained in the provisions described in the first paragraph under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock", or (b) the
Consolidated Coverage Ratio of the Company is increased by such designation;
(ii) unless not required under the provisions described above under the caption
"Additional Subsidiary Guarantees", such newly designated Restricted Subsidiary
executes and delivers a Subsidiary Guarantee and an opinion of counsel relating
to the enforceability and authorization of such Subsidiary Guarantee as required
by the Indenture; and (iii) no Default has occurred and is continuing
immediately preceding such designation and after giving pro forma effect
thereto.
Designation of a Subsidiary as an Unrestricted Subsidiary
Any newly-organized Subsidiary may be designated by the Company as an
Unrestricted Subsidiary at the time of its formation, so long as such Subsidiary
has total assets of $1,000 or less at the time of such designation. Any
Restricted Subsidiary may be designated by the Company as an Unrestricted
Subsidiary (at which time such Restricted Subsidiary's Guarantee will
terminate), so long as (i) at the time of such designation after giving pro
forma effect thereto as if such designation had occurred at the beginning of the
Company's most recently completed four fiscal quarters for which internal
financial statements are available preceding the date of such designation, (A)
the Company would be permitted to incur $1.00 of additional Indebtedness
pursuant to the Consolidated Coverage Ratio test contained in the provisions
described in the first paragraph under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock" and (B) if the Restricted
Subsidiary is a Key Subsidiary, the Consolidated Coverage Ratio is not less than
80% of the Consolidated Coverage Ratio for such period without giving pro forma
effect to such designation; and (ii) no Default has occurred and is continuing
immediately preceding such designation and after giving pro forma effect
thereto, including the requirement described in the third paragraph under the
caption "-- Restricted Payments" that any Investment in such Restricted
Subsidiary be deemed to be a Restricted Payment made on the date of such
designation.
Limitation on Status as Investment Company
The Indenture prohibits 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.
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Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail on the face of the financial statements, in the footnotes
thereto or in Management's Discussion and Analysis of Financial Condition and
Results of Operations the financial condition and results of operations of the
Company and its Restricted Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries of the Company) and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, whether or not required by the rules
and regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company and the Guarantors have agreed that, for so long as any Notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company to
comply with the repurchase provisions described under the caption "Repurchase at
the Option of Holders -- Asset Sales"; (iv) failure by the Company for 60 days
after notice in writing from the Trustee or the Holders of at least 25% of the
Notes to comply with any of its other agreements in the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which there is
issued or by which there is secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Restricted Subsidiaries (or the payment of
which is guaranteed by the Company or any of its Restricted Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness the maturity of which has been so accelerated, aggregates $10.0
million or more; (vi) failure by the Company or any of its Significant
Subsidiaries to pay final judgments aggregating in excess of $10.0 million,
which judgments are not paid, discharged or stayed for a period of 60 days and,
in the event such judgments are covered by insurance, an enforcement proceeding
has been commenced by any creditor upon any of such judgments which is not
promptly stayed; (vii) except as permitted by the Indenture, any Subsidiary
Guarantee is held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any Guarantor, or
any Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; (viii) any Gaming License of the
Company or any of its Restricted Subsidiaries is revoked, terminated or
suspended or otherwise ceases to be effective, resulting in the cessation or
suspension, for a period of more than 90 days, of operations of any portion of
the business of the Company or any of its Restricted Subsidiaries that accounted
for more than 10% of the Consolidated Cash Flow of the Company for the period of
the four consecutive fiscal quarters most recently ended for which internal
financial statements are available, except that any voluntary relinquishment of
a Gaming License if such relinquishment is, in the reasonable, good faith
judgment of the Board of Directors of the Company, evidenced by a resolution of
such Board, both desirable in the conduct of the business of the Company and its
Restricted Subsidiaries, taken as a whole, and not disadvantageous in any
material respect to the Holders of the Notes will not constitute an Event of
Default; and (ix) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries.
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If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable. Upon such a declaration, such
principal and interest will be due and payable immediately; however, if upon
such declaration there are any amounts outstanding under the New Credit Facility
and the amounts thereunder have not been accelerated, such principal and
interest will be due and payable upon the earlier of the time such amounts are
accelerated or five business days after the receipt by the Company and the
Representative under the New Credit Facility of such declaration.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, as such, will have any liability for any obligations of the
Company or any Guarantor under the Notes or the Indenture or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder of Notes by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, 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 and Liquidated Damages on
the outstanding Notes on the stated maturity or on the applicable
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redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company must have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the 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 the outstanding 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 must have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding 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 may have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to 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 will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) 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 must
deliver to the Trustee an Officers' Certificate stating that the deposit was not
made by the Company with the intent of preferring the Holders of Notes over the
other creditors of the Company with the intent of defeating, hindering, delaying
or defrauding creditors of the Company or others; and (vii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change
the time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency,
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to provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
Notes in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders of Notes or that does
not adversely affect the legal rights under the Indenture of any such Holder in
any material respect, or to comply with requirements of the Commission in order
to effect or maintain the qualification of the Indenture under the Trust
Indenture Act. However, no amendment may be made to the subordination provisions
of the Indenture that adversely affects the rights of any holder of Senior Debt
then outstanding unless the holders of such Senior Debt (or their
Representative) consents to such change.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (which has not been cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes, unless such Holder has offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; beneficial ownership
of 10% or more of the voting securities of a Person will be deemed to be
control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than dispositions of assets or rights in the ordinary course of
business, including, without limitation, sales of inventory and damaged, surplus
or obsolete property in the ordinary course of business (provided that the sale,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company and its Restricted Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the caption "Repurchase
at the Option of Holders -- Change of Control" and/or the provisions described
above under the caption "Certain Covenants -- Merger, Consolidation, or Sale of
Assets" and not by the provisions of the Asset Sale covenant), and (ii) the
issue or sale by the Company or any of its Restricted Subsidiaries of Equity
Interests of any of the Company's Restricted Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $100,000 or (b) for
net proceeds in excess of
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$100,000. Notwithstanding the foregoing, the following will not be deemed to be
Asset Sales: (i) a transfer of assets or rights by the Company to a Wholly Owned
Restricted Subsidiary or a Guarantor, or by a Restricted Subsidiary to the
Company or to a Wholly Owned Restricted Subsidiary or a Guarantor, (ii) an
issuance of Equity Interests by a Wholly Owned Restricted Subsidiary or a
Guarantor to the Company or to a Wholly Owned Restricted Subsidiary or a
Guarantor, (iii) a Restricted Payment that is permitted by the covenant
described above under the caption "Certain Covenants -- Restricted Payments" and
(iv) a Permitted Investment.
"Bally Wulff" means, collectively, Alliance Automaten GmbH & Co. KG, Bally
Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH, Geda Automatengrosshandel
GmbH, Erkens Vertriebs GmbH, Bally Gaming International GmbH, Kuepper GmbH and
Westav Westdeutscher Vertriebs GmbH.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars and German Deutschemarks
(or the Euro, if and when such currency replaces the German Deutschemark), (ii)
securities issued or directly fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any domestic commercial bank or
commercial bank of a foreign country recognized by the United States, in each
case having capital and surplus in excess of $500 million (or the foreign
currency equivalent thereof) and outstanding debt which is rated "A" (or similar
equivalent thereof) or higher by at least one nationally recognized statistical
rating organization (as defined under Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above and (v) commercial paper having one of the two highest
ratings obtainable from Moody's Investors Service, Inc. or Standard & Poor's
Corporation and in each case maturing within six months after the date of
acquisition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than an Exempt Person, (ii) the adoption of a plan
relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than an Exempt Person, becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a
person will be deemed to have "beneficial ownership" of all securities that such
person has the right to acquire, whether such right is currently exercisable or
is exercisable only upon the occurrence of a subsequent condition), directly or
indirectly, of 50% or more of the Voting Stock of the Company (measured by
voting power rather than number of shares), (iv) during any period of 12
consecutive months after the date of the Indenture, 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;
and (v) the Company consolidates with, or merges with or into, any Person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with,
or merges with or into, the Company, in any such event
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pursuant to a transaction in which any of the outstanding Voting Stock of the
Company is converted into or exchanged for cash, securities or other property,
other than any such transaction where the Voting Stock of the Company
outstanding immediately prior to such transaction is converted into or exchanged
for Voting Stock of the surviving or transferee Person constituting a majority
of the outstanding shares of such Voting Stock of such surviving or transferee
Person (immediately after giving effect to such issuance), but only if the
condition specified in clause (iv) also has occurred.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Interest Swap and Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation
and amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) of such Person and its Subsidiaries for such period to the extent that
such depreciation and amortization were deducted in computing such Consolidated
Net Income, plus (v) prepayment premiums and other charges incurred in
connection with the Refinancing. Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization of,
a Subsidiary of the referent Person will be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent that a corresponding amount
would be permitted at the date of determination to be dividended or distributed
to the Company by such Subsidiary without prior governmental approval (that has
not been obtained), and without direct or indirect restriction pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Subsidiary or its stockholders.
"Consolidated Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Consolidated Interest Expense of
such Person and its Restricted Subsidiaries for such period. In the event that
the Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
repays, redeems, retires, repurchases or defeases any Indebtedness or
Disqualified Stock (other than revolving credit borrowings) or issues preferred
stock subsequent to the commencement of the period for which the Consolidated
Coverage Ratio is being calculated but prior to the date on which the event for
which the calculation of the Consolidated Coverage Ratio is made (the
"Calculation Date"), then the Consolidated Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee, repayment
redemption, retirement, repurchase or defeasance of Indebtedness or Disqualified
Stock, or such issuance or redemption of preferred stock, as if the same had
occurred at the beginning of the applicable four-quarter reference period. In
addition, for purposes of making the computation referred to above, (i)
acquisitions of and investments in Restricted Subsidiaries that have been made
by the Company or any of its Restricted Subsidiaries, including through mergers
or investments or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period will be calculated without giving effect to
clause (iii) of the proviso set forth in the definition of Consolidated Net
Income, (ii) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, will be excluded, and (iii) the Consolidated
Interest Expense attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, will be excluded, but only to the extent that the obligations
giving rise to such Consolidated Interest Expense will not be obligations of the
referent Person or any of its Restricted Subsidiaries following
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the Calculation Date. For purposes of this definition, whenever pro forma effect
is to be given to an acquisition of assets, the amount of income or earnings
relating thereto and the amount of Consolidated Interest Expense associated with
any Indebtedness incurred in connection therewith, the pro forma calculations
will be determined in good faith by a responsible financial or accounting
officer of the Company.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Interest Swap and Hedging Obligations), (ii) the
consolidated interest expense of such Person and its Restricted Subsidiaries
that was capitalized during such period, (iii) any interest expense on
Indebtedness of another Person that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one of
its Restricted Subsidiaries (whether or not such Guarantee or Lien is called
upon), and (iv) all dividend payments, whether or not in cash, on any series of
Disqualified Stock of such Person or any of its Restricted Subsidiaries, other
than dividend payments on Equity Interests payable solely in Equity Interests of
the Company.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
however, (i) the Net Income (to the extent positive) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of any Restricted Subsidiary will be excluded to
the extent that the declaration or payment of dividends and distributions by
that Restricted Subsidiary of Net Income is not at the date of determination
permitted without any prior governmental approval (that has not been obtained)
or, directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income or loss of any Unrestricted Subsidiary will be excluded, whether
or not distributed to the Company or one of its Subsidiaries, (iv) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition will be excluded and (v) the
cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings, but only to the extent of any cash
received by such Person upon issuance of such preferred stock.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facilities" means, with respect to any Person, one or more debt
facilities (including, without limitation, the New Credit Facility) or
commercial paper facilities with banks or other institutional lenders as agent
providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such receivables) or letters
of credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time. Indebtedness under
Credit Facilities outstanding on the date on which Notes are first issued and
authenticated under the Indenture will be deemed to have been incurred on such
date in reliance on the exception provided by clauses (i) and (ii) of the
definition of Permitted Debt.
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"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
New Credit Facility; Indebtedness outstanding under any Credit Facility that
refinanced in part, but not in whole, the Indebtedness outstanding under the New
Credit Facility will constitute Designated Senior Debt only if it meets the
requirements of succeeding clause (ii), and (ii) any other Senior Debt of the
Company which, at the date of determination, has an aggregate principal amount
outstanding of, or under which, at the date of determination, the holders
thereof are committed to lend up to at least $25.0 million and is specifically
designated by the Company in the instrument evidencing or governing such Senior
Debt as "Designated Senior Debt" for purposes of the Indenture.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable other than at the Company's option), or upon the happening of any
event (other than the disqualification of the holder thereof by a Gaming
Authority), matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the Holder thereof,
in whole or in part, on or prior to the first anniversary of the Stated Maturity
of the Notes other than for Equity Interests (other than Disqualified Stock);
however, any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to the first anniversary of the Stated
Maturity of the Notes will not constitute Disqualified Stock if the "asset sale"
or "change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions described
under "Repurchase at the Option of Holders -- Change of Control" and "-- Asset
Sales".
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an underwritten primary offering of common stock of
the Company pursuant to an effective registration statement, or a private
placement of common stock exempt from registration, under the Act.
"Exempt Affiliate Transactions" means (i) any extension or renewal of the
Agreements or the KIC Agreement (as defined under "Management -- Related Party
Transactions"), in accordance with their terms, as well as any restructuring of
the Agreements, so long as, in the case of a restructuring of an Agreement, the
Board of Directors has determined that the restructured terms are fair to the
Company and, if the restructuring involves aggregate consideration in excess of
$10.0 million, the Company delivers a fairness opinion of the type specified in
clause (b) under "Certain Covenants -- Transactions with Affiliates" and (ii)
any agreements between the Company 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.
"Exempt Person" means (i) the Company or any employee benefit plan or stock
ownership plan of either the Company or any subsidiary of the Company, (ii) any
of KFW, KIC, GSA, Alfred Wilms, or any of their respective Affiliates, or any
successor to KFW, 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.
"Existing Indebtedness" means Indebtedness in existence on the date of the
Indenture, until such amounts are repaid.
"GAAP" means 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 have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
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"Gaming Authority" means any governmental agency which regulates gaming in
a jurisdiction in which the Company or any of its Subsidiaries conducts a Gaming
Business.
"Gaming Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the date of the Indenture,
including the management and operation of gaming machines and casinos, the
design, manufacture and distribution of gaming machines, equipment, monitoring
systems and amusement equipment, and other gaming-related businesses, including
but not limited to amusements, arcades, Internet-based gaming, pari-mutuel 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.
"Gaming Licenses" means every material license, material franchise, or
other material authorization required to own, lease, operate or otherwise
conduct or manage riverboat, tickseed 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.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means all of the Subsidiaries of the Company that execute a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Interest Swap and Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Interest Swap and Hedging Obligations) would appear
as a liability upon a balance sheet of such Person prepared in accordance with
GAAP, as well as all Indebtedness of others secured by a Lien on any asset of
such Person (whether or not such indebtedness is assumed by such Person) and, to
the extent not otherwise included, the Guarantee by such Person of any
Indebtedness of any other Person. The amount of any Indebtedness outstanding as
of any date will be (i) the accreted value thereof, in the case of any
Indebtedness that does not require current payments of interest, and (ii) the
principal amount thereof in the case of any other Indebtedness, except for
Indebtedness of others secured by a Lien on any asset of such Person, in which
case the amount of such Indebtedness will be deemed to be the lesser of the
stated amount of such Indebtedness and the value of the assets of such Person
securing such Indebtedness.
"Interest Swap and Hedging Obligations" 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
(and not for the purpose of speculative investment) 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.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Company, the Company will be deemed
to have made an Investment on the
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date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Restricted Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "Certain Covenants -- Restricted Payments".
"Key Subsidiaries" means United Coin Machine Co., BGII, Gaming, Alliance
Automaten GmbH & Co. KG, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH,
Foreign Gaming Ventures, Inc., Mississippi Ventures, Inc., Louisiana Ventures,
Inc., VSI, United Gaming Rainbow and RCVP.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in).
"Net Available Cash" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash payments received by way of a deferred
payment of principal pursuant to a note or installment receivable or otherwise
and proceeds received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness under Credit Facilities) secured by a Lien on the asset
or assets that are the subject of such Asset Sale, and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable by the
Company as a result thereof.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or loss,
together with any related provision for taxes on such gain or loss, realized in
connection with (a) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions) or (b) the disposition of any
securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries, (ii) any extraordinary or nonrecurring gain or loss, together with
any related provision for taxes on such extraordinary or nonrecurring gain or
loss and (iii) prepayment premiums and other charges incurred in connection with
the Refinancing.
"New Credit Facility" means the Credit Agreement by and among the Company,
certain of its Subsidiaries, the lenders referred to therein and Credit Suisse
First Boston, as Administrative Agent, together with the related documents
thereto (including without limitation the term loans and revolving loans
thereunder, any guarantees and security documents), as amended, extended,
renewed, restated, supplemented or otherwise modified (in whole or in part, and
without limitation as to amount terms, conditions, covenants and other
provisions) from time to time, and any agreement (and related document)
governing Indebtedness incurred to refund or refinance, in whole or in part, the
borrowings and commitments then outstanding or permitted to be outstanding under
such New Credit Facility or a successor New Credit Facility, whether by the same
or any other lender or group of lenders.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness (other than Indebtedness
represented by the Notes or
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outstanding under the New Credit Facility or any replacement Credit Facility) of
the Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (iii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or assets
of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities and amounts
payable under the documentation governing any Indebtedness.
"Permitted Investments" means (i) any Investment in the Company, a Wholly
Owned Restricted Subsidiary of the Company or a Guarantor that is engaged in a
Gaming Business or any Investment in the form of a loan to a foreign Restricted
Subsidiary; (ii) any Investment in Cash Equivalents; (iii) any Investment by the
Company or any Restricted Subsidiary of the Company in a Person, if as a result
of such Investment (a) such Person becomes a Wholly Owned Restricted Subsidiary
of the Company or a Guarantor and is engaged in a Gaming Business or (b) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company,
a Wholly Owned Restricted Subsidiary of the Company or a Guarantor and is
engaged in a Gaming Business; (iv) any Restricted Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption
"Repurchase at the Option of Holders -- Asset Sales"; (v) any acquisition of
assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Company; (vi) payments made to effect the Rainbow
Royalty Buyout and purchase the Rainbow Note Payable; (vii) repurchase of Notes;
(viii) Investments acquired by the Company or any of its Restricted Subsidiaries
(a) in exchange for any other Investment or accounts receivable held by the
Company or such Restricted Subsidiary in connection with or as a result of a
bankruptcy workout, reorganization or recapitalization of the issuer of such
Investment or accounts receivable or (b) as a result of a foreclosure by the
Company or such Restricted Subsidiary or other transfer of title with respect to
any secured Investment in default; (ix) Investments by the Company or any of its
Restricted Subsidiaries in securities issued directly or indirectly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof in an amount outstanding at any time equal to the net
present value of the aggregate amount of payments owed to winners of jackpots
from progressive games and having maturities that are approximately the same as
the due dates for future jackpot payments; and (x) Investments in any Person
engaged in the Gaming Business having an aggregate fair market value (measured
on the date each such Investment was made and without giving effect to
subsequent changes in value), when taken together with all other Investments
made pursuant to this clause (x) that are at the time outstanding (after giving
effect to any such Investments that are returned or repaid to the Company or to
any Restricted Subsidiary, without restriction, in cash or property on or prior
to the date of any such calculation), not to exceed an amount equal to (A) $20.0
million, plus (B) 50% of any dividends or distributions received by the Company
or any Restricted Subsidiary after the date of the Indenture from Unrestricted
Subsidiaries of the Company in excess of the full amount of all outstanding
Investments of the Company and its Restricted Subsidiaries in Unrestricted
Subsidiaries, except that such dividends may be used to make an Investment only
if the Consolidated Coverage Ratio for the Company's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such Investment is made would have been
at least 2.25 to 1.
"Permitted Refinancing Indebtedness" means any Indebtedness or Disqualified
Stock of the Company or any of its Restricted Subsidiaries issued in exchange
for, or the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness of the Company or any of its Restricted
Subsidiaries, so long as (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus premium and accrued
interest on, the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of reasonable expenses (including
defeasance costs) incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date the same as or later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or
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refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by (a) the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
or (b) the Company.
"Representative" means any trustee, agent or representative for any issue
of Senior Debt, but if and for so long as any Senior Debt lacks such a
representative, the Representative for such Senior Debt shall at all times be
the holders of a majority in outstanding principal amount of such Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"RCVP" means Rainbow Casino-Vicksburg Partnership, L.P., a Mississippi
limited partnership.
"Secured Indebtedness" means any Indebtedness of the Company or a
Guarantor, as applicable, secured by a Lien.
"Senior Debt" means, with respect to the Company or any Guarantor (i) all
Indebtedness outstanding under Credit Facilities and all Interest Swap and
Hedging Obligations, (ii) any other Indebtedness permitted to be incurred by the
Company or such Guarantor, as the case may be, under the terms of the Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to the
Notes (in the case of Senior Debt of the Company) or the relevant Subsidiary
Guarantee (in the case of Senior Debt of such Guarantor), and (iii) all
Obligations with respect to the foregoing. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (t) any Indebtedness
described under clause (xii) of "Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock", (u) any liability for federal, state, local or
other taxes owed or owing by the Company or such Guarantor, as the case may be,
(v) any Indebtedness of the Company or such Guarantor to any of their respective
Subsidiaries, (w) any trade payables, (x) that portion of any Indebtedness which
at the time of incurrence is incurred in violation of the Indenture (but as to
any such Indebtedness under the New Credit Facility, no such violation will be
deemed to exist if the Representative of the Lenders thereunder has received an
officer's certificate of the Company to the effect that the issuance of such
Indebtedness does not violate this Indenture and, if incurred pursuant to the
first paragraph under the limitation on incurrence of indebtedness covenant,
setting forth in reasonable detail the reasons therefor), (y) any Indebtedness
represented by the 12 7/8% Notes that remain outstanding after the date of the
Indenture and any Indebtedness represented by any guarantees made by the
Guarantors in respect thereof, or (z) any Indebtedness of any of the Company's
Subsidiaries existing on the date of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
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"SVS" means Southern Video Services, Inc., a Louisiana corporation.
"Unrestricted Subsidiary" means any Subsidiary (other than the Key
Subsidiaries or any successor to any of them) that is designated by the Board of
Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only
to the extent that such Subsidiary: (i) has no Indebtedness other than
Non-Recourse Debt; (ii) is a Person with respect to which neither the Company
nor any of its Restricted Subsidiaries has any direct or indirect obligation (a)
to subscribe for additional Equity Interests or (b) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (iii) has not guaranteed or otherwise directly
or indirectly provided credit support for any Indebtedness of the Company or any
of its Restricted Subsidiaries. Any such designation by the Board of Directors
must be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"Certain Covenants -- Restricted Payments". If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary will be deemed
to be incurred by a Restricted Subsidiary of the Company as of such date (and,
if such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock", the Company shall be in default
of such covenant).
"VDS" means Video Distributing Services, Inc., a Louisiana corporation.
"VSI" means Video Services, Inc., a Louisiana corporation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares or shares
held by foreign nationals in each case to the extent required by applicable law)
at the time is owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
EXISTING NOTES; REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the Registration Rights Agreement, the Company has agreed to
file with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to the Exchange Notes.
Upon the effectiveness of the Registration Statement, the Company will offer to
the Holders of Transfer Restricted Securities pursuant to the Exchange Offer who
are able to make certain representations the opportunity to exchange their
Transfer Restricted Securities for Exchange Notes. If (i) the Company is not
required to file the Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any Holder of Transfer Restricted Securities notifies
the Company prior to the 20th day following consummation of the Exchange Offer
that (A) it is prohibited by law or Commission policy from participating in the
Exchange Offer, (B) it may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the prospectus
contained in the Registration Statement is not appropriate or available for such
resales or (C) it is a broker-dealer and owns Existing Notes acquired directly
from the Company or an affiliate of the Company, the Company will file with the
Commission a Shelf Registration Statement to cover resales of the Existing Notes
by the Holders thereof who satisfy certain conditions relating to the provision
of
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information in connection with the Shelf Registration Statement. The Company
will use its best efforts to cause the applicable registration statement to be
declared effective as promptly as possible by the Commission. For purposes of
the foregoing, "Transfer Restricted Securities" means each Note until such time
as Rule 144 under the Act or any successor provision is available for sales of
the Notes, or, if earlier, (i) the date on which such Existing Note has been
exchanged by a person other than a broker-dealer for a Exchange Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of an Existing Note for a Exchange Note, the date on which such Exchange
Note is sold to a purchaser who receives from such broker-dealer on or prior to
the date of such sale a copy of the prospectus contained in the Registration
Statement, (iii) the date on which such Existing Note has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Existing Note is
distributed to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will file
an Registration Statement with the Commission on or prior to 60 days after the
closing date of the sale of the Existing Notes to the Initial Purchaser, (ii)
the Company will use its best efforts to have the Exchange Offer Registration
Statement declared effective by the Commission on or prior to 150 days after the
closing date of the sale of the Existing Notes to the Initial Purchaser, (iii)
unless the Exchange Offer would not be permitted by applicable law or Commission
policy, the Company will commence the Exchange Offer and use its best efforts to
issue on or prior to 30 business days after the date on which the Registration
Statement was declared effective by the Commission Exchange Notes in exchange
for all Existing Notes tendered prior thereto in the Exchange Offer and (iv) if
obligated to file the Shelf Registration Statement, the Company will use its
best efforts to file the Shelf Registration Statement with the Commission on or
prior to 30 days after such filing obligation arises and to cause the Shelf
Registration to be declared effective by the Commission on or prior to 60 days
after such obligation arises.
If (a) the Company fails to file any of the registration statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such registration statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Registration Statement, or (d) the Shelf
Registration Statement or the Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of the
Notes during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (a) through (d) above, a "Registration
Default"), then the Company will pay Liquidated Damages to each Holder of Notes
with respect to the first 90-day period immediately following the occurrence of
the first Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Notes held by such Holder. The amount of the Liquidated
Damages will increase by an additional $.05 per week per $1,000 principal amount
of Notes with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $.50
per week per $1,000 principal amount of Notes. All accrued Liquidated Damages
will be paid by the Company on each Damages Payment Date (as defined in the
Registration Rights Agreement) to the Global Note Holder (as defined in the
Registration Rights Agreement) by wire transfer of immediately available funds
or by federal funds check and to Holders of certificated securities by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Following the cure
of all Registration Defaults, the accrual of Liquidated Damages will cease. No
holder of Existing Notes may include any of such Existing Notes in any Shelf
Registration Statement pursuant to the Registration Rights Agreement unless and
until such holder furnishes to the Company in writing, within 20 business days
after receipt of a request therefor, such information as the Company may
reasonably request for use in connection with any Shelf Registration Statement
or prospectus. No holder of Existing Notes will be entitled to Liquidated
Damages pursuant to the Registration Rights Agreement unless and until such
holder has used its best efforts to provide all such reasonably requested
information. Each holder as to which any Shelf Registration Statement is being
effected must agree to furnish promptly to the Company all information required
to be disclosed in order to make the information previously furnished to the
Company by such holder not materially misleading.
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Holders of Existing Notes will be required to deliver information to be
used in connection with the Shelf Registration Statement and to provide comments
on the Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Notes included in the Shelf
Registration Statement and benefit from the provisions regarding Liquidated
Damages set forth above. For each Existing Note tendered to the Company pursuant
to the Exchange Offer and not validly withdrawn by the Holder thereof, the
Holder of such Existing Note will receive an Exchange Note having a principal
amount equal to the principal amount of such surrendered Existing Note.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and subject
to certain expectations with respect to "affiliates" of the Company, the Company
believes that the Exchange Notes may be offered for resale, resold and otherwise
transferred by the Holders thereof without further compliance with the
registration and prospectus delivery provisions of the Securities Act. See "Plan
of Distribution".
Each holder of the Existing Notes who wishes to exchange such Existing
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations. Any broker-dealer who holds Existing Notes that were acquired
for its own account as a result of market-making activities or other trading
activities may exchange such Existing Notes pursuant to the Exchange Offer, but
such broker-dealer may be deemed an "underwriter" within the meaning of the
Securities Act and therefore must deliver a prospectus meeting the requirements
of the Securities Act in connection with any resales of the Exchange Notes
received by such broker-dealer in the Exchange Offer. Pursuant to the
Registration Rights Agreement, such prospectus delivery requirement may be
satisfied by the delivery of this Prospectus. See "Plan of Distribution".
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Registration Rights Agreement, a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal U.S. federal income tax
consequences resulting from the beneficial ownership of Existing Notes by
certain persons and from the exchange of the Existing Notes for Exchange Notes
received pursuant to the Exchange Offer. This summary does not purport to
consider all the possible U.S. federal tax consequences of the purchase,
ownership or disposition of the Notes and is not intended to reflect the
particular tax position of any beneficial owner. It deals only with Notes held
as capital assets. Moreover, except as expressly indicated, it addresses initial
purchasers who purchased at the initial offering price and does not address
beneficial owners that may be subject to special tax rules, such as banks,
insurance companies, dealers in securities or currencies, purchasers that hold
Notes as a hedge against currency risks or as part of a straddle with other
investments or as part of a "synthetic security" or other integrated investment
(including a "conversion transaction") comprised of a Note and one or more other
investments, or purchasers that have a "functional currency" other than the U.S.
dollar. Except to the extent discussed below under "Non-U.S. Holders", this
summary is not applicable to persons other than "U.S. Holders" (defined below).
This summary is based upon the U.S. federal tax laws and regulations as now in
effect and as currently interpreted and does not take into account possible
changes in such tax laws or such interpretations, any of which may be applied
retroactively. It does not include any description of the tax laws of any state,
local or foreign government that may be applicable to the Notes or holders
thereof. Persons considering the exchange of Existing Notes for Exchange Notes
should consult their own tax advisors concerning the application of the U.S.
federal tax laws to their particular situations as well as any consequences to
them under the laws of any other taxing jurisdiction.
U.S. HOLDERS
Payments of Interest. In general, interest on a Note will be taxable to a
beneficial owner who or which is (i) an individual who is a citizen or resident
of the United States, (ii) a corporation, partnership or other entity created or
organized under the laws of the United States or any state thereof (including
the District of Columbia) or (iii) an estate or trust subject to United States
federal income taxation on its income without
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regard to its source (a "U.S. Holder") as ordinary income at the time it is
received or accrued, depending on the Holder's method of accounting for tax
purposes.
Exchange Offer. The exchange of Existing Notes for the Exchange Notes
pursuant to the Exchange Offer will not be treated as an "exchange" for federal
income tax purposes because the Exchange Notes will not be considered to differ
materially in kind or extent from the Existing Notes. As a result, there will be
no federal income tax consequences to Holders exchanging the Existing Notes
pursuant to the Exchange Offer.
NON-U.S. HOLDERS
Under present U.S. federal income and estate tax law and subject to the
discussion of backup withholding below:
(a) payments of principal and interest on the Exchange Notes by the
Company or any agent of the Company to any Holder that is not a U.S. Holder
(a "Non-U.S. Holder") will not be subject to U.S. federal withholding tax,
provided that (i) the Non-U.S. Holder does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote, (ii) the Non-U.S. Holder is not a
controlled foreign corporation that is related to the Company (directly or
indirectly) through stock ownership and (iii) either (A) the beneficial
owner of the Exchange Notes certifies to the Company or its agent, under
penalties of perjury, that it is not a "United States person" (as defined
in the Code) and provides its name and address, or (B) a securities
clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the Notes on behalf of the beneficial
owner certifies to the Company or its agent under penalties of perjury that
such statement has been received from the beneficial owner by it or by a
financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof;
(b) a Non-U.S. Holder will not be subject to U.S. federal withholding
tax on gain realized on the sale, exchange or redemption of an Exchange
Note; and
(c) a Note held by an individual who at the time of death is not a
citizen or resident of the United States will not be subject to U.S.
federal estate tax as a result of such individual's death if, at the time
of such death, the individual did not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the
Company entitled to vote and the income on the Exhange Notes would not have
been effectively connected with the conduct of a trade or business by the
individual in the United States.
Regulations proposed by the IRS on April 15, 1996, if finalized in their
current form, would modify the certification requirements described in clause
(a)(iii) with respect to certain payments made after such regulations become
effective. Such proposed regulations are proposed to be effective with respect
to payments made after December 31, 1997, although the IRS has unofficially
indicated that final regulations will have an effective date of January 1, 1999.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the Existing Note or the Exchange Note is effectively connected
with the conduct of such trade or business, the Non-U.S. Holder, although exempt
from the withholding tax discussed in the preceding paragraph (provided that
such holder properly claims such exemption by furnishing a properly executed IRS
Form 4224 on or before any payment due), may be subject to U.S. federal income
tax on such interest in the same manner as if it were a U.S. Holder.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the Exchange Notes are outstanding, the
Company is required to provide the IRS with certain information, including the
Holder's name, address and taxpayer identification number, the aggregate amount
of principal and interest paid to that Holder during the calendar year and the
amount of tax withheld, if any. This obligation, however, does not apply with
respect to certain U.S. Holders, including
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corporations, tax-exempt organizations, qualified pension and profit sharing
trust and individual retirement accounts.
In the event that a U.S. Holder subject to the reporting requirements
described above fails to supply its correct taxpayer identification number in
the manner required by applicable law or underreports its tax liability, the
Company, its agent or paying agents or a broker may be required to "backup"
withhold a tax equal to 31% of each payment of interest and principal (and
premium, if any) on the Exchange Notes. This backup withholding is not an
additional tax and may be credited against the U.S. Holder's U.S. federal income
tax liability, provided that the required information is furnished to the IRS.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of an Exchange Note, if such
holder has provided the required certification that it is not a United States
person as set forth in clause (iii) in the first paragraph under "-- Non-U.S.
Holders", or has otherwise established an exemption (provided that neither the
Company not its agent has actual knowledge that the holder is a United States
person or that the conditions of any exemption are not in fact satisfied). As
noted above, proposed Treasury Regulations, if adopted in their current form,
would also provide alternative certification requirements and means for
obtaining the exemption from withholding tax.
Payment of the proceeds from the sale of an Exchange Note to or through a
foreign office of a broker generally will not be subject to information
reporting or backup withholding, except that information reporting may apply to
such payments if the broker is a United States person, a controlled foreign
corporation for United States tax purposes or a foreign person 50% or more of
whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment was effectively connected with a
U.S. trade or business. Payment of the proceeds from a sale of an Exchange Note
to or through the U.S. office of a broker is subject to information reporting
and backup withholding unless the holder or beneficial owner certifies as to its
taxpayer identification number or otherwise establishes an exemption from
information reporting and backup withholding.
PLAN OF DISTRIBUTION
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and subject
to the immediately following sentence, the Company believes that the Exchange
Notes may be offered for resale, resold and otherwise transferred by the Holders
thereof without further compliance with the registration and prospectus delivery
provisions of the Securities Act. However, any purchaser of Existing Notes who
is an "affiliate" of the Company or has any arrangement or understanding with
any person to participate in the distribution of the Exchange Notes (i) will not
be able to rely on the interpretation by the staff of the Commission set forth
in the above-mentioned no-action letters, (ii) will not be able to tender its
Existing Notes in the Exchange Offer and (iii) must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any sale or transfer of the Existing Notes unless such sale or transfer is made
pursuant to an exemption from such requirements.
Each holder of the Existing Notes who wishes to exchange such Existing
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) it is not an "affiliate," as
defined in Rule 405 of the Securities Act, of the Company, (ii) it is not
engaged in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in a distribution of the Exchange
Notes and (iii) any Exchange Notes to be received by it will be acquired in the
ordinary course of business. In addition, any broker-dealer who holds Existing
Notes that were acquired for its own account as a result of market-making
activities or other trading activities may exchange such Existing Notes pursuant
to the Exchange Offer, but such broker-dealer may be deemed an "underwriter"
within the meaning of the Securities Act and therefore must deliver a prospectus
meeting the requirements of the Securities Act in connection with any resales of
the Exchange Notes received by such broker-dealer in the Exchange Offer.
Pursuant to the Registration Rights Agreement, such prospectus delivery
requirement may be satisfied by the delivery of this Prospectus.
115
<PAGE> 117
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Existing Notes against certain liabilities, including
liabilities under the Securities Act, as set forth in the Registration Rights
Agreement.
LEGAL MATTERS
Certain legal matters regarding the validity of the Exchange Notes offered
hereby will be passed upon for the Company by Milbank, Tweed, Hadley & McCloy,
New York, New York. Michael Hirschfeld, a partner of Milbank, Tweed, Hadley &
McCloy, is a director of the Company.
EXPERTS
The audited financial statements of the Company included in this Prospectus
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, to the extent and for the periods indicated in their report
thereon. The audited financial statements of BGII included in this Prospectus
have been audited by Coopers & Lybrand LLP, independent certified public
accountants, to the extent and for the periods indicated in their reports
thereon. Such financial statements have been included in reliance upon the
reports of KPMG Peat Marwick LLP and Coopers & Lybrand L.L.P., appearing
elsewhere herein, and upon the authority of said firms as experts in accounting
and auditing.
116
<PAGE> 118
FINANCIAL STATEMENT INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
ALLIANCE GAMING CORPORATION
Audited Consolidated Financial Statements
Independent Auditors' Report...................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997.......................... F-3
Consolidated Statements of Operations for the Three Years Ended June 30, 1995,
1996 and 1997.................................................................. F-4
Consolidated Statement of Stockholders' Equity for the Years Ended June 30, 1995,
1996 and 1997.................................................................. F-5
Consolidated Statements of Cash Flows for the Three Years Ended June 30, 1995,
1996 and 1997.................................................................. F-6
Notes to Consolidated Financial Statements........................................ F-7
BALLY GAMING INTERNATIONAL, INC.
Audited Consolidated Financial Statements
Report of Independent Accountants................................................. F-35
Consolidated Balance Sheets, December 31, 1995 and 1994........................... F-36
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994
and 1993....................................................................... F-37
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1995, 1994 and 1993............................................................ F-38
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994
and 1993....................................................................... F-39
Notes to Consolidated Financial Statements........................................ F-40
Unaudited Condensed Consolidated Financial Statements for the Three Months Ended
March 31, 1996
Condensed Consolidated Balance Sheets -- March 31, 1996 (unaudited) and December
31, 1995....................................................................... F-59
Consolidated Statements of Operations (unaudited) -- for the Three Months Ended
March 31, 1996 and 1995........................................................ F-60
Consolidated Statement of Stockholders' Equity (unaudited) -- for the Three Months
Ended March 31, 1996........................................................... F-61
Condensed Consolidated Statements of Cash Flows (unaudited) -- for the Three
Months Ended March 31, 1996 and 1995........................................... F-62
Notes to Condensed Consolidated Financial Statements (unaudited).................. F-63
</TABLE>
F-1
<PAGE> 119
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Alliance Gaming Corporation:
We have audited the accompanying consolidated balance sheets of Alliance
Gaming Corporation and Subsidiaries as of June 30, 1996 and 1997 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, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Las Vegas, Nevada
September 3, 1997
F-2
<PAGE> 120
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 48,057 $ 28,924
Accounts and notes receivable, net of allowance for doubtful accounts
of $17,727 and $21,929............................................ 93,502 87,701
Inventories, net of reserves of $9,484 and $8,856.................... 41,656 37,329
Other current assets................................................. 8,354 9,627
-------- --------
Total current assets.............................................. 191,569 163,581
-------- --------
Long-term notes receivable, net of allowance for doubtful accounts of
$1,770 and $1,972.................................................... 14,184 8,981
Leased equipment, net.................................................. 3,507 7,902
Property, plant and equipment, net..................................... 74,577 74,647
Excess of costs over net assets of acquired businesses, net of
accumulated amortization of $422 and $1,723.......................... 60,292 62,098
Intangible assets, net of accumulated amortization of $5,216 and
$9,626............................................................... 20,247 18,231
Deferred tax assets, net of valuation allowance........................ 5,459 11,776
Other assets, net of reserves of $3,679 and $3,502..................... 5,669 4,800
-------- --------
$375,504 $352,016
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 16,240 $ 14,270
Accrued compensation and related costs............................... 7,309 6,974
Other accrued liabilities............................................ 31,234 30,418
Current maturities of long-term debt................................. 25,777 1,124
-------- --------
Total current liabilities......................................... 80,560 52,786
-------- --------
Senior Secured Notes, net of unamortized discount of $3,071 and
$2,776............................................................... 150,929 151,224
Other long-term debt, less current maturities.......................... 14,638 21,491
Deferred tax liabilities............................................... 4,731 10,365
Other liabilities...................................................... 2,100 2,068
-------- --------
Total liabilities............................................ 252,958 237,934
-------- --------
Minority interest...................................................... 1,148 1,546
Series B Preferred Stock, $.10 par value, $100 liquidation value;
684,551 and 754,198 shares issued and outstanding, net of discount... 51,552 58,981
Commitments and contingencies
Stockholders' equity:
Special Stock, 10,000,000 shares authorized:
Series E, $100 liquidation value; 113,160 shares and 123,689
shares issued and outstanding.................................... 11,316 12,368
Common Stock, $.10 par value; 175,000,000 shares authorized,
31,763,000 and 31,852,000 shares issued and outstanding........... 3,176 3,185
Additional paid-in capital........................................... 139,031 138,590
Cumulative translation adjustment.................................... (287) (11,719)
Accumulated deficit.................................................. (83,390) (88,869)
-------- --------
Total stockholders' equity................................... 69,846 53,555
-------- --------
$375,504 $352,016
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 121
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Gaming equipment and systems............................. $ -- $ 10,575 $134,734
Wall machines and amusement games........................ -- 3,356 131,934
Route operations......................................... 106,854 109,938 127,028
Casino operations........................................ 25,134 48,509 51,450
-------- -------- --------
131,988 172,378 445,146
-------- -------- --------
Costs and expenses:
Cost of gaming equipment and systems..................... -- 7,213 84,496
Cost of wall machines and amusement games................ -- 2,022 68,426
Cost of route operations................................. 79,887 84,212 95,716
Cost of casino operations................................ 14,231 22,046 22,269
Selling, general and administrative...................... 28,249 30,620 100,415
Provision for doubtful receivables....................... 400 1,020 9,059
Depreciation and amortization............................ 9,520 10,988 22,606
Direct acquisition costs................................. 1,669 55,843 --
Unusual items............................................ 2,293 5,498 700
-------- -------- --------
136,249 219,462 403,687
-------- -------- --------
Operating income (loss).................................... (4,261) (47,084) 41,459
Other income (expense):
Interest income.......................................... 2,798 1,571 1,620
Interest expense......................................... (8,133) (8,897) (23,626)
Rainbow royalty.......................................... (810) (4,070) (4,722)
Minority interest........................................ (397) (963) (1,092)
Other, net............................................... 317 301 139
-------- -------- --------
Income (loss) before income taxes.......................... (10,486) (59,142) 13,778
Income tax provision....................................... (265) (755) (7,993)
-------- -------- --------
Net income (loss).......................................... (10,751) (59,897) 5,785
Special Stock dividends, including repurchase premium...... -- (362) (11,974)
-------- -------- --------
Net loss applicable to common shares....................... $(10,751) $(60,259) $ (6,189)
======== ======== ========
Net loss per common share.................................. $ (0.95) $ (4.64) $ (0.19)
======== ======== ========
Weighted average common shares outstanding................. 11,300 13,000 31,822
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 122
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN 000'S)
<TABLE>
<CAPTION>
INITIAL SERIES
AND SERIES E
COMMON STOCK SPECIAL STOCK ADDITIONAL UNREALIZED CUMULATIVE TOTAL
---------------- ---------------- PAID-IN ACCUM. LOSS ON TRANSLATION STOCKHOLDERS'
SHARES DOLLARS SHARES DOLLARS CAPITAL DEFICIT SECURITIES ADJUSTMENT EQUITY
------ ------- ------ ------- ---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 30,
1994................... 10,506 $1,051 1,333 $ 133 $ 26,716 $(12,380) $ (421) -- $ 15,099
Net loss................. -- -- -- -- -- (10,751) -- -- (10,751)
Shares issued for
acquisition............ 712 71 -- -- 3,683 -- -- -- 3,754
Compensatory stock
issued................. 250 25 -- -- 1,288 -- -- -- 1,313
Net change in unrealized
loss on securities
available for sale..... -- -- -- -- -- -- 105 -- 105
Shares issued upon
exercise of options.... 186 18 -- -- 447 -- -- -- 465
------- ------ ------- ------- -------- -------- ------ -------- --------
BALANCES AT JUNE 30,
1995................... 11,654 1,165 1,333 133 32,134 (23,131) (316) -- 9,985
Net loss................. -- -- -- -- -- (59,897) -- -- (59,897)
Shares issued for
acquisition and related
financing.............. 2,145 215 -- -- 7,496 -- -- -- 7,711
Initial Series Special
Stock converted into
common stock........... 1,333 133 (1,333) (133) -- -- -- -- --
Conversion of
subordinated
debentures............. 15,136 1,513 113 11,316 95,151 -- -- -- 107,980
Common stock issued in
private placement...... 1,495 150 -- -- 4,250 -- -- -- 4,400
Special Stock dividend... -- -- -- -- -- (362) -- -- (362)
Net change in unrealized
loss on securities
available for sale..... -- -- -- -- -- -- 316 -- 316
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (287) (287)
------- ------ ------- ------- -------- -------- ------ -------- --------
BALANCES AT JUNE 30,
1996................... 31,763 3,176 113 11,316 139,031 (83,390) -- (287) 69,846
Net income............... -- -- -- -- -- 5,785 -- -- 5,785
Shares issued upon
exercise of options.... 92 9 -- -- 281 -- -- -- 290
Adjustments to
acquisition
consideration.......... (3) -- -- -- (12) -- -- -- (12)
Special Stock
dividends.............. -- -- 10 1,052 -- (11,264) -- -- (10,212)
Special Stock repurchase
premium................ -- -- -- -- (710) -- -- -- (710)
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (11,432) (11,432)
------- ------ ------- ------- -------- -------- ------ -------- --------
BALANCES AT JUNE 30,
1997................... 31,852 $3,185 123 $12,368 $138,590 $(88,869) $ -- $(11,719) $ 53,555
======= ====== ======= ======= ======== ======== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 123
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $(10,751) $(59,897) $ 5,785
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 9,520 10,988 22,606
Amortization of debt discounts........................ 297 245 807
Loss on debenture conversion.......................... -- 30,079 --
Writedown of other assets............................. 2,796 6,095 1,075
Loss on sale of assets................................ -- 105 1,233
Provision for doubtful receivables.................... 400 1,020 9,059
Other................................................. 1,282 1,544 (651)
Change in operating assets and liabilities, net of
effects of businesses acquired:
Accounts and notes receivable......................... 1,345 (5,934) (4,601)
Inventories........................................... (40) 5,844 (6,898)
Other current assets.................................. 255 (95) (1,549)
Accounts payable...................................... (447) (1,889) (1,970)
Accrued liabilities................................... (2,355) 12,780 (760)
-------- -------- --------
Net cash provided by operating activities........ 2,302 885 24,136
-------- -------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired......... 2,481 (79,209) --
Additions to property, plant and equipment............... (8,887) (8,101) (13,257)
Proceeds from disposal of property and equipment......... 351 2,282 254
Sales (purchases) of securities available for sale....... (11,086) 13,516 --
Additions to intangible assets........................... (425) (1,097) (6,749)
Additions to other long-term assets...................... (5,427) (3,994) (1,825)
-------- -------- --------
Net cash used in investing activities............ (22,993) (76,603) (21,577)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt, net of expenses............ -- 145,420 --
Reduction of long-term debt.............................. (3,125) (51,446) (6,774)
Net change in credit lines............................... -- -- (11,578)
Issuance of Series B Preferred Stock, net of discount.... -- 15,000 --
Fees paid for conversion of convertible debentures....... -- (3,333) --
Issuance of common stock................................. 465 4,400 --
Repurchase of Series B Preferred Stock................... -- -- (3,879)
Proceeds from exercise of stock options.................. -- -- 767
-------- -------- --------
Net cash provided by (used in) financing activities... (2,660) 110,041 (21,464)
-------- -------- --------
Effect of exchange rate changes on cash.................. -- -- (228)
-------- -------- --------
Cash and cash equivalents:
Increase (decrease) for year.......................... (23,351) 34,323 (19,133)
Balance, beginning of year............................ 37,085 13,734 48,057
-------- -------- --------
Balance, end of year.................................. $ 13,734 $ 48,057 $ 28,924
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 124
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
Alliance Gaming Corporation ("Alliance" or the "Company") is a diversified,
worldwide gaming company that (i) designs and manufactures gaming machines and
computerized monitoring systems for gaming machines, (ii) owns and manages a
significant installed base of gaming machines, (iii) owns and operates two
regional casinos and (iv) in Germany, is a full-service supplier of wall-mounted
gaming machines and amusement games
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Alliance Gaming Corporation, and its wholly-owned and partially owned,
controlled subsidiaries. In the case of Video Services, Inc. ("VSI"), the
Company owns 100% of the voting stock. The Company is entitled to receive 71% of
dividends declared by VSI, if any, at such time that dividends are declared.
Effective March 29, 1995 the Company acquired the general partnership interest
in a dockside casino in Vicksburg, Mississippi and accordingly the results of
operations of the Rainbow Casino have been included in the accompanying
consolidated financial statements since that date. Effective June 18, 1996, the
Company acquired Bally Gaming International, Inc. ("BGII"); the results of
operations of BGII have been included in the accompanying consolidated financial
statements since that date. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
prior year financial statements to conform with the current year presentation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid debt instruments purchased with
an original maturity of three months or less at the date of purchase and are
carried at cost, which approximates market value.
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.
Inventories consist of the following at June 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN 000'S)
<S> <C> <C>
Raw materials............................................ $13,339 $ 9,356
Work-in-process.......................................... 1,264 1,683
Finished goods........................................... 27,053 26,290
------- -------
Total.......................................... $41,656 $37,329
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated over the
estimated useful lives or lease terms, if less, using the straight line method
as follows; buildings and improvements, 30-39 years; gaming equipment, 5-7
years; furniture, fixtures and equipment, 3-10 years; and leasehold
improvements, 5-20 years.
F-7
<PAGE> 125
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Property, plant and equipment consists of the following at June 30, 1996
and 1997:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN 000'S)
<S> <C> <C>
Land................................................... $ 20,336 $ 21,610
Buildings and leasehold improvements................... 29,819 30,027
Gaming equipment....................................... 36,895 46,247
Furniture, fixtures and equipment...................... 15,614 16,458
Less accumulated depreciation and amortization......... (28,087) (39,695)
-------- --------
Property, plant and equipment, net..................... $ 74,577 $ 74,647
======== ========
</TABLE>
EXCESS OF COSTS OVER NET ASSETS OF ACQUIRED BUSINESSES
Excess of costs over net assets of acquired businesses is the excess of the
cost over the fair value of net assets of acquired businesses and is generally
amortized on the straight-line method over a period of 40 years.
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 24 years,
with an average life of approximately 10 years, and deferred issuance costs for
financing which are amortized over the life of the related financing. The
Company continually evaluates whether events and circumstances have occurred
that indicate the estimated useful life may warrant revision or that the
remaining balance may not be recovered.
ESTIMATES
The preparation of the consolidated 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.
IMPAIRMENT RECOGNITION
Management evaluates the carrying value of all long-lived assets to
determine recoverability based on an analysis of non-discounted future cash
flows. Based on its most recent analysis, management believes that no material
impairment in the value of long-lived assets exists at June 30, 1997.
REVENUE RECOGNITION
The Company sells equipment and systems 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 amusement games is normally recognized
at the time products are shipped and title has passed to the customer. Revenue
from sales of software included in computerized monitoring systems is recognized
at the time the system is accepted by the customer, which normally coincides
with installation of the equipment. Revenue from sales of hardware included in
computerized monitoring systems is recognized at the time the product is
shipped.
F-8
<PAGE> 126
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with industry practice, the Company recognizes gaming
revenues as the net win from gaming machine operations, which is the difference
between coins and currency deposited into the machines 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 route operations
which operate under revenue-sharing arrangements and revenue-sharing payments as
a cost of route operations. The Company monitors its exposure for credit losses
and maintains allowances for anticipated losses.
UNUSUAL ITEMS
The Company discloses as a separate component of operating income (loss),
income and expense items that are unusual and infrequently occurring. During the
year ended June 30, 1997 the Company incurred unusual charges of $0.7 million
related primarily to separation costs of Alliance personnel subsequent to the
BGII acquisition.
During the year ended June 30, 1996 the Company incurred unusual charges
for the write off of its investments in projects in Kansas and one Native
American development project, totaling $3.4 million. Also in fiscal year 1996
the Company incurred unusual charges in its route operations for reserves for
certain parts inventories which became obsolete due to technological changes to
gaming devices being deployed as a result of the new Gambler's Bonus product, as
well as an accrual to reserve for the present value of the future lease payments
for one small casino location for which cash flows received under the
participation agreement were inadequate to service the building lease paid by
the Company, totaling $2.1 million.
During 1995 the Company incurred unusual items consisting of $1.3 million
in compensation expense recognized upon the issuance of 250,000 shares of Common
Stock to the Company's then President, Chief Executive Officer and Chairman of
the Board, in connection with his employment agreement, and $1.0 million related
to certain contracts and termination costs.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is their
local currency. Assets and liabilities of foreign operations are translated into
U.S. dollars at the rate of exchange at the end of the period, and the income
and expense accounts are translated at the average rate of exchange for the
period. Translation adjustments are reflected as a separate component of
stockholders' equity. Gains and losses on foreign currency transactions are
included in the accompanying consolidated statements of operations.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
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. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date. Taxes on income of the Company's foreign
subsidiaries are provided at the tax rates applicable to the tax jurisdictions
in which they are located.
LOSS PER SHARE OF COMMON STOCK
Loss per share of common stock has been computed by dividing the net loss
applicable to common stockholders by the weighted average number of shares of
common stock outstanding. Fully diluted earnings per share is not presented
because the effect of the common stock equivalents would be anti-dilutive.
F-9
<PAGE> 127
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The carrying amounts at June 30,
1997 for the Company's financial instruments approximate fair value.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share"
(SFAS No. 128) which establishes standards for computing and presenting earnings
per share ("EPS"), and supersedes APB Opinion No. 15. The Statement replaces
primary EPS with basic EPS and requires dual presentation of basic and diluted
EPS. The Statement is effective for both interim and annual periods ending after
December 15, 1997 and earlier application is not permitted. After adoption, all
prior period EPS data must be restated to conform to SFAS No. 128. For the years
ended June 30, 1995, 1996 and 1997 the basic EPS does not differ from the
reported primary EPS, and diluted EPS would have been antidilutive for each of
these periods.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes requirements for disclosure of comprehensive income
and becomes effective for the Company for the year ending June 30, 1999.
Comprehensive income includes items such as foreign currency translation
adjustments which are currently being presented by the Company as a component of
stockholders' equity. This is a disclosure item only and will have no impact on
reported earnings per share.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers and will supersede SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The new standard becomes effective for years
beginning after December 15, 1997. This is a disclosure item only and will have
no impact on reported earnings per share.
2. ACQUISITIONS
On June 18, 1996, the Company completed the acquisition of all the
outstanding shares of BGII. The consideration paid consisted of approximately
$77.2 million in cash, $3.0 million in the Company's common stock and $36.6
million in the Company's Series B Preferred Stock which totaled $11.84 per share
for the 9,855,500 shares of BGII outstanding (excluding the 1,000,000 shares
beneficially owned by the Company). The acquisition has been accounted for as a
purchase and the results of operations of BGII have been included in the
consolidated financial statements beginning on June 18, 1996. The purchase price
was allocated based on estimated fair values at the date of the acquisition. At
June 30, 1997, the excess of purchase price over the fair value of the net
assets acquired was approximately $61.2 million which is being amortized on a
straight-line basis over 40 years. During fiscal 1997 the Company made certain
adjustments aggregating approximately $6.6 million to the goodwill originally
recorded, related to the settlement of certain pre-acquisition contingencies.
On a pro forma basis for the year ended June 30, 1996 assuming the
acquisition of BGII occurred on July 1, 1995, the Company would have had
revenues of $397.9 million and a net loss applicable to common shares of $26.5
million (or an $0.83 loss per common share).
The Company incurred direct acquisition costs of $1.7 million and $55.8
million during the fiscal years ended June 30, 1995, and 1996, respectively. The
direct acquisition costs have been presented separately in the Company's
consolidated statements of operations, as management believes that such
presentation provides additional relevant information. Direct acquisition costs
in fiscal year 1996 included the $30.1 million non-
F-10
<PAGE> 128
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash accounting loss on the exchange offer component of the financing for the
acquisition plus legal, accounting, transaction financing fees, public and
investor relations, printing costs and related costs.
3. RECEIVABLES
The Gaming Equipment and Systems and Wall Machines and Amusement Games
business units grant 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
Company's Nevada route operations from time to time make loans to location
operators for build-outs, tenant improvements and initial operating expenses,
which are generally secured by the personal guarantees of the operators and the
locations' assets. The majority of the loans bear interest rates between 8% to
14%. They are expected to be repaid over a period of time not to exceed the life
of the revenue sharing arrangement and have due dates ranging from July 1997 to
April 2007.
The following table represents, at June 30, 1997, scheduled collections of
accounts and notes receivable (net of allowances for doubtful accounts) by
fiscal year:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
- --------------------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL
- ------- ------ ------ ---- ---- ---------- -------
(IN 000'S)
<S> <C> <C> <C> <C> <C> <C>
$87,701 $5,024 $2,001 $381 $562 $1,013 $96,682
======= ====== ====== ==== ==== ======= =======
</TABLE>
4. REFINANCING TRANSACTION
In August 1997 the Company effected a series of related transactions (as
described below, the "Refinancing"). The Refinancing consisted of the private
placement of $150 million of Senior Subordinated Notes and the closing of $230
million of bank financing. The bank financing provides for (i) term loans in the
aggregate amount of up to $140.0 million, comprised of a $75.0 million tranche
with a 7 1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche with
an 8-year term (the "Tranche C Term Loan", and together with the Tranche B Term
Loan, the "Term Loan Facilities") and a $25.0 million tranche with a 7 1/2-year
term (the "Delayed Draw Term Facility"); and (ii) a $90.0 million revolving
credit facility (the "Revolving Credit Facility") with a 6-year term. Each of
these credit facilities are variable rate borrowings in accordance with a credit
grid. The interest rates at the highest level of the credit grid and maturity
dates are as follows:
<TABLE>
<CAPTION>
INITIAL MATURITY
RATE DATE
------------- ----------------
<S> <C> <C>
Tranche B Term Loan.............................. LIBOR + 2.75% January 31, 2005
Tranche C Term Loan.............................. LIBOR + 3.00% July 31, 2005
Delayed Draw Term Facility....................... LIBOR + 2.75% January 31, 2005
Revolving Credit Facility........................ LIBOR + 2.25% July 31, 2003
</TABLE>
As part of the Refinancing, the Company used the proceeds of the Senior
Subordinated Note offering, together with borrowings under the Revolving Credit
Facility, the Term Loan Facilities and the Delayed Draw Term Facility and cash
on hand to fund (a) the repurchase at a premium of substantially all of the
Company's 12 7/8% Notes, plus accrued interest to August 8, 1997 totaling $183.7
million, (b) the redemption at liquidation value of all of the Company's Series
B Preferred Stock on September 8, 1997 totaling $77.6 million, (c) the purchase
from HFS Gaming Corporation of the right to receive royalty payments based on
revenues of the Rainbow Casino and the repayment of related debt owed to an HFS
affiliate, National Gaming Mississippi, Inc. on August 12, 1997 totaling $26.3
million and (d) the payment of transaction fees and expenses totaling $16.6
million. At June 30, 1997, based on the terms of the new $90.0 million Revolving
Credit Facility, the Company would have been able to borrow the full amount of
the revolving credit line, on
F-11
<PAGE> 129
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which the Company had initial borrowings of approximately $14.5 million on
August 8, 1997. The borrowing base for the revolving credit facility includes
eligible receivables and inventory (as defined). Additionally, in July 1997 the
Company redeemed the remaining balance of the 7 1/2% Convertible Debentures at a
price of 104%, or a total of $1.7 million.
In conjunction with the Refinancing, the Company incurred fees, expenses,
and charges totaling approximately $78.4 million, including the premium on the
repurchase of the 12 7/8% Notes of $27.7 million and $16.4 million for the
difference between the carrying value and the liquidation value of the Series B
Preferred Stock, which will be recorded in the quarter ended September 30, 1997.
On a pro forma basis as of June 30, 1997, in comparison to the actual year end
balances, the Refinancing would have resulted in a decrease in cash and cash
equivalents of $12.8 million, a decrease in working capital of $13.5 million, an
increase in total long-term debt of $128.0 million, but the elimination of the
12 7/8% Notes and Series B Preferred Stock.
The Senior Subordinated Notes bear interest at 10%, are due in 2007, and
are general unsecured obligations of the Company, ranking subordinate in right
of payment to all Senior Debt (as defined) of the Company, including
indebtedness under the new credit facility. The Senior Subordinated Notes will
be fully and unconditionally guaranteed on a joint and several senior
subordinated basis by all existing and future domestic Restricted Subsidiaries
(as defined) of the Company, subject to certain exceptions including the
partially-owned entities through which its Mississippi casino and Louisiana
route operations are conducted. The Subsidiary Guarantees (as defined) are
general unsecured obligations of the Guarantors, ranking subordinate in right of
payment to all Senior Debt of the Guarantors. The Company will be able to
designate other current or future subsidiaries as Unrestricted Subsidiaries (as
defined) under certain circumstances. Unrestricted Subsidiaries will not be
required to issue a Subsidiary Guarantee and will not be subject to many of the
restrictive covenants set forth in the Indenture pursuant to which the Senior
Subordinated Notes were issued. The Indenture for the Company's Senior
Subordinated Notes contains various covenants, including limitations on
incurrence of additional indebtedness, on restricted payments and on dividend
and payment restrictions on subsidiaries. The Senior Subordinated Notes may not
be redeemed for the first five years. Upon the occurrence of a Change of Control
(as defined), the holders of the Senior Subordinated Notes will have the right
to require the Company to purchase their Notes at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase.
The new credit facility is guaranteed by each domestic subsidiary of the
U.S. Borrower and German Subsidiaries (both as defined), other than the entity
which holds the Company's interest in its Louisiana operations and other
non-material subsidiaries (as defined), and is subject to both a U.S. and German
Pledge Agreement (both as defined). The new credit facility contains a number of
maintenance covenants and together with the indenture, both have other
significant covenants that, among other things, restrict the ability of the
Company and certain of its subsidiaries to dispose of assets, incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, enter into certain acquisitions, repurchase equity interests (as
defined) or subordinated indebtedness, issue or sell equity interests of the
Company's subsidiaries (as defined), engage in mergers or consolidations, or
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities. After considering the Refinancing transaction
described above, the resulting maturities of long-term debt, for each of the
five fiscal years ending subsequent to June 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
- -------------------------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL
- ------- ------- ------- ------- ------- ---------- ---------
(IN 000'S)
<S> <C> <C> <C> <C> <C> <C>
$1,989 $2,468 $1,974 $1,974 $2,017 $297,944 $308,366
====== ====== ====== ====== ====== ========
</TABLE>
F-12
<PAGE> 130
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT AND LINES OF CREDIT
As discussed in Note 4, substantially all of the Company's indebtedness
shown below was repaid as part of the Refinancing. Prior to the Refinancing,
long-term debt and lines of credit at June 30, 1996 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN 000'S)
<S> <C> <C>
12 7/8% Senior Secured Notes due 2003, net of unamortized
discount of $3,071,000 and $2,776,000........................ $150,929 $151,224
7 1/2% Convertible subordinated debentures due 2003,
unsecured.................................................... 1,642 1,642
Hospitality Franchise Systems note payable, secured by the
assets of the Rainbow Casino................................. 7,864 6,569
Subordinated note payable to stockholder....................... 2,268 --
Bally Wulff revolving lines of credit.......................... 13,664 9,611
Bally Gaming and Systems revolving line of credit.............. 7,525 --
Other, secured by related equipment............................ 7,452 4,793
-------- --------
191,344 173,839
Less current maturities........................................ 25,777 1,124
-------- --------
Long-term debt, less current maturities........................ $165,567 $172,715
======== ========
</TABLE>
In connection with the acquisition of BGII, the Company issued $154.0
million aggregate principal amount of 12 7/8% Senior Secured Notes due 2003 (the
"12 7/8% Notes") and 15% Non Voting Senior Pay-in-Kind Special Stock Series B
(the "Series B Preferred Stock") with an original liquidation value of $68.5
million. The 12 7/8% Notes were secured by pledges of equity interests in
certain of the Company's subsidiaries, and were fully and unconditionally
guaranteed on a joint and several senior basis by each present and future
subsidiary, as defined.
During 1995, Hospitality Franchise Systems, Inc. ("HFS") and its affiliate,
National Gaming Mississippi, Inc. ("NGM"), together agreed to loan up to $12.0
million to the Company's majority controlled subsidiary Rainbow Casino Vicksburg
Partnership, L.P. ("RCVP"). Of these loan commitments, RCVP ultimately borrowed
$10.0 million and $1.3 million from HFS and NGM respectively. The notes bear
interest at 7.5% and 10%, respectively, and required monthly payments of
principal and interest over an 84-month period. Prior to the Refinancing, HFS
was entitled to receive a monthly royalty fee based on the Rainbow Casino's
gaming revenues of 12% on the first $40.0 million, 11% on the next $10.0
million, and 10% thereafter.
The Bally Wulff entities held two bank lines of credit which provided for
borrowings of DM16,000,000 and DM750,000 (approximately $9.2 million and $0.4
million, respectively at June 30, 1997). The DM750,000 line of credit amortizes
by DM250,000 per quarter and bears interest at 6.95%. The DM16,000,000 credit
line bears interest at a rate tied to an international borrowing rate plus 1%
(4.30% at June 30, 1997) and is due on demand. These lines were fully drawn at
June 30, 1997. The Bally Wulff entities also had a DM16,300,000 (approximately
$9.4 million at June 30, 1997) revolving line of credit for general working
capital purposes which bears interest at a rate tied to an international
borrowing rate plus 1% (4.30% at June 30, 1997) and was due on demand. No
amounts were outstanding under this line at June 30, 1997.
In March 1997, BGII's domestic subsidiary, Bally Gaming, Inc., obtained a
bank revolving line of credit which, as amended, provided 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 $30.0 million. Borrowings under this agreement bore interest at one and
one-half percent above the bank's prime rate (9.75% at June 30, 1997). Eligible
borrowing capacity under this agreement at June 30, 1997 was $30.0 million and
no amounts were outstanding at June 30, 1997.
F-13
<PAGE> 131
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1992, Alfred H. Wilms, a director and the Company's largest
stockholder, provided to VSI, a majority-controlled subsidiary of Alliance, a
subordinated loan for $6.5 million (the "VSI Loan"). During 1993 the loan was
funded and interest was charged based on the London Interbank Offered Rate plus
2%. All scheduled principal and interest payments were made until September 1996
when the loan was paid in full.
In July 1997, the Company redeemed the remaining 7 1/2% Convertible
Debentures at a price of 104%, or a total of $1.7 million.
6. STOCKHOLDERS' EQUITY, OPTIONS AND WARRANTS
SPECIAL STOCK
The Company's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of special stock ("Special Stock"). To date, there have been
three series of Special Stock issued: the Initial Series, the Series B and the
Series E. 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 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, 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 had designated an initial series of Special Stock as "Non-voting
Junior Convertible Special Stock" which consisted of 1,333,333 shares (the
"Initial Series") which were sold to Kirkland -Ft. Worth Investment Partners,
L.P. ("Kirkland"), pursuant to a Letter Agreement dated June 25, 1993, for $5.0
million. The Initial Series had certain conditions relating to regulatory
licensing, which, when met allowed the holder to convert on a one-for-one basis
into shares of common stock. The licensing condition was met and during fiscal
year 1996 Kirkland elected to convert its shares to common stock.
In June 1996, the Company completed an offering of 200,000 shares of its
Series B Preferred Stock. The Series B Preferred Stock was also issued as part
of the consideration in the BGII acquisition. During fiscal year 1997 the
Company recorded non-cash dividends in the form of additional shares of Series B
Preferred Stock totaling $10.2 million. During fiscal year 1997 the Company
repurchased a total of 18,000 shares of Series B Preferred Stock at a premium to
their carrying value of $0.7 million. As discussed in Note 4, on September 8,
1997 the Company redeemed all of the outstanding shares of Series B Preferred
Stock at their liquidation price of $100 per share, plus accrued dividends.
Each share of Series E Special Stock accrues cumulative dividends until
June 18, 1999 at an annual rate of 11 1/2%, payable quarterly in cash or, at the
Company's option, in additional shares of Series E Special Stock. The Series E
Special Stock is convertible after June 18, 1998 into common stock at a
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 Special
Stock), subject to adjustment under certain circumstances, and has a $100
liquidation preference per share. Upon default in the payment of dividends for
six consecutive dividend payment dates, the number of directors constituting the
Board of Directors of the Company will be increased by two, and the holders of
shares of Series E Special Stock will have the right, voting separately as a
class with the holders of any parity stock, to elect two directors to the
Company's Board of Directors. Such right will exist until all dividends
accumulated on such shares have been paid or set apart for payment in full.
Other than as described above, the holders of shares of Series E Special Stock
have no other voting rights except as required by law.
F-14
<PAGE> 132
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLANS
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. Generally, options are granted at the fair
market value of the Company's Common Stock at the date of the grant and are
exercisable over ten 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. Generally, options
are granted at the fair market value of the Company's Common Stock at the date
of the grant and are exercisable over five to ten years.
In April 1997 the Company's shareholders approved the 1996 Long-Term
Incentive Plan (the "1996 Plan") which provides for the issuance of up to
3,000,000 shares of common stock to Company employees, directors and designated
paid consultants. Generally, options are granted at the fair value of the
Company's common stock at the date of grant and are exercisable over five to ten
years.
Pursuant to the BGII acquisition agreement, the Company assumed BGII's
obligations with respect to each of its outstanding stock options, and such
options became exercisable pursuant to employee election (except for certain
identified former executive officers and directors of BGII) for a number of
shares of Common Stock equal to the number of shares of BGII common stock
subject thereto. Such options must be exercised by June 18, 1999.
On August 29, 1996, the Board of Directors repriced the exercise price of
previously issued, unexercised options for substantially all current employees
and directors to $3.4375 per share which was the closing price of the Company's
common stock on June 18, 1996. The closing price of the Company's common stock
on August 29, 1996 was $2.50. Transactions involving stock options are
summarized as follows:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
BALANCE, JUNE 30, 1994.......................... 1,490,500 $ 5.60
Granted....................................... 1,598,334 6.15
Exercised..................................... (186,000) 2.38
Canceled...................................... (285,000) 6.90
--------- -----
BALANCE, JUNE 30, 1995.......................... 2,617,834 6.00
Granted....................................... 689,000 3.39
Exercised..................................... -- --
Canceled...................................... (621,000) 5.97
--------- -----
BALANCE, JUNE 30, 1996.......................... 2,685,834 5.53
Granted....................................... 3,726,319 3.50
Exercised..................................... (91,836) 1.65
Canceled...................................... (1,704,000) 5.97
--------- -----
BALANCE, JUNE 30, 1997.......................... 4,616,317 $ 3.84
========= =====
Exercisable at June 30, 1997.................... 3,633,972 $ 4.02
========= =====
</TABLE>
F-15
<PAGE> 133
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following options were outstanding as of June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- --------------------------------
WEIGHTED-AVG. WEIGHTED-AVG.
RANGE OF REMAINING OUTSTANDING REMAINING OUTSTANDING
EXERCISE PRICES CONTRACTUAL LIFE SHARES CONTRACTUAL LIFE SHARES
- ----------------------------------- ------------------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
$2.25 - $3.00...................... 3.47 92,500 3.47 92,500
$3.01 - $4.00...................... 6.12 4,085,483 5.87 3,129,250
$4.01 - $5.00...................... 4.60 30,000 4.60 30,000
over $5.01......................... 1.32 408,334 1.32 382,222
--------- ---------
4,616,317 3,633,972
========= =========
</TABLE>
At June 30, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.25 - $8.375 and 5.64
years, respectively.
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 equals or exceeds the market price on
date of grant, no compensation expense is recognized. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, "Accounting for Stock Based Compensation," the
Company's net loss applicable to common shares would have increased from $60.3
million (or $4.64 per share) to $61.2 million (or $4.71 per share) on a pro
forma basis for the year ended June 30, 1996, and from a loss of $6.2 million
(or $.19 per share) to $8.3 million (or $.26 per share) on a pro forma basis for
the year ended June 30, 1997. Pro forma net loss reflects only options granted
in 1996 and 1997. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected over the
options' vesting period, generally three years, and compensation cost for
options granted prior to July 1, 1995 is not considered.
The per share weighted-average fair value of stock options granted during
1996 and 1997 was $5.80 and $1.43, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1996 and 1997: expected dividend yield of 0%, risk free interest
rate of 6.5%, a volatility factor of .79 for 1996 and .51 for 1997, and expected
lives varying from 3 to 10 years.
WARRANTS
At June 30, 1997, Mr. Wilms held warrants to purchase 2,000,000 shares of
Common Stock at $2.50 per share, subject to adjustment that expire September 1,
1998. These warrants were issued in connection with the funding of the $6.5
million five year subordinated loan for VSI.
Upon closing of the private placement of the Company's 7 1/2% Convertible
Subordinated Debentures and the $5.0 million equity investment in the Initial
Series 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 which expire September 21, 1999, but
under certain circumstances the expiration date may be extended. These warrants
are exercisable one year after the grant date and in equal increments only after
the market price of the Common Stock reaches $11, $13 and $15. 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 7 1/2% Convertible Debentures; Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") and Oppenheimer & Co., Inc.
("Oppenheimer"), respectively, each of which expire on September 21, 1999.
During the year ended June 30, 1996, in connection with the
F-16
<PAGE> 134
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commencement of employment with the Company, the then Board Chairman and then
Vice-Chairman were each granted warrants to purchase 250,000 shares of common
stock on the same terms as the Kirkland warrants described above except that
such warrants expire on September 21, 2000. At the completion of the BGII
acquisition, GSA was issued an additional 2,500,000 warrants on the same terms
as the original warrants issued to Kirkland described above. During the
financing stage of the BGII acquisition, Cerberus Partners L.P. and certain
affiliates of Canyon Partners, Inc. were issued warrants to purchase 250,000
shares of Common Stock at $5.00 per share which expire on August 31, 2002. None
of the warrants granted to Kirkland, GSA, Friend, and the now former Board
members were exercisable at June 30, 1997.
BGII had issued warrants to purchase 1,200,000 shares of common stock at a
purchase price of $12.50 per share expiring on July 29, 1998 all of which are
currently exercisable. Pursuant to the merger agreement, the Company has assumed
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.
At June 30, 1997, shares of the Company's Common Stock were reserved for
future issuance as follows:
<TABLE>
<CAPTION>
(IN 000'S)
----------
<S> <C>
Shares underlying stock options issued or issuable under the 1984 Plan..... 102
Shares underlying stock options issued or issuable under the Incentive
Plan..................................................................... 2,970
Shares underlying stock options issued or issuable under the 1996 Plan..... 3,000
Shares underlying all warrants issued...................................... 10,125
Shares for former BGII option holders...................................... 431
------
Total............................................................ 16,628
======
</TABLE>
7. INCOME TAXES
The components of the Company's income tax expense for the years ended June
30, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ------
(IN 000'S)
<S> <C> <C> <C>
Current tax expense:
U.S. Federal...................................... $ -- $533 $ 225
Foreign........................................... -- 172 7,701
State............................................. 102 50 750
---- ---- ------
102 755 8,676
---- ---- ------
Deferred tax expense:
U.S. Federal...................................... 163 -- --
Foreign........................................... -- -- (683)
State............................................. -- -- --
---- ---- ------
Total provision for income taxes.......... $265 $755 $7,993
==== ==== ======
</TABLE>
F-17
<PAGE> 135
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's income tax provision as compared to the
tax provision calculated by applying the statutory federal tax rate (35%) to the
income (loss) before income taxes for the years ended June 30, 1995, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- ------
(IN 000'S)
<S> <C> <C> <C>
Computed expected income tax expense (benefit) at
35%................................................. $(3,670) $(20,700) $4,826
Change in valuation allowance......................... 3,736 (6,453) 169
Change in estimates, principally due to changes in
estimated tax depreciation and NOL's................ 1,166 686
State income taxes, net of federal benefit............ 67 33 488
Tax gain on conversion of debt to equity, net......... 18,265
Acquisition costs not currently deductible............ 7,102
Foreign taxes, net of federal benefit................. -- -- 1,940
Other, net............................................ 132 1,342 (116)
------- -------- ------
$ 265 $ 755 $7,993
======= ======== ======
</TABLE>
The major components of the deferred tax assets and liabilities as of June
30, 1996 and 1997 are presented below.
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN 000'S)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carry forwards............................ $ 8,923 $ 7,510
Foreign tax credit carry forwards............................ 11,843 11,843
Inventory obsolescence reserves.............................. 3,721 4,048
Bad debt reserves............................................ 4,719 6,359
Accruals not currently deductible for tax purposes........... 2,831 3,581
Reserve for abandoned projects............................... 1,863 1,311
Other........................................................ 2,087 7,800
-------- --------
Total gross deferred tax assets...................... 35,987 42,452
Less: Valuation allowance...................................... (30,528) (30,676)
-------- --------
Deferred tax assets............................................ $ 5,459 $ 11,776
-------- --------
Deferred Tax Liabilities:
Property and equipment, principally due to depreciation
differences............................................... $ 3,172 $ 3,703
Other........................................................ 1,559 6,662
-------- --------
Total gross deferred tax liabilities................. 4,731 10,365
-------- --------
Net deferred tax assets........................................ $ 728 $ 1,411
======== ========
</TABLE>
Management has considered certain tax planning strategies as permitted by
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes". Management has determined that tax benefits associated with recorded
deferred tax assets, net of valuation allowance, are more likely than not
realizable through future taxable income and future reversals of existing
taxable temporary differences.
At June 30, 1997, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $21.5 million which are available
to offset future federal taxable income, if any, expiring in the years 2007
through 2011 and is subject to annual limitations with respect to net operating
losses pursuant to Section 382 of the Internal Revenue Code of approximately
$4.7 million. At June 30, 1997 the Company has
F-18
<PAGE> 136
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
foreign tax credit carry forwards of approximately $11.8 million and alternative
minimum tax credit (AMT) carry forwards of approximately $1.5 million. Foreign
tax credits are available to offset future taxes due in the U.S. on future
foreign taxable income and expire between 1998 and 2002 unless utilized prior to
such time. AMT credits are available to be carried forward indefinitely and may
be utilized against regular U.S. Corporate tax to the extent it does not exceed
computed AMT calculations.
8. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is related to the consolidated
statements of cash flows. The Company recorded the following significant
non-cash items for the years ended June 30, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN 000'S)
<S> <C> <C> <C>
Acquisition of the general partnership interest in RCVP:
Property, plant and equipment............................... $23,400 $ $
Long-term debt.............................................. 13,839
Convertible debentures converted to equity securities......... 83,358
Common and Series B Preferred Stock issued in the BGII
Acquisition................................................. 42,738
BGII common stock purchased in fiscal year 1995 and canceled
upon consummation of the BGII Acquisition................... 10,481
Accrual of contingent payment to RCC.......................... 1,000
Dividends for Series E and Series B Preferred Stock........... 11,264
Translation rate adjustment................................... 11,204
Valuation adjustments to pre-acquisition contingencies........ 962
Reclassify inventory to property, plant and equipment......... 9,642
Reclassify receivables to other assets........................ 1,837
Reclassify other assets to property, plant and equipment...... 1,074 1,818
</TABLE>
Payments for interest expense in fiscal years 1995, 1996 and 1997 were
approximately $5.6 million, $8.0 million and $22.5 million, respectively.
Payments for income taxes in fiscal years 1995, 1996 and 1997 were approximately
$0.1 million, $0.3 million and $3.5 million, respectively.
9. COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, or other sources are recorded when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated.
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 BGII and Bally Entertainment Corporation dated May
10, 1996, the Company is obligated to pay a royalty on new machines sold or
leased after June 18, 1996 of $35 per machine with a minimum annual royalty
payment of $1.0 million for the initial five-year term of the amended agreement,
which is subject to annual renewals thereafter at the option of the Company.
Royalty expense under this agreement for the year ended June 30, 1997 was $1.0
million.
F-19
<PAGE> 137
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases office space, equipment, warehouse and repair
facilities, Route Operation locations, casino and other locations under
non-cancelable operating leases. Certain Route Operation location leases provide
only for contingent rentals based upon a percentage of gaming revenue and are
cancelable at any time by either party. Future minimum rentals under
non-cancelable operating leases at June 30, 1997 are:
<TABLE>
<CAPTION>
TOTAL NET
MINIMUM SUBLEASE MINIMUM
YEAR ENDED JUNE 30, RENTALS INCOME RENTALS
---------------------------------------------- ------- -------- -------
(IN 000'S)
<S> <C> <C> <C>
1998.......................................... $12,658 $1,354 $11,304
1999.......................................... 10,287 1,263 9,024
2000.......................................... 7,958 829 7,129
2001.......................................... 6,344 478 5,866
2002.......................................... 4,574 446 4,128
Thereafter.................................... 42,805 1,755 41,050
------- ------ -------
$84,626 $6,125 $78,501
======= ====== =======
</TABLE>
Operating lease rental expense, including contingent lease rentals, for
years ended June 30 1995, 1996 and 1997 was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN 000'S)
<S> <C> <C> <C>
Minimum rentals............................... $ 9,704 $10,194 $15,126
Contingent rentals............................ 58,113 60,525 70,744
------- ------- -------
67,817 70,719 85,870
Sublease rental income........................ (1,192) (1,487) (1,606)
------- ------- -------
$66,625 $69,232 $84,264
======= ======= =======
</TABLE>
In conjunction with sales by Bally Gaming, Inc., with recourse to the
Company, of certain trade receivables to third parties, the Company has
guaranteed amounts due from three customers of approximately $10.5 million at
June 30, 1997. It is possible that one or more of Bally Gaming, Inc.'s customers
whose obligation has been guaranteed may be unable to make payments as such
become due. In such an event, Bally Gaming, Inc. may become responsible for
repayment of at least a portion of such amounts over the term of the
receivables. At June 30, 1997, amounts due from one customer under three
contracts totaling $3.6 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. In August 1996, the Company received demand notices from the holder
of notes related to one customer's trade receivables for which payments were in
arrears from December 1995 and in December 1996, the holder of the notes filed
suit against the Company to seek payment from the Company for approximately $3.6
million. 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 $8.3 million on all receivables
with recourse is included in the Company's allowance for doubtful accounts at
June 30, 1997.
Through a wholly-owned subsidiary, the Company originally purchased a 45%
limited partnership interest in Rainbow Casino Vicksburg Partnership, L.P.
("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. In March 1995, Alliance increased its ownership position from
45% to 100%. Pursuant to the transactions consummated in March 1995, Rainbow
Casino Corporation (RCC), the former owner of 55% of the Rainbow Casino, is now
entitled to receive 10% of the net available cash flow after debt service and
other items, as defined (which amount increases to 20% of such amount when
revenues exceed $35.0 million but only on such incremental amount), for a period
of 15 years, such period being subject to one year extensions
F-20
<PAGE> 138
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for each year in which a minimum payment of $50,000 is not made. In addition,
the agreement required that, if under defined circumstances the casino achieved
earnings of at least $10.5 million before deducting depreciation, amortization,
royalty and income taxes, then the Company would be obligated to make a one time
payment to certain principals of the original partnership of $1.0 million which
payment was earned in fiscal 1996 and paid in cash in September 1996.
During fiscal 1996, Bally Wulff increased the amount of tax reserves by
$1.0 million (to a total reserve of $1.4 million) as a result of developments in
an ongoing quadrennial audit of Wulff's tax returns for the years 1988 through
1991. The German tax authorities have proposed preliminary adjustments which
range from $1.4 million (which has been accrued) to $5.0 million.
LITIGATION
In the action filed on December 2, 1996, the Company was named as a
defendant in an action brought by Canpartners Investments IV and Cerberus
Partners, pending in federal district court for the Southern District of New
York. The Company entered into certain loan commitment letters with the
plaintiffs in August 1995, contemplating that the plaintiffs would lend
approximately $30.0 million to partially fund the Company's then pending hostile
tender offer for BGII. The Company entered into a merger agreement with BGII in
October 1995 and did not use funds provided by the plaintiffs to fund the
acquisition of BGII in June 1996. The plaintiffs have asserted claims based upon
the loan commitment letters and failure to pay termination fees in connection
with such loan commitment, and seek damages on various theories, ranging from
$2.2 million (breach of contract and fraudulent concealment) to in excess of
$12.0 million (breach of duty of good faith and fair dealing). The Company
believes that it has strong defenses and has filed a motion to dismiss the
complaint. The Company intends to defend the action vigorously.
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 filed suit against
BGII and approximately 45 other 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' 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 $1.0 billion, 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.
In August 1996, the Company received demand notices from a holder of
customer notes receivable which were sold on a recourse basis to a third party
for which payments were in arrears from December 1995. In December 1996 the
holder of the notes filed suit against the Company seeking payment from the
Company of approximately $3.6 million. The Company intends to vigorously pursue
all legal defenses available to it.
The Company is also a party to various lawsuits relating to routine matters
incidental to its business. Management does not believe that the outcome of such
litigation, including the matters above, in the aggregate, will have a material
adverse effect on the Company.
10. 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. Each of the
Company's business units conducts business in 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 June 30, 1997 net accounts and notes receivable, including
obligations of three
F-21
<PAGE> 139
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers which are guaranteed by the Company, by region as a percentage of
total net receivables are as follows:
<TABLE>
<CAPTION>
WALL MACHINES GAMING
AND AMUSEMENT EQUIPMENT ROUTE CASINO
GAMES AND SYSTEMS OPERATIONS OPERATIONS TOTAL
------------- ----------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Germany............................ 46.7% -- -- -- 46.7%
Other international
jurisdictions.................... 1.4 19.7% -- -- 21.1
Nevada............................. -- 12.4 4.2% -- 16.6
Mississippi........................ -- 3.7 -- -- 3.7
Atlantic City...................... -- 2.6 -- -- 2.6
Others individually less than 5%... -- 9.3 -- -- 9.3
--
---- ---- --- -----
48.1% 47.7% 4.2% --% 100.0%
==== ==== === == =====
</TABLE>
Receivables and customer obligations guaranteed by the Company from
emerging market customers contain increased risk factors compared to receivables
at the Bally Wulff entities or other traditional markets for Bally Gaming, Inc.
11. SEGMENT INFORMATION
The Company has operations based primarily in Germany and the United
States. The German operation's customers are a diverse group of operators of
wall machines and amusement games at arcades, hotels, restaurants and taverns,
primarily in Germany. Gaming Equipment and Systems' customers are primarily
casinos and gaming machine distributors in the United States and abroad.
Receivables of the German operations and Gaming Equipment and Systems are
generally collateralized by the related equipment. See "Concentration of Credit
Risk".
The table below presents information as to the Company's identifiable
assets at June 30, 1996 and 1997, and revenues, operating income, capital
expenditures and depreciation and amortization by geographic region for the year
ended June 30, 1997. As the operations from BGII were consolidated for only the
last twelve days of the year ended June 30, 1996, the geographic segment
information related to the statements of operations is not material and has not
been presented for fiscal year 1996.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------
1996 1997
-------- --------
(IN 000'S)
<S> <C> <C>
Identifiable assets:
Germany.............................................. $107,545 $110,371
United States........................................ 267,959 242,450
Eliminations......................................... -- (805)
-------- --------
Consolidated......................................... $375,504 $352,016
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
----------------------------------------------------------------
OPERATING CAPITAL DEPRECIATION AND
REVENUES INCOME (LOSS) EXPENDITURES AMORTIZATION
-------- ------------- ------------ ----------------
(IN 000'S)
<S> <C> <C> <C> <C>
Germany................................ $142,961 $23,356 $ 2,091 $ 6,579
United States.......................... 311,334 19,346 11,166 16,027
Eliminations........................... (9,149) (1,243) -- --
-------- ------- ------- -------
Consolidated........................... $445,146 $41,459 $ 13,257 $ 22,606
======== ======= ======= =======
</TABLE>
F-22
<PAGE> 140
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INTERIM FINANCIAL INFORMATION (UNAUDITED)
Following is the unaudited quarterly results of the Company for the years
ended June 30, 1996 and 1997. This information is not covered by the Independent
Auditors' Report.
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN 000'S, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Revenues........................................ $ 38,541 $ 37,687 $ 40,568 $ 55,582
Operating loss.................................. (1,465) (2,059) (2,348) (41,212)
Net loss........................................ (3,418) (6,013) (5,398) (45,068)
Net loss applicable to common shares............ (3,418) (6,013) (5,398) (45,430)
Loss per share.................................. (.29) (.50) (.42) (3.43)
1997
Revenues........................................ $102,912 $128,703 $101,691 $111,840
Operating income................................ 8,956 13,909 8,882 9,712
Net income...................................... 635 4,145 561 444
Net income (loss) applicable to common shares... (2,261) 1,051 (2,420) (2,559)
Income (loss) per share......................... (.07) .03 (.08) (.08)
</TABLE>
13. CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements are presented to provide
certain financial information regarding guaranteeing and non-guaranteeing
subsidiaries in relation to the Company's Senior Subordinated Notes which were
issued in the Refinancing transaction completed in August 1997 (see note 4). The
financial information presented includes Alliance Gaming Corporation (the
"Parent") and its wholly-owned guaranteeing subsidiaries (together the "Parent
and Guaranteeing Subsidiaries"), and the non-guaranteeing subsidiaries Video
Services, Inc., United Gaming Rainbow, BGI Australia Pty. Limited, Bally Gaming
de Puerto Rico, Inc., and Alliance Automaten GmbH & Co. KG (the subsidiary that
holds the Company's German interests) (together the "Non-Guaranteeing
Subsidiaries"). The notes to consolidating financial statements should be read
in conjunction with these consolidating financial statements.
F-23
<PAGE> 141
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEETS
JUNE 30, 1996
(IN 000'S)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 36,954 $ 11,103 $ -- $ 48,057
Accounts and notes receivable, net....... 39,327 55,473 (1,298) 93,502
Inventories, net......................... 23,818 17,838 -- 41,656
Other current assets..................... 6,274 2,080 -- 8,354
-------- -------- --------- --------
Total current assets.................. 106,373 86,494 (1,298) 191,569
-------- -------- --------- --------
Long-term notes receivable, net............ 97,227 1,773 (84,816) 14,184
Leased equipment, net...................... -- 3,507 -- 3,507
Property, plant and equipment, net......... 39,170 35,407 -- 74,577
Excess of costs over net assets of acquired
businesses, net.......................... 36,890 23,402 -- 60,292
Intangible assets, net..................... 19,826 421 -- 20,247
Investments in subsidiaries................ 98,599 -- (98,599) --
Deferred tax assets........................ 4,131 1,328 -- 5,459
Other assets, net.......................... 14,088 (5,521) (2,898) 5,669
-------- -------- --------- --------
$416,304 $146,811 $(187,611) $375,504
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 14,361 $ 4,439 $ (2,560) $ 16,240
Accrued liabilities...................... 29,635 10,549 (1,641) 38,543
Current maturities of long-term debt..... 8,200 17,577 -- 25,777
-------- -------- --------- --------
Total current liabilities............. 52,196 32,565 (4,201) 80,560
-------- -------- --------- --------
Senior Secured Notes due 2003, net......... 150,929 -- -- 150,929
Other long-term debt, less current
maturities............................... 83,289 15,647 (84,298) 14,638
Deferred tax liabilities................... 4,731 -- -- 4,731
Other liabilities.......................... 2,613 -- (513) 2,100
-------- -------- --------- --------
Total liabilities................ 293,758 48,212 (89,012) 252,958
-------- -------- --------- --------
Minority interest.......................... 1,148 -- -- 1,148
Series B Special Stock..................... 51,552 -- -- 51,552
Commitments and contingencies
Stockholders' equity:
Series E Special Stock................... 11,316 -- -- 11,316
Common Stock............................. 3,176 17,832 (17,832) 3,176
Additional paid-in-capital............... 139,031 70,373 (70,373) 139,031
Cumulative translation adjustment........ (287) (314) 314 (287)
Retained earnings (accumulated
deficit).............................. (83,390) 10,708 (10,708) (83,390)
-------- -------- --------- --------
Total stockholders' equity....... 69,846 98,599 (98,599) 69,846
-------- -------- --------- --------
$416,304 $146,811 $(187,611) $375,504
======== ======== ========= ========
</TABLE>
See accompanying notes.
F-24
<PAGE> 142
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEETS
JUNE 30, 1997
(IN 000'S)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 16,462 $ 12,462 $ -- $ 28,924
Accounts and notes receivable, net....... 31,799 57,207 (1,305) 87,701
Inventories, net......................... 19,231 18,778 (680) 37,329
Other current assets..................... 6,695 2,932 -- 9,627
-------- -------- --------- --------
Total current assets.................. 74,187 91,379 (1,985) 163,581
-------- -------- --------- --------
Long-term notes receivable, net............ 96,271 1,501 (88,791) 8,981
Leased equipment, net...................... -- 7,902 -- 7,902
Property, plant and equipment, net......... 41,836 32,811 -- 74,647
Excess of costs over net assets of acquired
businesses, net.......................... 41,185 21,031 (118) 62,098
Intangible assets, net..................... 17,979 252 -- 18,231
Investment in subsidiaries................. 100,478 -- (100,478) --
Deferred tax assets........................ 6,265 5,511 -- 11,776
Other assets, net.......................... 16,045 (11,269) 24 4,800
-------- -------- --------- --------
$394,246 $149,118 $(191,348) $352,016
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 9,936 $ 4,262 $ 72 $ 14,270
Accrued liabilities...................... 21,129 16,727 (464) 37,392
Current maturities of long-term debt..... 585 1,348 (809) 1,124
-------- -------- --------- --------
Total current liabilities............. 31,650 22,337 (1,201) 52,786
-------- -------- --------- --------
Senior Secured Notes due 2003, net......... 151,224 -- -- 151,224
Other long-term debt, less current
maturities............................... 87,924 22,676 (89,109) 21,491
Deferred tax liabilities................... 6,865 3,500 -- 10,365
Other liabilities.......................... 2,501 -- (433) 2,068
-------- -------- --------- --------
Total liabilities................ 280,164 48,513 (90,743) 237,934
-------- -------- --------- --------
Minority interest.......................... 1,546 -- -- 1,546
Series B Special Stock..................... 58,981 -- -- 58,981
Commitments and contingencies
Stockholders' equity:
Series E Special Stock................... 12,368 -- -- 12,368
Common Stock............................. 3,185 17,832 (17,832) 3,185
Additional paid-in capital............... 138,590 68,699 (68,699) 138,590
Cumulative translation adjustment........ (11,719) (11,880) 11,880 (11,719)
Retained earnings (accumulated
deficit).............................. (88,869) 25,954 (25,954) (88,869)
-------- -------- --------- --------
Total stockholders' equity....... 53,555 100,605 (100,605) 53,555
-------- -------- --------- --------
$394,246 $149,118 $(191,348) $352,016
======== ======== ========= ========
</TABLE>
See accompanying notes.
F-25
<PAGE> 143
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1995
(IN 000'S)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Route operations......................... $ 92,034 $ 14,820 $ -- $106,854
Casino operations........................ 20,698 4,436 -- 25,134
-------- ------- ------- --------
112,732 19,256 -- 131,988
-------- ------- ------- --------
Costs and expenses:
Cost of route operations................. 70,649 9,238 -- 79,887
Cost of casino operations................ 12,047 2,184 -- 14,231
Selling, general and administrative...... 25,627 2,964 (342) 28,249
Provision for doubtful receivables....... 387 13 -- 400
Depreciation and amortization............ 8,175 1,345 -- 9,520
Direct acquisition costs................. 1,669 -- -- 1,669
Unusual items............................ 2,293 -- -- 2,293
-------- ------- ------- --------
120,847 15,744 (342) 136,249
-------- ------- ------- --------
Operating income (loss).................... (8,115) 3,512 342 (4,261)
Earnings in consolidated subsidiaries...... 1,208 -- (1,208) --
Other income (expense):
Interest income.......................... 2,786 115 (103) 2,798
Interest expense......................... (7,131) (1,105) 103 (8,133)
Rainbow royalty.......................... -- (810) -- (810)
Minority interest........................ (397) -- -- (397)
Other, net............................... 464 195 (342) 317
-------- ------- ------- --------
Income (loss) before income taxes.......... (11,185) 1,907 (1,208) (10,486)
Income tax benefit (provision)............. 434 (699) -- (265)
-------- ------- ------- --------
Net income (loss).......................... $(10,751) $ 1,208 $(1,208) $(10,751)
======== ======= ======= ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 144
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1996
(IN 000'S)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Gaming equipment and systems.............. $ 11,700 $ 1,223 $(2,348) $ 10,575
Wall machines and amusement games......... -- 3,356 -- 3,356
Route operations.......................... 93,037 16,901 -- 109,938
Casino operations......................... 14,747 33,862 (100) 48,509
-------- ------- ------- --------
119,484 55,342 (2,448) 172,378
-------- ------- ------- --------
Costs and expenses:
Cost of gaming equipment and systems...... 8,531 1,030 (2,348) 7,213
Cost of wall machines and amusement
games.................................. -- 2,022 -- 2,022
Cost of route operations.................. 73,436 10,776 -- 84,212
Cost of casino operations................. 9,722 12,324 -- 22,046
Selling, general and administrative....... 18,915 11,797 (92) 30,620
Provision for doubtful receivables........ 973 47 -- 1,020
Depreciation and amortization............. 8,746 2,242 -- 10,988
Direct acquisition costs.................. 55,843 -- -- 55,843
Unusual items............................. 5,498 -- -- 5,498
-------- ------- ------- --------
181,664 40,238 (2,440) 219,462
-------- ------- ------- --------
Operating income (loss)..................... (62,180) 15,104 (8) (47,084)
Earnings in consolidated subsidiaries....... 8,378 -- (8,378) --
Other income (expense):
Interest income........................... 1,654 391 (474) 1,571
Interest expense.......................... (7,407) (1,964) 474 (8,897)
Rainbow royalty........................... -- (4,070) -- (4,070)
Minority interest......................... (963) -- -- (963)
Other, net................................ 987 209 (895) 301
-------- ------- ------- --------
Income (loss) before income taxes........... (59,531) 9,670 (9,281) (59,142)
Income tax provision........................ (366) (1,292) 903 (755)
-------- ------- ------- --------
Net income (loss)........................... (59,897) 8,378 (8,378) (59,897)
-------- ------- ------- --------
Special Stock dividends..................... (362) -- -- (362)
-------- ------- ------- --------
Net loss applicable to common shares........ $(60,259) $ 8,378 $(8,378) $(60,259)
======== ======= ======= ========
</TABLE>
See accompanying notes.
F-27
<PAGE> 145
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997
(IN 000'S)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Gaming equipment and systems.............. $130,764 $ 11,070 $ (7,100) $134,734
Wall machines and amusement games......... -- 131,954 (20) 131,934
Route operations.......................... 108,148 18,880 -- 127,028
Casino operations......................... 11,738 39,712 -- 51,450
-------- -------- -------- --------
250,650 201,616 (7,120) 445,146
-------- -------- -------- --------
Costs and expenses:
Cost of gaming equipment and systems...... 82,673 8,796 (6,973) 84,496
Cost of wall machines and amusement
games.................................. -- 68,437 (11) 68,426
Cost of route operations.................. 83,592 12,124 -- 95,716
Cost of casino operations................. 7,528 14,741 -- 22,269
Selling, general and administrative....... 55,565 44,859 (9) 100,415
Provision for doubtful receivables........ 5,049 4,010 -- 9,059
Depreciation and amortization............. 13,390 9,216 -- 22,606
Unusual items............................. 700 -- -- 700
-------- -------- -------- --------
248,497 162,183 (6,993) 403,687
-------- -------- -------- --------
Operating income............................ 2,153 39,433 (127) 41,459
Earnings in consolidated subsidiaries....... 23,497 -- (23,497) --
Other income (expense):
Interest income........................... 1,635 369 (384) 1,620
Interest expense.......................... (21,042) (2,968) 384 (23,626)
Rainbow royalty........................... -- (4,722) -- (4,722)
Minority interest......................... (1,092) -- -- (1,092)
Other, net................................ 135 4 -- 139
-------- -------- -------- --------
Income before income taxes.................. 5,286 32,116 (23,624) 13,778
Income tax benefit (provision).............. 499 (8,492) -- (7,993)
-------- -------- -------- --------
Net income.................................. 5,785 23,624 (23,624) 5,785
Special Stock dividends..................... (11,974) -- -- (11,974)
-------- -------- -------- --------
Net loss applicable to common shares........ $ (6,189) $ 23,624 $ (23,624) $ (6,189)
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-28
<PAGE> 146
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1995
(IN 000'S)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $(10,751) $ 1,208 $(1,208) $(10,751)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization......... 8,175 1,345 -- 9,520
Amortization of debt discounts........ 62 235 -- 297
Write down of other assets............ 2,892 (96) -- 2,796
Provision for doubtful receivables.... 387 13 -- 400
Other................................. 1,282 -- -- 1,282
Change in operating assets and
liabilities, net of effects of
business acquired:
Accounts and notes receivable......... 1,530 66 (251) 1,345
Inventories........................... (40) -- -- (40)
Other current assets.................. 251 4 -- 255
Accounts payable...................... (254) (193) -- (447)
Accrued expenses...................... (2,540) 185 -- (2,355)
Intercompany accounts................. (3,040) 249 2,791 --
-------- ------- ------- --------
Net cash provided by (used in)
operating activities........... (2,046) 3,016 1,332 2,302
-------- ------- ------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash
acquired.............................. -- 2,481 -- 2,481
Additions to property and equipment...... (7,643) (1,244) -- (8,887)
Proceeds from disposal of property and
equipment............................. 225 126 -- 351
Purchases of securities available for
sale.................................. (11,086) -- -- (11,086)
Other.................................... (5,852) -- -- (5,852)
-------- ------- ------- --------
Net cash provided by (used in)
investing activities........... (24,356) 1,363 -- (22,993)
-------- ------- ------- --------
Cash flows from financing activities:
Proceeds from long-term debt, net of
expenses.............................. -- 1,504 (1,504) --
Reduction of long-term debt.............. (578) (2,719) 172 (3,125)
Issuance of common stock................. 465 -- -- 465
-------- ------- ------- --------
Net cash used in financing
activities..................... (113) (1,215) (1,332) (2,660)
-------- ------- ------- --------
Cash and cash equivalents:
Increase (decrease) for year............. (26,515) 3,164 -- (23,351)
Balance, beginning of year............... 34,750 2,335 -- 37,085
-------- ------- ------- --------
Balance, end of year..................... $ 8,235 $ 5,499 $ -- $ 13,734
======== ======= ======= ========
</TABLE>
See accompanying notes.
F-29
<PAGE> 147
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1996
(IN 000'S)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $(59,897) $ 8,378 $(8,378) $(59,897)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization....... 8,746 2,242 -- 10,988
Amortization of debt discounts...... 9 236 -- 245
Loss on debenture conversion........ 30,079 -- -- 30,079
Write down of other assets.......... 6,117 (22) -- 6,095
(Gain) loss on sale of property and
equipment........................ (13) 118 -- 105
Provision for doubtful
receivables...................... 973 47 -- 1,020
Other............................... 2,839 (1,295) -- 1,544
Change in operating assets and
liabilities, net of effects of
business acquired:
Accounts and notes receivable....... (3,642) (2,389) 97 (5,934)
Inventories......................... 5,754 90 -- 5,844
Other current assets................ (1,508) 1,413 -- (95)
Intercompany accounts............... (7,038) (1,340) 8,378 --
Accounts payable.................... (3,195) 1,403 (97) (1,889)
Accrued liabilities................. 12,930 (174) 24 12,780
-------- ------- ------- --------
Net cash provided by (used in)
operating activities........... (7,846) 8,707 24 885
-------- ------- ------- --------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired.............................. (79,209) -- -- (79,209)
Additions to property, plant and
equipment............................. (6,290) (1,811) -- (8,101)
Proceeds from disposal of property and
equipment............................. 2,106 176 -- 2,282
Purchases of securities available for
sale.................................. 13,516 -- -- 13,516
Other.................................... (7,156) 2,065 -- (5,091)
-------- ------- ------- --------
Net cash provided by (used in)
investing activities........... (77,033) 430 -- (76,603)
-------- ------- ------- --------
Cash flows from financing activities:
Proceeds from long-term debt, net of
expenses.............................. 144,764 1,301 (645) 145,420
Reduction of long-term debt.............. (47,233) (4,834) 621 (51,446)
Issuance of Special Stock................ 15,000 -- -- 15,000
Fees paid for conversion of convertible
debentures............................ (3,333) -- -- (3,333)
Issuance of Common Stock................. 4,400 -- -- 4,400
-------- ------- ------- --------
Net cash provided by (used in)
financing activities........... 113,598 (3,533) (24) 110,041
-------- ------- ------- --------
Cash and cash equivalents:
Increase for year........................ 28,719 5,604 -- 34,323
Balance, beginning of year............... 8,235 5,499 -- 13,734
-------- ------- ------- --------
Balance, end of year..................... $ 36,954 $ 11,103 $ -- $ 48,057
======== ======= ======= ========
</TABLE>
See accompanying notes.
F-30
<PAGE> 148
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1997
(IN 000'S)
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 5,785 $ 23,624 $ (23,624) $ 5,785
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization....... 13,390 9,216 -- 22,606
Amortization of debt discounts...... 295 512 -- 807
Write down of other assets.......... 803 272 -- 1,075
Loss on sale of property and
equipment........................ 503 730 -- 1,233
Provision for doubtful
receivables...................... 5,049 4,010 -- 9,059
Other............................... 32 (683) -- (651)
Change in operating assets and
liabilities, net of effects of
business acquired:
Accounts and notes receivable....... 1,912 (10,495) 3,982 (4,601)
Inventories......................... 4,587 (12,165) 680 (6,898)
Other current assets................ (287) (1,262) -- (1,549)
Intercompany accounts............... (20,345) 5,673 14,672 --
Accounts payable.................... (4,425) (177) 2,632 (1,970)
Accrued liabilities................. (8,943) 7,269 914 (760)
-------- -------- -------- --------
Net cash provided by (used in)
operating activities........... (1,644) 26,524 (744) 24,136
-------- -------- -------- --------
Cash flows from investing activities:
Additions to property, plant and
equipment............................. (9,198) (4,059) -- (13,257)
Proceeds from disposal of property and
equipment............................. 78 176 -- 254
Other.................................... (8,375) (199) -- (8,574)
-------- -------- -------- --------
Net cash used in investing
activities..................... (17,495) (4,082) -- (21,577)
-------- -------- -------- --------
Cash flows from financing activities:
Net change in credit lines............... (7,525) (4,053) (11,578)
Reduction of long-term debt.............. (767) (6,751) 744 (6,774)
Proceeds from exercise of stock
options............................... 767 -- -- 767
Repurchase of Series B Preferred Stock... (3,879) -- -- (3,879)
Dividends (paid) received................ 10,051 (10,051) -- --
-------- -------- -------- --------
Net cash used in financing
activities..................... (1,353) (20,855) 744 (21,464)
-------- -------- -------- --------
Effect of exchange rates on cash........... -- (228) (228)
Cash and cash equivalents:
Increase for year........................ (20,492) 1,359 -- (19,133)
Balance, beginning of year............... 36,954 11,103 -- 48,057
-------- -------- -------- --------
Balance, end of year..................... $ 16,462 $ 12,462 $ -- $ 28,924
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-31
<PAGE> 149
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
BASIS OF PRESENTATION
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.
DEBT AND LINES OF CREDIT
Long-term debt and lines of credit at June 30, 1997 consist of the
following:
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
(IN 000'S)
<S> <C> <C> <C> <C>
12 7/8% Senior Secured notes due 2003 net
of unamortized discount.................. $151,224 $ $ $151,224
7.5% Convertible subordinated debentures
due 2003, unsecured...................... 1,642 1,642
Hospitality Franchise Systems note
payable.................................. 6,569 6,569
Bally Wulff revolving lines of credit...... 9,611 9,611
Intercompany notes payable................. 85,815 4,103 (89,918) --
Other...................................... 1,052 3,741 4,793
-------- ------- -------- --------
239,733 24,024 (89,918) 173,839
Less current maturities.................... 585 1,348 (809) 1,124
-------- ------- -------- --------
Long-term debt, less current maturities.... $239,148 $ 22,676 $ (89,109) $172,715
======== ======= ======== ========
</TABLE>
F-32
<PAGE> 150
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The federal, foreign and state income tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
(IN 000'S)
<S> <C> <C> <C> <C>
Deferred Tax Assets:
Net operating loss carry forwards.......... $ 8,923 $ $ $ 8,923
Inventory obsolescence reserves............ 3,070 651 3,721
Bad debt reserves.......................... 4,719 4,719
Foreign tax credit carry forwards.......... 11,843 11,843
Reserves for abandoned projects............ 1,863 1,863
Accruals not currently deductible for tax
purposes................................. 2,831 2,831
Other...................................... 918 1,169 2,087
-------- ------- -------- --------
Total gross deferred tax assets............ 34,167 1,820 35,987
Less: Valuation allowance.................. (30,036) (492) (30,528)
-------- ------- -------- --------
Deferred tax assets........................ $ 4,131 $1,328 $ -- $ 5,459
-------- ------- -------- --------
Deferred Tax Liabilities:
Property and equipment, principally due to
depreciation differences................. $ 3,172 $ 3,172
Other...................................... 1,559 1,559
-------- ------- -------- --------
Total gross deferred tax liabilities....... 4,731 4,731
-------- ------- -------- --------
Net deferred tax assets (liabilities)...... $ (600) $1,328 $ -- $ 728
======== ======= ======== ========
</TABLE>
F-33
<PAGE> 151
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The federal, foreign and state income tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities as of June 30, 1997 are as follows (in 000's):
<TABLE>
<CAPTION>
ALLIANCE
GAMING
PARENT AND NON- CORPORATION
GUARANTEEING GUARANTEEING AND
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS SUBSIDIARIES
------------ ------------ ----------- ------------
(IN 000'S)
<S> <C> <C> <C> <C>
Deferred Tax Assets:
Net operating loss carry forwards......... $ 7,510 $ $ $ 7,510
Inventory obsolescence reserves........... 3,400 648 4,048
Bad debt reserves......................... 6,359 6,359
Foreign tax credit carry forwards......... 11,843 11,843
Reserves for abandoned projects........... 1,311 1,311
Accruals not currently deductible for tax
purposes................................ 3,581 3,581
Other..................................... 2,937 4,863 7,800
-------- ------ -------- --------
Total gross deferred tax assets........... 36,941 5,511 42,452
Less: Valuation allowance................. (30,676) (30,676)
-------- ------ -------- --------
Deferred tax assets....................... $ 6,265 $5,511 $ -- $ 11,776
-------- ------ -------- --------
Deferred Tax Liabilities:
Property and equipment, principally due to
depreciation differences................ $ 3,703 $ $ $ 3,703
Other..................................... 3,162 3,500 6,662
-------- ------ -------- --------
Total gross deferred tax liabilities...... 6,865 3,500 -- 10,365
-------- ------ -------- --------
Net deferred tax assets (liabilities)..... $ (600) $2,011 $ -- $ 1,411
======== ====== ======== ========
</TABLE>
14. RESERVES AND ALLOWANCES
The following tables represent the activity for each of the fiscal years
ended June 30, 1995, 1996 and 1997 for each of the valuation reserve and
allowance accounts (in 000's):
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
YEAR ADDITIONS DEDUCTIONS YEAR
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended June 30, 1997..................... $ 19,497 $ 9,179 $4,775 $ 23,901
Year ended June 30, 1996..................... 1,659 18,995(a) 1,157 19,497
Year ended June 30, 1995..................... 1,389 1,258 988 1,659
Inventory valuation allowance:
Year ended June 30, 1997..................... $ 9,484 $ 1,719 $2,347 $ 8,856
Year ended June 30, 1996..................... -- 11,315(a) 1,831 9,484
Other assets valuation reserve:
Year ended June 30, 1997..................... $ 3,679 $ 162 $ 339 $ 3,502
Year ended June 30, 1996..................... 631 4,629 1,581 3,679
Year ended June 30, 1995..................... 1,762 213 1,344 631
</TABLE>
- ---------------
(a) Includes reserves assigned to BGII receivables and inventory in purchase
accounting of $17.6 million and $9.8 million, respectively.
F-34
<PAGE> 152
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bally Gaming International, Inc.
We have audited the accompanying consolidated financial statements of Bally
Gaming International, Inc. as listed in the index on page F-1 of this Prospectus
as of December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bally Gaming
International, Inc. as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Las Vegas, Nevada
February 13, 1996
F-35
<PAGE> 153
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 5,526 $ 9,204
Accounts and notes receivable, net of allowance for doubtful accounts
of $16,281 and $12,282............................................ 87,176 84,632
Inventories, net:
Raw materials and work-in-process................................. 16,066 21,082
Finished goods.................................................... 35,525 28,377
-------- --------
51,591 49,459
Other current assets................................................. 3,983 5,074
-------- --------
Total current assets......................................... 148,276 148,369
Long-term notes receivable, net of allowance for doubtful accounts of
$7,869 and $8,198.................................................... 9,981 5,558
Property, plant and equipment, at cost:
Land................................................................. 1,357 1,357
Buildings and leasehold improvements................................. 19,871 19,262
Machinery and equipment.............................................. 30,328 26,636
Furniture, fixtures and equipment.................................... 6,162 6,075
Less accumulated depreciation........................................ (34,474) (28,972)
-------- --------
Property, plant and equipment, net................................ 23,244 24,358
Intangible assets, less accumulated amortization of $13,720 and
$12,609.............................................................. 10,814 11,410
Other assets........................................................... 2,001 2,547
-------- --------
$194,316 $192,242
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 18,556 $ 19,272
Accrued liabilities and other payables:
Compensation and benefit related liabilities......................... 5,608 5,962
Other................................................................ 11,798 11,363
-------- --------
17,406 17,325
Current maturities of long-term debt................................. 14,957 16,000
-------- --------
Total current liabilities.................................... 50,919 52,597
10 3/8% Senior Secured Notes due 1998, net of unamortized discount of
$344 and $458........................................................ 39,656 39,542
Other long-term debt, less current maturities.......................... 15,331 14,220
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,
10,799,501 and 10,749,501 issued and outstanding.................. 108 107
Additional paid-in-capital........................................... 68,345 67,758
Retained earnings.................................................... 1,842 5,235
Cumulative translation adjustments................................... 18,662 13,560
Unearned compensation................................................ (547) (777)
-------- --------
Total stockholders' equity................................... 88,410 85,883
-------- --------
$194,316.. $192,242
======== ========
</TABLE>
See accompanying notes.
F-36
<PAGE> 154
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues:
Sales.................................................... $244,471 $231,318 $164,571
Other.................................................... 4,841 4,874 4,136
-------- -------- --------
249,312 236,192 168,707
-------- -------- --------
Costs and expenses:
Cost of sales............................................ 163,131 157,059 121,710
Selling, general and administrative...................... 65,289 59,989 57,357
Provision for doubtful receivables....................... 6,712 5,763 8,176
Unusual charges.......................................... 5,816 -- --
-------- -------- --------
240,948 222,811 187,243
-------- -------- --------
Operating income (loss).................................... 8,364 13,381 (18,536)
Interest expense........................................... 6,853 6,768 4,424
-------- -------- --------
Income (loss) before income taxes and extraordinary gain... 1,511 6,613 (22,960)
Provision for income taxes................................. 4,904 2,820 4,242
-------- -------- --------
Income (loss) before extraordinary gain.................... (3,393) 3,793 (27,202)
Extraordinary gain on early extinguishment of debt......... -- -- 3,759
-------- -------- --------
Net income (loss).......................................... $ (3,393) $ 3,793 $(23,443)
======== ======== ========
Net income (loss) per common share:
Income (loss) before extraordinary gain.................. $ (0.31) $ 0.35 $ (2.54)
Extraordinary gain on early extinguishment of debt....... -- -- 0.35
-------- -------- --------
Net income (loss)........................................ $ (0.31) $ 0.35 $ (2.19)
======== ======== ========
Weighted average number of common shares and common stock
equivalents outstanding............................... 10,776 10,727 10,685
======== ======== ========
</TABLE>
See accompanying notes.
F-37
<PAGE> 155
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN- RETAINED TRANSLATION UNEARNED STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENTS COMPENSATION EQUITY
------ ---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992... $106 $ 65,757 $ 24,885 $11,662 $ (1,133) $ 101,277
Net loss..................... -- -- (23,443) -- -- (23,443)
Issuance of restricted
Company common stock
award..................... 1 1,149 -- -- (1,150) --
Exercise of warrants......... -- 30 -- -- -- 30
Amortization of unearned
compensation.............. -- -- -- -- 951 951
Foreign currency translation
adjustment................ -- -- -- (4,536) -- (4,536)
Issuance of stock warrants... -- 600 -- -- -- 600
---- ------- -------- ------- ------- -------
Balance at December 31, 1993... 107 67,536 1,442 7,126 (1,332) 74,879
Net income................... -- -- 3,793 -- -- 3,793
Amortization of unearned
compensation.............. -- -- -- -- 555 555
Foreign currency translation
adjustment................ -- -- -- 6,434 -- 6,434
Issuance of Company common
stock under compensation
agreement................. -- 222 -- -- -- 222
---- ------- -------- ------- ------- -------
Balance at December 31, 1994... 107 67,758 5,235 13,560 (777) 85,883
---- ------- -------- ------- ------- -------
Net loss..................... -- -- (3,393) -- -- (3,393)
Exercise of stock options.... 1 587 -- -- -- 588
Amortization of unearned
compensation.............. -- -- -- -- 230 230
Foreign currency translation
adjustment................ -- -- -- 5,102 -- 5,102
---- ------- -------- ------- ------- -------
Balance at December 31, 1995... $108 $ 68,345 $ 1,842 $18,662 $ (547) $ 88,410
==== ======= ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
COMMON
STOCK
SHARE AMOUNTS (IN THOUSANDS) ISSUED
- ------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992... 10,623
Issuance of restricted
Company common stock
award..................... 100
Exercise of warrants......... 2
------
Balance at December 31, 1993... 10,725
Issuance of Company common
stock under compensation
agreement................. 25
------
Balance at December 31, 1994... 10,750
Exercise of stock options.... 50
------
Balance at December 31, 1995... 10,800
======
</TABLE>
See accompanying notes.
F-38
<PAGE> 156
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ (3,393) $ 3,793 $(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)
Depreciation and amortization....................................... 8,953 8,271 8,103
Deferred income taxes............................................... (778) (296) 163
Provision for doubtful receivables.................................. 6,712 5,763 8,176
Provision for writedown of building to be sold...................... 812 -- --
Provision for inventory valuation................................... 1,955 2,230 6,156
(Gain) loss on disposals of property, plant and equipment........... 48 (83) 64
Changes in operating assets and liabilities:
Accounts and notes receivable..................................... (10,304) (15,823) (17,648)
Inventories....................................................... (2,167) (3,889) (15,077)
Other current assets.............................................. 1,279 (713) (1,534)
Accounts payable and accrued liabilities.......................... 578 2,730 9,717
Other, net............................................................. 100 (759) (466)
-------- -------- --------
Cash provided by (used in) operating activities................... 3,795 1,224 (29,548)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net assets of distribution business acquired............................. -- -- (8,382)
Purchases of property, plant and equipment............................... (8,240) (9,537) (6,467)
Proceeds from disposals of property, plant and equipment................. 1,757 1,749 1,091
Other.................................................................... 250 1,397 351
-------- -------- --------
Cash used in investing activities................................. (6,233) (6,391) (13,407)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Senior Secured Notes and Common Stock
Warrants............................................................... -- -- 40,000
Net change in lines of credit............................................ 359 21,423 28,711
Repayments of long-term debt............................................. (2,908) (13,192) (29,761)
Exercise of stock warrants and stock options............................. 588 -- 30
-------- -------- --------
Cash provided by financing activities............................. (1,961) 8,231 38,980
Effect of exchange rate changes on cash.................................. 721 704 (389)
-------- -------- --------
Increase (decrease) in cash and cash equivalents......................... (3,678) 3,768 (4,364)
Cash and cash equivalents, beginning of year............................. 9,204 5,436 9,800
-------- -------- --------
Cash and cash equivalents, end of year................................... $ 5,526 $ 9,204 $ 5,436
======== ======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Operating activities include cash payments for interest and income
taxes as follows:
Interest paid....................................................... $ 6,888 $ 5,972 $ 2,910
Income taxes paid, net of refunds................................... 1,801 4,020 6,454
Investing activities exclude the following non-cash activities:
Exchange of income tax receivable for intangible assets and
equipment.......................................................... -- -- 1,969
Long-term note received from sale of assets......................... -- 517 --
Financing activities exclude the following non-cash activities:
Issuance of restricted stock awards................................. -- -- 1,150
Issuance of Company common stock under compensation agreement....... -- 222 --
Issuance of note payable for license agreement...................... -- 1,465 --
</TABLE>
See accompanying notes.
F-39
<PAGE> 157
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.
F-40
<PAGE> 158
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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 $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 36 months or more or through payments from the net
winnings of the machines until the purchase price is paid.
F-41
<PAGE> 159
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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.
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 stockholders' 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, 1995, 1994 and
1993 were $9.2 million, $8.7 million and $7.8 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 10,775,699, 10,726,556 and 10,685,054 for the
years ended December 31, 1995, 1994 and 1993.
Common stock equivalents were not included in the computation of earnings
(loss) per common share as their effect would have been antidilutive or
immaterial.
F-42
<PAGE> 160
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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 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".
F-43
<PAGE> 161
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Germany.................................. $130,655 $111,068 $112,601
United States............................ 129,140 131,228 60,533
Eliminations............................. (10,483) (6,104) (4,427)
-------- -------- --------
Consolidated............................. $249,312 $236,192 $168,707
======== ======== ========
Operating Income (Loss):
Germany.................................. $ 5,581 $ 9,232 $ 9,702
United States............................ 2,982 4,184 (27,658)
Eliminations............................. (199) (35) (580)
-------- -------- --------
Consolidated............................. $ 8,364 $ 13,381 $(18,536)
======== ======== ========
Identifiable Assets:
Germany.................................. $100,207 $ 97,537 $ 81,899
United States............................ 100,643 99,478 90,613
Eliminations............................. (6,534) (4,773) (1,682)
-------- -------- --------
Consolidated............................. $194,316 $192,242 $170,830
======== ======== ========
</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".
Export sales (including sales to Wulff) from Gaming's and Systems'
operations for the years ended December 31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Europe........................................ $12,890 $10,889 $ 8,651
Far East...................................... 998 860 223
Latin America................................. 5,392 4,015 2,030
Canada........................................ 6,185 3,254 1,589
Other......................................... 1,824 556 --
------- ------- -------
$27,289 $19,574 $12,493
======= ======= =======
</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".
F-44
<PAGE> 162
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
10 3/8% Senior Secured Notes due 1998, net of
unamortized discount of $344 and $458................ $ 39,656 $ 39,542
Other long-term debt:
Wulff revolving lines of credit........................ 15,905 15,853
Bally Gaming, Inc. revolving line of credit............ 9,400 7,768
Notes payable, 5% to 12%............................... 4,983 6,599
Less current maturities................................ (14,957) (16,000)
------- --------
$15,331 $ 14,220
======= ========
</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 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 DMI6,300,000 (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
F-45
<PAGE> 163
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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, 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
F-46
<PAGE> 164
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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-47
<PAGE> 165
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> <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
F-48
<PAGE> 166
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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.
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>
F-49
<PAGE> 167
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
OTHER REVENUES
Other revenues for the years ended December 31, 1995, 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Interest......................................... $3,615 $3,538 $3,795
Currency transaction gain (loss)................. (53) (30) (245)
Other............................................ 1,279 1,366 586
------ ------ ------
$4,841 $4,874 $4,136
====== ====== ======
</TABLE>
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 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.
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.
F-50
<PAGE> 168
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The provision (credit) for foreign and domestic income taxes for the years
ended December 31, 1995, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Federal:
Current........................................ $ 260 $ 220 $ 476
Deferred....................................... -- -- --
------ ------ ------
260 220 476
------ ------ ------
Foreign:
Current........................................ 4,586 2,896 3,603
Deferred....................................... 58 (296) 163
------ ------ ------
4,644 2,600 3,766
------ ------ ------
Total provision for income taxes................. $4,904 $2,820 $4,242
====== ====== ======
</TABLE>
The major components of the net deferred tax asset as of December 31, 1995,
and 1994 were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Property, plant and equipment.......................... $ 1,193 $ 1,075
Other.................................................. -- 131
-------- --------
Total deferred tax liabilities............... 1,193 1,206
-------- --------
Bad debt reserves...................................... 5,876 4,933
Inventory reserves..................................... 4,736 5,527
Wulff corporate reorganization......................... 366 235
Net operating loss carryforwards....................... 391 --
Foreign tax credit carryforwards....................... 12,955 8,382
AMT tax credit carryforwards........................... 570 384
Intangibles............................................ 909 2,432
Accrued liabilities.................................... 562 1,201
Deferred compensation.................................. 476 696
Other.................................................. 500 31
-------- --------
Total deferred tax assets.................... 27,341 23,821
-------- --------
Valuation allowance.................................... (24,667) (21,460)
-------- --------
Net deferred tax assets...................... $ 1,481 $ 1,155
======== ========
</TABLE>
At December 31, 1995 and 1994, 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 carry-forwards 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.
F-51
<PAGE> 169
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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,
-----------------------------
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
Taxes at federal statutory rate................. $ 529 $2,248 $(7,806)
Losses with no current tax benefit.............. -- -- 11,528
Federal alternative minimum tax................. 200 200 143
Foreign earnings at other than U.S. statutory
rate.......................................... 3,529 (2) 238
Foreign withholding on dividends................ 450 353 333
Other........................................... 196 21 34
Impact of SFAS 109 adoption..................... -- -- (228)
------ ------ -------
$4,904 $2,820 $ 4,242
====== ====== =======
</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
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, 1995, 1994 and 1993 were none, $90,000 and
$295,000, 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 none, none, and $281,000 for the years ended
December 31, 1995, 1994 and 1993, 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 noncompetition 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, 1995 and 1994, the Company was
indebted to the firm for approximately $480,000 and $200,000, respectively, for
legal services rendered. During the years ended December 31, 1995, 1994 and
1993, Waters, McPherson, McNeill, P.C., billed the Company
F-52
<PAGE> 170
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
approximately $1.5 million, $1.3 million, and $1.0 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, 1995, 1994 and 1993 was approximately $140,000, $120,000 and
$91,000, 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, 1995, 1994 and 1993 was $3.0 million, $2.9 million and $1.1
million, respectively.
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, 1995, 1994 and 1993 was $3.6
million, $2.7 million and $2.6 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 $.1 million, $1.0 million
and $.5 million during 1995,
F-53
<PAGE> 171
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1994 and 1993, 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 $6.3 million and $3.5 million on all
receivables with recourse is included in the Company's allowance for doubtful
accounts at December 31, 1995 and 1994, 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 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), 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 a defendant. The Amended
Fiorella Action also alleged
F-54
<PAGE> 172
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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 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 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
F-55
<PAGE> 173
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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 indicated
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 to 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, 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 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
F-56
<PAGE> 174
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
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 believe 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.
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 of
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 Gaming and/or the Company at December 31, 1995
relate to these emerging markets including approximately 25% to three customers
operating in Mississippi. Receivables and customer
F-57
<PAGE> 175
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
obligations guaranteed by Gaming and/or 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.
F-58
<PAGE> 176
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 2,009 $ 5,526
Accounts and notes receivable, net of allowance for doubtful
accounts of $17,054 and $16,281................................. 82,872 87,176
Inventories, net:
Raw materials and work-in-process............................... 17,342 16,066
Finished goods.................................................. 34,619 35,525
-------- --------
51,961 51,591
Other current assets............................................... 4,450 3,983
-------- --------
Total current assets....................................... 141,292 148,276
Long-term notes receivable, net of allowance for doubtful accounts of
$7,887 and $7,869.................................................. 9,696 9,981
Property, plant and equipment, net................................... 23,615 23,244
Intangible assets, less accumulated amortization of $14,045 and
$13,720............................................................ 10,417 10,814
Other assets......................................................... 1,916 2,001
-------- --------
$ 186,936 $194,316
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 14,707 $ 18,556
Accrued liabilities and other payables............................. 16,258 17,406
Current maturities of long-term debt............................... 24,678 14,957
-------- --------
Total current liabilities.................................. 55,643 50,919
10 3/8% Senior Secured Notes due 1998, net of unamortized discount of
$312 and $344...................................................... 39,688 39,656
Other long-term debt, less current maturities........................ 5,605 15,331
Commitments and contingencies
Stockholders' equity:
Preferred stock.................................................... -- --
Common stock....................................................... 108 108
Additional paid-in-capital......................................... 68,345 68,345
Retained earnings.................................................. 1,329 1,842
Cumulative translation adjustments................................. 16,708 18,662
Unearned compensation.............................................. (490) (547)
-------- --------
Total stockholders' equity................................. 86,000 88,410
-------- --------
$ 186,936 $194,316
======== ========
</TABLE>
See accompanying notes.
F-59
<PAGE> 177
BALLY GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
(IN THOUSANDS, EXCEPT
PER
SHARE DATA)
<S> <C> <C>
Revenues:
Sales................................................................ $57,435 $67,658
Other................................................................ 1,109 631
------- -------
58,544 68,289
------- -------
Costs and expenses:
Cost of sales........................................................ 37,757 43,500
Selling, general and administrative.................................. 16,526 16,998
Provision for doubtful receivables................................... 991 1,154
Unusual charges...................................................... 996 --
------- -------
56,270 61,652
------- -------
Operating income..................................................... 2,274 6,637
Interest expense..................................................... 1,665 1,733
------- -------
Income before income taxes........................................... 609 4,904
Provision for income taxes........................................... 1,122 2,042
------- -------
Net income (loss).................................................... $ (513) $ 2,862
======= =======
Net income (loss) per common share................................... $ (0.05) $ 0.27
======= =======
Weighted average number of common shares and common stock equivalents
outstanding....................................................... 10,805 10,751
======= =======
</TABLE>
See accompanying notes.
F-60
<PAGE> 178
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> <C> <C> <C> <C> <C>
Balance at December 31, 1995
and March 31, 1996........ 10,800
============
</TABLE>
See accompanying notes.
F-61
<PAGE> 179
BALLY GAMING INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................... $ (513) $ 2,862
Adjustments to reconcile net income (loss) to cash used in operating
activities:
Depreciation and amortization..................................... 1,898 1,440
Provision for doubtful receivables................................ 991 1,154
Provision for inventory valuation................................. 538 158
Changes in operating assets and liabilities....................... (4,299) (10,795)
Other, net........................................................ (372) (424)
------- --------
Cash used in operating activities............................ (1,757) (5,605)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........................... (2,733) (2,232)
Proceeds from disposals of property, plant and equipment............. 554 410
Other................................................................ (39) (286)
------- --------
Cash used in investing activities............................ (2,218) (2,108)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in lines of credit........................................ 817 2,602
Repayments of long-term debt......................................... (227) (914)
------- --------
Cash provided by financing activities........................ 590 1,688
Effect of exchange rate changes on cash................................ (132) 780
------- --------
Decrease in cash and cash equivalents.................................. (3,517) (5,245)
Cash and cash equivalents, beginning of period......................... 5,526 9,204
------- --------
Cash and cash equivalents, end of period............................... $ 2,009 $ 3,959
======= ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Operating activities include cash payments for interest and income
taxes as follows:
Interest paid........................................................ $ 2,598 $ 2,721
Income taxes paid.................................................... 1,264 1,333
</TABLE>
See accompanying notes.
F-62
<PAGE> 180
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
F-63
<PAGE> 181
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Company withdrew its litigation against Alliance. The Company and Alliance have
extended the unilateral termination date of the Merger Agreement until June 18,
1996.
LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
10 3/8% Senior Secured Notes due 1998, net of
unamortized discount of $312 and $344....... $ 39,688 $ 39,656
======= =======
Other long-term debt:
Wulff revolving lines of credit............... $ 16,289 $ 15,905
Bally Gaming, Inc. revolving line of credit... 9,332 9,400
Notes payable, 5% to 12%...................... 4,662 4,983
Less current maturities....................... (24,678) (14,957)
------- -------
$ 5,605 $ 15,331
======= =======
</TABLE>
INCOME TAXES
The Company's effective tax rate in the 1996 and 1995 periods differ 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 and Gaming expense product research and development costs as
incurred. Research and development costs were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Wulff...................................................... $ 868 $ 853
Gaming..................................................... 877 971
Systems.................................................... 502 473
------ ------
$2,247 $2,297
====== ======
</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 Alliance 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 10,805,262 and 10,751,299 for the three months
ended March 31, 1996 and 1995, respectively.
F-64
<PAGE> 182
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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
F-65
<PAGE> 183
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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 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
F-66
<PAGE> 184
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
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 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
F-67
<PAGE> 185
BALLY GAMING INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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 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 gaining 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.
F-68
<PAGE> 186
======================================================
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
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 THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Incorporation of Certain Documents by
Reference........................... 3
Prospectus Summary.................... 4
Risk Factors.......................... 16
Use of Proceeds of Exchange Notes..... 25
The Exchange Offer.................... 26
Capitalization........................ 34
Selected Financial Data............... 35
Unaudited Pro Forma Condensed Combined
Financial Information............... 37
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 42
Business.............................. 50
Management............................ 76
Principal Stockholders................ 78
Certain Transactions.................. 79
The Refinancing....................... 81
Description of Exchange Notes......... 85
Certain Federal Income Tax
Considerations.................... 113
Plan of Distribution.................. 115
Legal Matters......................... 116
Experts............................... 116
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$150,000,000
[ALLIANCE GAMING LOGO]
10% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES B
--------------------
PROSPECTUS
OCTOBER , 1997
--------------------
OFFER TO EXCHANGE
10% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES B
FOR 10% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES A
======================================================
<PAGE> 187
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of the Company's Articles of Incorporation limits the liability
of the Company's directors and officers. It provides that a director or officer
of the Company will not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director or officer,
except for liability (i) for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law or (ii) for the payment of
dividends in violation of Section 78.300 of the Nevada General Corporation Law.
It also provides that any repeal or modification of the foregoing provision by
the stockholders of the Company will be prospective only, and will not adversely
affect any limitation on the personal liability of a director or officer of the
Company existing at the time of such repeal or modification.
Section 78.300 of the Nevada General Corporation Law provides:
1. The directors of a corporation shall not make distributions to
stockholders except as provided by applicable law.
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 distribution made or of any loss
sustained by the corporation by reason of the distribution to stockholders.
However, Section 78.751 of the Nevada General Corporation Law permits the
Registrant to indemnify its directors and officers as follows:
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except any action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit
or proceeding if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, has no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and that, with respect to any criminal action or proceeding,
he had reasonable cause to believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually
and reasonably incurred by him in connection with the defense or settlement
of the action or suit if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter
as to which such a person has been 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
II-1
<PAGE> 188
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 consisting of directors who were not parties to the
act, suit or proceeding cannot be obtained, 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.
6. The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the
articles of incorporation or any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise, for either an action in his
official capacity or an action in another capacity while holding his
office, except that indemnification, unless ordered by a court pursuant
to subsection 2 or for the advancement of expenses made pursuant to
subsection 5, may not be made to or on behalf of any director or officer
if a final adjudication establishes that his acts or omissions involved
intentional misconduct, fraud or a knowing violation of the law and was
material to the cause of action.
(b) Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs,
executors and administrators of such a person.
The Company's bylaws provide for indemnification of directors and officers
to the full extent allowable by law. In addition, the Company has entered into
agreements with its directors which provide for indemnification to the full
extent allowable by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
The exhibits to this Registration Statement are listed in the accompanying
Exhibit Index and are filed (except where otherwise indicated) as part of this
Registration Statement.
II-2
<PAGE> 189
(b) No financial statement schedules are required to be filed.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement 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
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE> 190
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Alliance Gaming
Corporation has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada, on
October 7, 1997.
ALLIANCE GAMING CORPORATION
By: /s/ MORRIS GOLDSTEIN
------------------------------------
Morris Goldstein
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------- -----------------
<C> <S> <C>
/s/ MORRIS GOLDSTEIN President, Chief Executive October 7, 1997
- ------------------------------------------ Officer (Principal Executive
Morris Goldstein Officer
/s/ SCOTT D. SCHWEINFURTH Sr. Vice President, Treasurer & October 7, 1997
- ------------------------------------------ Chief Financial Officer
Scott D. Schweinfurth (Principal Accounting &
Financial Officer)
/s/ JACQUES ANDRE Director October 7, 1997
- ------------------------------------------
Jacques Andre
/s/ ANTHONY L. DICESARE Director October 7, 1997
- ------------------------------------------
Anthony L. Dicesare
/s/ MICHAEL HIRSCHFELD Director October 7, 1997
- ------------------------------------------
Michael Hirschfeld
/s/ JOEL KIRSCHBAUM Director October 7, 1997
- ------------------------------------------
Joel Kirschbaum
/s/ HANS KLOSS Director October 7, 1997
- ------------------------------------------
Hans Kloss
/s/ ALFRED H. WILMS Director October 7, 1997
- ------------------------------------------
Alfred H. Wilms
</TABLE>
II-4
<PAGE> 191
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Alliance
Holding Company has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada, on
October 7, 1997.
ALLIANCE HOLDING COMPANY
By: /s/ MORRIS GOLDSTEIN
------------------------------------------
Morris Goldstein
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
MORRIS GOLDSTEIN President (Principal Executive October 7, 1997
- ------------------------------------------ Officer) and Director
Morris Goldstein
SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ and Financial Officer)
Scott D. Schweinfurth
DAVID D. JOHNSON Director October 7, 1997
- ------------------------------------------
David D. Johnson
</TABLE>
II-5
<PAGE> 192
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, APT Games, Inc.
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Las Vegas, Nevada, on October 7,
1997.
APT GAMES, INC.
By: /s/ MORRIS GOLDSTEIN
------------------------------------
Morris Goldstein
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
MORRIS GOLDSTEIN President (Principal Executive October 7, 1997
- ------------------------------------------ Officer) and Director
Morris Goldstein
SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ and Financial Officer)
Scott D. Schweinfurth and Director
DAVID D. JOHNSON Director October 7, 1997
- ------------------------------------------
David D. Johnson
ALFRED H. WILMS Director October 7, 1997
- ------------------------------------------
Alfred H. Wilms
</TABLE>
II-6
<PAGE> 193
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, United Coin
Machine Co. has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada, on
October 7, 1997.
UNITED COIN MACHINE CO.
By: /s/ ROBERT L. MIODUNSKI
------------------------------------
Robert L. Miodunski
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
/s/ ROBERT L. MIODUNSKI President (Principal Executive October 7, 1997
- ------------------------------------------ Officer)
Robert L. Miodunski
/s/ SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ and Financial Officer) and
Scott D. Schweinfurth Director
/s/ DAVID D. JOHNSON Director October 7, 1997
- ------------------------------------------
David D. Johnson
/s/ MORRIS GOLDSTEIN Director October 7, 1997
- ------------------------------------------
Morris Goldstein
/s/ ALFRED H. WILMS Director October 7, 1997
- ------------------------------------------
Alfred H. Wilms
</TABLE>
II-7
<PAGE> 194
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Plantation
Investments, Inc. has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada,
on October 7, 1997.
PLANTATION INVESTMENTS, INC.
By: /s/ ROBERT L. SAXTON
------------------------------------
Robert L. Saxton
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
/s/ ROBERT L. SAXTON President (Principal Executive October 7, 1997
- ------------------------------------------ Officer)
Robert L. Saxton
/s/ SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ and Financial Officer)
Scott D. Schweinfurth
/s/ MORRIS GOLDSTEIN Director October 7, 1997
- ------------------------------------------
Morris Goldstein
/s/ ALFRED H. WILMS Director October 7, 1997
- ------------------------------------------
Alfred H. Wilms
</TABLE>
II-8
<PAGE> 195
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Bally Gaming
International, Inc. has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada,
on October 7, 1997.
BALLY GAMING INTERNATIONAL, INC.
By: /s/ MORRIS GOLDSTEIN
------------------------------------
Morris Goldstein
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
/s/ MORRIS GOLDSTEIN President (Principal Executive October 7, 1997
- ------------------------------------------ Officer) and Director
Morris Goldstein
/s/ SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ & Financial Officer) and
Scott D. Schweinfurth Director
/s/ DAVID D. JOHNSON Director October 7, 1997
- ------------------------------------------
David D. Johnson
</TABLE>
II-9
<PAGE> 196
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Bally Gaming,
Inc. has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in Las Vegas, Nevada, on October 7,
1997.
BALLY GAMING, INC.
By: /s/ MORRIS GOLDSTEIN
------------------------------------
Morris Goldstein
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
/s/ MORRIS GOLDSTEIN President (Principal Executive October 7, 1997
- ------------------------------------------ Officer) and Director
Morris Goldstein
/s/ SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ and Financial Officer)
Scott D. Schweinfurth and Director
/s/ DAVID D. JOHNSON Director October 7, 1997
- ------------------------------------------
David D. Johnson
</TABLE>
II-10
<PAGE> 197
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Foreign Gaming
Ventures, Inc. has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada, on
October 7, 1997.
FOREIGN GAMING VENTURES, INC.
By: /s/ MORRIS GOLDSTEIN
------------------------------------
Morris Goldstein
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
/s/ MORRIS GOLDSTEIN President (Principal Executive October 7, 1997
- ------------------------------------------ Officer) and Director
Morris Goldstein
/s/ SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ and Financial Officer)
Scott D. Schweinfurth
/s/ ALFRED H. WILMS Director October 7, 1997
- ------------------------------------------
Alfred H. Wilms
</TABLE>
II-11
<PAGE> 198
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Louisiana
Ventures, Inc. has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada, on
October 7, 1997.
LOUISIANA VENTURES, INC.
By: /s/ MORRIS GOLDSTEIN
------------------------------------
Morris Goldstein
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
/s/ MORRIS GOLDSTEIN President (Principal Executive October 7, 1997
- ------------------------------------------ Officer) and Director
Morris Goldstein
/s/ SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ and Financial Officer)
Scott D. Schweinfurth
/s/ ALFRED H. WILMS Director October 7, 1997
- ------------------------------------------
Alfred H. Wilms
</TABLE>
II-12
<PAGE> 199
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, United Gaming
Rainbow has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in Las Vegas, Nevada, on October
7, 1997.
UNITED GAMING RAINBOW
By: /s/ ROBERT L. SAXTON
------------------------------------
Robert L. Saxton
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
/s/ ROBERT L. SAXTON President (Principal Executive October 7, 1997
- ------------------------------------------ Officer)
Robert L. Saxton
/s/ SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ and Financial Officer)
Scott D. Schweinfurth
/s/ MORRIS GOLDSTEIN Director October 7, 1997
- ------------------------------------------
Morris Goldstein
/s/ ALFRED H. WILMS Director October 7, 1997
- ------------------------------------------
Alfred H. Wilms
</TABLE>
II-13
<PAGE> 200
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Native American
Investment, Inc. has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada, on
October 7, 1997.
NATIVE AMERICAN INVESTMENTS, INC.
By: /s/ MORRIS GOLDSTEIN
------------------------------------
Morris Goldstein
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Morris Goldstein, Scott Schweinfurth and David
Johnson his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him in his name, place and stead in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- -----------------
<C> <S> <C>
/s/ MORRIS GOLDSTEIN President (Principal Executive October 7, 1997
- ------------------------------------------ Officer) and Director
Morris Goldstein
/s/ SCOTT D. SCHWEINFURTH Treasurer (Principal Accounting October 7, 1997
- ------------------------------------------ and Financial Officer) and
Scott D. Schweinfurth Director
/s/ DAVID D. JOHNSON Director October 7, 1997
- ------------------------------------------
David D. Johnson
/s/ ALFRED H. WILMS Director October 7, 1997
- ------------------------------------------
Alfred H. Wilms
</TABLE>
II-14
<PAGE> 201
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------------------------------------------------------------------- --------
<C> <S> <C>
4.1 Indenture, dated as of August 8, 1997, between Alliance Gaming
Corporation, the Guarantors named therein and U.S. Trust Company of New
York, as trustee (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997)..................
4.2 Form of 10% Senior Subordinated Note due 2007 (included as Exhibit to
4.1)...................................................................
4.3 Registration Rights Agreement, dated as of August 8, 1997, between
Alliance Gaming Corporation, the Subsidiary Guarantors named therein
and Credit Suisse First Boston Corporation.............................
5.1 Opinion of Milbank, Tweed, Hadley & McCloy.............................
8.1 Opinion of Milbank, Tweed, Hadley & McCloy (included in Exhibit 5.1)...
12.1 Statement re Computation of Ratio of Earnings to Fixed Changes.........
23.1 Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibit 5.1)...
23.2 Consent of KPMG Peat Marwick LLP.......................................
23.3 Consent of Coopers & Lybrand L.L.P. ...................................
24.1 Powers of Attorney (included on signature pages of this Registration
Statement).............................................................
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of
the United States Trust Company of New York under the Trust Indenture
Act of 1939............................................................
99.1 Form of Letter of Transmittal..........................................
99.2 Form of Notice of Guaranteed Delivery..................................
99.3 Form of Instructions to Registered Holder and/or Book-Entry Transfer
Facility Participant from Beneficial Owner.............................
</TABLE>
<PAGE> 1
A/B EXCHANGE
REGISTRATION RIGHTS AGREEMENT
Dated as of August 8, 1997
by and among
Alliance Gaming Corporation
and
APT Games, Inc.
United Coin Machine Co.
Plantation Investments, Inc.
Alliance Holding Company
Bally Gaming International, Inc.
Bally Gaming, Inc.
Foreign Gaming Ventures, Inc.
Louisiana Ventures, Inc.
United Gaming Rainbow
Native American Investment, Inc.
and
Credit Suisse First Boston Corporation
<PAGE> 2
This Registration Rights Agreement (this "Agreement") is made
and entered into as of August 8, 1997 by and among Alliance Gaming Corporation,
a Nevada corporation (the "Company"), the Subsidiary Guarantors (as defined
below) and Credit Suisse First Boston Corporation, as purchaser (the
"Purchaser"), who has agreed to purchase the Company's 10% Series A Senior
Subordinated Notes due 2007 (the "Series A Notes") pursuant to the Purchase
Agreement (as defined below).
This Agreement is made pursuant to the Purchase Agreement,
dated August 4, 1997 (the "Purchase Agreement"), by and among the Company, the
Subsidiary Guarantors and the Purchaser. In order to induce the Purchaser to
purchase the Series A Notes, the Company has agreed to provide the registration
rights set forth in this Agreement. The execution and delivery of this Agreement
is a condition to the obligations of the Purchaser set forth in Section 3 of the
Purchase Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms
shall have the following meanings:
Act: The Securities Act of 1933, as amended.
Broker-Dealer: Any broker or dealer registered under the
Exchange Act.
Closing Date: The date of this Agreement.
Commission: The Securities and Exchange Commission.
Consummate: A Registered Exchange Offer shall be deemed
"Consummated" for purposes of this Agreement upon the occurrence of (i) the
filing and effectiveness under the Act of the Exchange Offer Registration
Statement relating to the Series B Notes to be issued in the Exchange Offer,
(ii) the maintenance of such Registration Statement continuously effective and
the keeping of the Exchange Offer open for a period not less than the minimum
period required pursuant to Section 3(b) hereof, and (iii) the delivery by the
Company to the Registrar under the Indenture of Series B Notes in the same
aggregate principal amount as the aggregate principal amount of Series A Notes
that were tendered by Holders thereof pursuant to the Exchange Offer.
Damages Payment Date: With respect to the Series A Notes, each
Interest Payment Date.
Effectiveness Target Date: As defined in Section 5.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Offer: The registration by the Company under the Act
of the Series B Notes pursuant to a Registration Statement pursuant to which the
Company offers the Holders of all outstanding Transfer Restricted Securities the
opportunity to exchange all such outstanding Transfer Restricted Securities held
by such Holders for Series B Notes in an aggregate principal amount equal to the
aggregate principal amount of the Transfer Restricted Securities tendered in
such exchange offer by such Holders.
Exchange Offer Registration Statement: The Registration
Statement relating to the Exchange Offer, including the related Prospectus.
<PAGE> 3
Exempt Resales: The transactions in which the Purchaser
proposes to sell the Series A Notes to certain "qualified institutional buyers,"
as such term is defined in Rule 144A under the Act, and outside the United
States to a foreign person in a transaction meeting the requirements of Rule 904
under the Securities Act.
Holders: As defined in Section 2(b) hereof.
Indemnified Holder: As defined in Section 8(a) hereof.
Indenture: The Indenture, dated as of August 8, 1997, among
the Company, United States Trust Company of New York, as trustee (the "Trustee")
and the Subsidiary Guarantors, pursuant to which the Notes are to be issued, as
such Indenture is amended or supplemented from time to time in accordance with
the terms thereof.
Interest Payment Date: As defined in the Indenture and the
Notes.
NASD: National Association of Securities Dealers, Inc.
Notes: The Series A Notes and the Series B Notes.
Person: An individual, partnership, limited liability company,
corporation, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
Prospectus: The prospectus included in a Registration
Statement, as amended or supplemented by any prospectus supplement and by all
other amendments thereto, including post-effective amendments, and all material
incorporated by reference into such Prospectus.
Purchaser: As defined in the preamble hereto.
Record Holder: With respect to any Damages Payment Date
relating to Notes, each Person who is a Holder of Notes on the record date with
respect to the Interest Payment Date on which such Damages Payment Date shall
occur.
Registration Default: As defined in Section 5 hereof.
Registration Statement: Any registration statement of the
Company relating to (a) an offering of Series B Notes pursuant to an Exchange
Offer or (b) the registration for resale of Transfer Restricted Securities
pursuant to the Shelf Registration Statement, which is filed pursuant to the
provisions of this Agreement, in each case, including the Prospectus included
therein, all amendments and supplements thereto (including post-effective
amendments) and all exhibits and material incorporated by reference therein.
Series B Notes: The Company's 10% Series B Senior Subordinated
Notes due 2007 to be issued pursuant to the Indenture in the Exchange Offer.
Shelf Filing Deadline: As defined in Section 4 hereof.
3
<PAGE> 4
Shelf Registration Statement: As defined in Section 4 hereof.
Subsidiary Guarantors: Collectively, APT Games, Inc., United
Coin Machine Co., Plantation Investments, Inc., Alliance Holding Company, Bally
Gaming International, Inc., Bally Gaming, Inc., Foreign Gaming Ventures, Inc.,
Louisiana Ventures, Inc., United Gaming Rainbow and Native American Investment,
Inc.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section
77aaa-77bbbb) as in effect on the date of the Indenture.
Transfer Restricted Securities: Each Series A Note until such
time as Rule 144 under the Act or any successor provision is available for sales
of the Series A Notes, or, if earlier, (i) the date on which such Series A Note
has been exchanged by a person other than a broker-dealer for a Series B Note in
the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of a Series A Note for a Series B Note, the date on which such
Series B Note is sold to a purchaser who receives from such broker-dealer on or
prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement, (iii) the date on which such Series A
Note has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which such
Series A Note is distributed to the public pursuant to Rule 144 under the Act.
Underwritten Registration or Underwritten Offering: A
registration in which securities of the Company are sold to an underwriter for
reoffering to the public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities entitled to
the benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. A Person is
deemed to be a holder of Transfer Restricted Securities (each, a "Holder")
whenever such Person owns Transfer Restricted Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permissible under
applicable law or Commission policy (after the procedures set forth in Section
6(a) below have been complied with), the Company and the Subsidiary Guarantors
shall (i) cause to be filed with the Commission as soon as practicable after the
Closing Date, but in no event later than 60 days after the Closing Date, a
Registration Statement under the Act relating to the Series B Notes and the
Exchange Offer, (ii) use their best efforts to cause such Registration Statement
to become effective at the earliest possible time, but in no event later than
150 days after the Closing Date, (iii) in connection with the foregoing, file
(A) all pre-effective amendments to such Registration Statement as may be
necessary in order to cause such Registration Statement to become effective, (B)
if applicable, a post-effective amendment to such Registration Statement
pursuant to Rule 430A under the Act and (C) cause all necessary filings in
connection with the registration and qualification of the Series B Notes to be
made under the Blue Sky laws of such jurisdictions as are necessary to permit
Consummation of the Exchange Offer, and (iv) promptly following the
effectiveness
4
<PAGE> 5
of such Registration Statement, commence the Exchange Offer. The Exchange Offer
shall be on the appropriate form permitting registration of the Series B Notes
to be offered in exchange for the Transfer Restricted Securities and to permit
resales of Notes held by Broker-Dealers as contemplated by this Section 3.
(b) The Company shall cause the Exchange Offer Registration
Statement to be effective continuously and shall keep the Exchange Offer open
for a period of not less than the minimum period required under applicable
federal and state securities laws to Consummate the Exchange Offer; provided,
however, that in no event shall such period be less than 20 business days. The
Company shall cause the Exchange Offer to comply with all applicable federal and
state securities laws. No securities other than the Notes shall be included in
the Exchange Offer Registration Statement. The Company shall use its best
efforts to cause the Exchange Offer to be Consummated on the earliest
practicable date after the Exchange Offer Registration Statement has become
effective, but in no event later than 30 business days thereafter.
(c) The Company shall indicate in a "Plan of Distribution"
section contained in the Prospectus contained in the Exchange Offer Registration
Statement that any Broker-Dealer who holds Series A Notes that are Transfer
Restricted Securities and that were acquired for its own account as a result of
market-making activities or other trading activities (other than Transfer
Restricted Securities acquired directly from the Company) may exchange such
Series A Notes pursuant to the Exchange Offer; however, such Broker-Dealer may
be deemed to be an "underwriter" within the meaning of the Act and must,
therefore, deliver a prospectus meeting the requirements of the Act in
connection with any resales of the Series B Notes received by such Broker-Dealer
in the Exchange Offer, which prospectus delivery requirement may be satisfied by
the delivery by such Broker-Dealer of the Prospectus contained in the Exchange
Offer Registration Statement. Such "Plan of Distribution" section shall also
contain all other information with respect to such resales by Broker-Dealers
that the Commission may require in order to permit such resales pursuant
thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer
or disclose the amount of Notes held by any such Broker-Dealer except to the
extent required by the Commission as a result of a change in policy after the
date of this Agreement.
(d) The Company and the Subsidiary Guarantors shall use their
best efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented and amended as required by the provisions of Section
6(c) below to the extent necessary to ensure that it is available for resales of
Notes acquired by Broker-Dealers for their own accounts as a result of
market-making activities or other trading activities, and to ensure that it
conforms with the requirements of this Agreement, the Act and the policies,
rules and regulations of the Commission as announced from time to time, for as
long as the Series A Notes are Transfer Restricted Securities. The Company shall
provide sufficient copies of the latest version of such Prospectus to
Broker-Dealers promptly upon request at any time, for as long as the Series A
Notes are Transfer Restricted Securities, in order to facilitate such resales.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Company is not required to
file an Exchange Offer Registration Statement or to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy (after the procedures set forth in Section 6(a) below have
been complied with) or (ii) if any Holder of Transfer Restricted Securities
shall notify the Company within 20 business days of the Consummation of the
Exchange Offer (A) that such Holder is prohibited by applicable law or
Commission policy from participating in the Exchange Offer, or (B) that such
Holder may not resell
5
<PAGE> 6
the Series B Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and that the Prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
Holder, or (C) that such Holder is a Broker-Dealer and holds Series A Notes
acquired directly from the Company or one of its affiliates, then the Company
and the Subsidiary Guarantors shall (subject to compliance with applicable
gaming laws) use their best efforts to
(x) cause to be filed a shelf registration statement
pursuant to Rule 415 under the Act, which may be an amendment to the Exchange
Offer Registration Statement (in either event, the "Shelf Registration
Statement") on or prior to the earlier to occur of (1) the 30th day after the
date on which the Company determines that it is not required to file the
Exchange Offer Registration Statement and (2) the 30th day after the date on
which the Company receives notice from a Holder of Transfer Restricted
Securities as contemplated by clause (ii) above (such earlier date being the
"Shelf Filing Deadline"), which Shelf Registration Statement shall provide for
resales of all Transfer Restricted Securities the Holders of which shall have
provided the information required pursuant to Section 4(b) hereof;
(y) make all required gaming filings and receive all
required gaming approvals; and
(z) cause such Shelf Registration Statement to be
declared effective by the Commission on or before the 30th day after the Shelf
Filing Deadline.
The Company and the Subsidiary Guarantors shall use their best
efforts to keep such Shelf Registration Statement continuously effective,
supplemented and amended as required by the provisions of Sections 6(b) and (c)
hereof to the extent necessary to ensure that it is available for resales of
Notes by the Holders of Transfer Restricted Securities entitled to the benefit
of this Section 4(a), and to ensure that it conforms with the requirements of
this Agreement, the Act and the policies, rules and regulations of the
Commission as announced from time to time, for a period of two years following
the Closing Date.
(b) Provision by Holders of Certain Information in Connection
with the Shelf Registration Statement. No Holder of Transfer Restricted
Securities may include any of its Transfer Restricted Securities in any Shelf
Registration Statement pursuant to this Agreement unless and until such Holder
furnishes to the Company in writing, within 20 business days after receipt of a
request therefor, such information as the Company may reasonably request for use
in connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus included therein and agrees in writing to be bound hereby. No Holder
of Transfer Restricted Securities shall be entitled to Liquidated Damages
pursuant to Section 5 hereof unless and until such Holder shall have used its
best efforts to provide all such reasonably requested information. Each Holder
as to which any Shelf Registration Statement is being effected agrees to furnish
promptly to the Company all information required to be disclosed in order to
make the information previously furnished to the Company by such Holder not
materially misleading.
SECTION 5. LIQUIDATED DAMAGES
If (i) any of the Registration Statements required by this
Agreement is not filed with the Commission on or prior to the date specified for
such filing in this Agreement, (ii) any of such Registration Statements has not
been declared effective by the Commission on or prior to the date specified for
such effectiveness in this Agreement (the "Effectiveness Target Date"), (iii)
the Exchange Offer has not been Consummated within 30 business days after the
Effectiveness Target Date with respect to the Exchange
6
<PAGE> 7
Offer Registration Statement or (iv) any Registration Statement required by this
Agreement is filed and declared effective but shall thereafter cease to be
effective or fail to be usable for its intended purpose without being succeeded
immediately by a post-effective amendment to such Registration Statement that
cures such failure and that is itself immediately declared effective (each such
event referred to in clauses (i) through (iv), a "Registration Default"), the
Company and the Subsidiary Guarantors hereby jointly and severally agree to pay
liquidated damages to each Holder of Transfer Restricted Securities with respect
to the first 90-day period immediately following the occurrence of such
Registration Default, in an amount equal to $.05 per week per $1,000 principal
amount of Transfer Restricted Securities held by such Holder for each week or
portion thereof that the Registration Default continues, provided, however, in
the circumstances set forth in Section 4(a), (A) the filing of a Shelf
Registration Statement shall be deemed to cure any default under clause (i)
above, (B) effectiveness of such a Registration Statement shall be deemed to
cure any default under clauses (ii) and (iii) above and (C) supplementation or
amendment of such a Registration Statement shall be deemed to cure any default
under clause (iv) above, provided further, however, that the matters described
clauses (A), (B) and (C) above shall only cure such defaults with respect to
Series A Notes required to be registered under Section 4(a). The amount of the
liquidated damages shall increase by an additional $.05 per week per $1,000 in
principal amount of Transfer Restricted Securities with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of liquidated damages of $.50 per week per $1,000 principal
amount of Transfer Restricted Securities. All accrued liquidated damages shall
be paid to Record Holders by the Company by wire transfer of immediately
available funds or by federal funds check on each Damages Payment Date, as
provided in the Indenture. Following the cure of all Registration Defaults
relating to any particular Transfer Restricted Securities, the accrual of
liquidated damages with respect to such Transfer Restricted Securities will
cease.
All obligations of the Company and the Subsidiary Guarantors
set forth in the preceding paragraph that are outstanding with respect to any
Transfer Restricted Security at the time such security ceases to be a Transfer
Restricted Security shall survive until such time as all such obligations with
respect to such Security shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection with
the Exchange Offer, the Company and the Subsidiary Guarantors shall comply with
all of the provisions of Section 6(c) below, shall use their best efforts to
effect such exchange to permit the sale of Transfer Restricted Securities being
sold in accordance with the intended method or methods of distribution thereof
(consistent with the terms hereof), and shall comply with all of the following
provisions:
(i) If in the reasonable opinion of counsel to the
Company there is a question as to whether the Exchange Offer is permitted by
applicable law, the Company and the Subsidiary Guarantors hereby agree to seek a
no-action letter or other favorable decision from the Commission's staff
allowing the Company and the Subsidiary Guarantors to Consummate an Exchange
Offer for such Series A Notes. The Company and the Subsidiary Guarantors each
hereby agrees to pursue the issuance of such a decision to the Commission staff
level but shall not be required to take action beyond that to effect a change of
Commission policy. The Company and the Subsidiary Guarantors each hereby agrees,
however, to (A) participate in telephonic conferences with the Commission, (B)
deliver to the Commission staff an analysis prepared by counsel to the Company
setting forth the legal bases, if any, upon which such counsel has
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concluded that such an Exchange Offer should be permitted and (C) diligently
pursue a resolution (which need not be favorable) by the Commission's staff of
such submission.
(ii) As a condition to its participation in the
Exchange Offer pursuant to the terms of this Agreement, each Holder of Transfer
Restricted Securities shall furnish, upon the request of the Company, prior to
the Consummation thereof, a written representation to the Company (which may be
contained in the letter of transmittal contemplated by the Exchange Offer
Registration Statement) to the effect that (A) it is not an affiliate of the
Company, (B) it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a distribution
of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring
the Series B Notes in its ordinary course of business. In addition, all such
Holders of Transfer Restricted Securities shall otherwise cooperate in the
Company's preparations for the Exchange Offer. Each Holder hereby acknowledges
and agrees that any Broker-Dealer and any such Holder using the Exchange Offer
to participate in a distribution of the securities to be acquired in the
Exchange Offer (1) could not under Commission policy as in effect on the date of
this Agreement rely on the position of the Commission enunciated in Morgan
Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings
Corporation (available May 13, 1988), as interpreted in the Commission's letter
to Shearman & Sterling dated July 2, 1993, and similar no-action letters
(including any no-action letter obtained pursuant to clause (i) above), and (2)
must comply with the registration and prospectus delivery requirements of the
Act in connection with a secondary resale transaction and that such a secondary
resale transaction should be covered by an effective registration statement
containing the selling security holder information required by Item 507 or 508,
as applicable, of Regulation S-K if the resales are of Series B Notes obtained
by such Holder in exchange for Series A Notes acquired by such Holder directly
from the Company.
(iii) Prior to effectiveness of the Exchange Offer
Registration Statement, the Company and the Subsidiary Guarantors shall provide
a supplemental letter to the Commission (A) stating that the Company and the
Subsidiary Guarantors are registering the Exchange Offer in reliance on the
position of the Commission enunciated in Exxon Capital Holdings Corporation
(available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991)
and, if applicable, any no-action letter obtained pursuant to clause (i) above
and (B) including a representation that neither the Company nor the Subsidiary
Guarantors has entered into any arrangement or understanding with any Person to
distribute the Series B Notes to be received in the Exchange Offer and that, to
the best of the Company's information and belief, each Holder participating in
the Exchange Offer is acquiring the Series B Notes in its ordinary course of
business and has no arrangement or understanding with any Person to participate
in the distribution of the Series B Notes received in the Exchange Offer.
(b) Shelf Registration Statement. In connection with the Shelf
Registration Statement, the Company and the Subsidiary Guarantors shall comply
with all the provisions of Section 6(c) below and shall use their best efforts
to effect such registration to permit the sale of the Transfer Restricted
Securities being sold in accordance with the intended method or methods of
distribution thereof (consistent with the terms hereof), and pursuant thereto
the Company will as expeditiously as possible prepare and file with the
Commission a Registration Statement relating to the registration on any
appropriate form under the Act, which form shall be available for the sale of
the Transfer Restricted Securities in accordance with the intended method or
methods of distribution thereof.
(c) General Provisions. In connection with any Registration
Statement and any Prospectus required by this Agreement to permit the sale or
resale of Transfer Restricted Securities (including, without
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limitation, any Registration Statement and the related Prospectus required to
permit resales of Notes by Broker-Dealers), subject to Sections 3 and 4, the
Company shall:
(i) comply with all applicable gaming laws, make all
required filings under applicable gaming law and receive all required approval
for any related offering;
(ii) use its best efforts to keep such Registration
Statement continuously effective and provide all requisite financial statements
(including, if required by the Act or any regulation thereunder, financial
statements of the Guarantor) for the period specified in Section 3 or 4 of this
Agreement, as applicable; upon the occurrence of any event that would cause any
such Registration Statement or the Prospectus contained therein (A) to contain a
material misstatement or omit to state a material fact necessary to make the
statements therein not misleading or (B) not to be effective and usable for
resale of Transfer Restricted Securities during the period required by this
Agreement, the Company shall file promptly an appropriate amendment to such
Registration Statement, in the case of clause (A), correcting any such
misstatement or omission, and, in the case of either clause (A) or (B), use its
best efforts to cause such amendment to be declared effective and such
Registration Statement and the related Prospectus to become usable for their
intended purpose(s) as soon as practicable thereafter;
(iii) prepare and file with the Commission such
amendments and post-effective amendments to the Registration Statement as may be
necessary to keep the Registration Statement effective for the applicable period
set forth in Section 3 or 4 hereof, as applicable, or such shorter period as
will terminate when all Transfer Restricted Securities covered by such
Registration Statement have been sold; cause the Prospectus to be supplemented
by any required Prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 under the Act, and to comply fully with the applicable
provisions of Rules 424 and 430A under the Act in a timely manner; and comply
with the provisions of the Act applicable to it with respect to the disposition
of all securities covered by such Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by the
sellers thereof set forth in such Registration Statement or supplement to the
Prospectus;
(iv) advise the underwriter(s), if any, and selling
Holders promptly and, if requested by such Persons, to confirm such advice in
writing, (A) when the Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to any Registration Statement or any
post-effective amendment thereto, when the same has become effective, (B) of any
request by the Commission for amendments to the Registration Statement or
amendments or supplements to the Prospectus or for additional information
relating thereto, (C) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement under the Act or of
the suspension by any state securities commission of the qualification of the
Transfer Restricted Securities for offering or sale in any jurisdiction, or the
initiation of any proceeding for any of the preceding purposes, (D) of the
existence of any fact or the happening of any event that makes any statement of
a material fact made in the Registration Statement, the Prospectus, any
amendment or supplement thereto, or any document incorporated by reference
therein untrue, or that requires the making of any additions to or changes in
the Registration Statement or the Prospectus in order to make the statements
therein not materially misleading. 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 from qualification of the Transfer
Restricted Securities under state securities or Blue Sky laws, the Company and
the Subsidiary Guarantors shall use their best efforts to obtain the withdrawal
or lifting of such order at the earliest possible time;
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<PAGE> 10
(v) furnish to each of the selling Holders and each
of the underwriter(s), if any, before filing with the Commission, copies of any
Registration Statement or any Prospectus included therein or any amendments or
supplements to any such Registration Statement or Prospectus (including all
documents incorporated by reference after the initial filing of such
Registration Statement), which documents will be subject to the review of such
Holders and underwriter(s), if any, for a period of at least two business days,
and the Company will not file any such Registration Statement or Prospectus or
any amendment or supplement to any such Registration Statement or Prospectus
(including all such documents incorporated by reference) to which a selling
Holder of Transfer Restricted Securities covered by such Registration Statement
or the underwriter(s), if any, shall reasonably object within five business days
after the receipt thereof. A selling Holder or underwriter, if any, shall be
deemed to have reasonably objected to such filing only if such Registration
Statement, amendment, Prospectus or supplement, as applicable, as proposed to be
filed, contains a material misstatement or omission;
(vi) with respect to Shelf Registration Statements
filed under Section 4 hereof, upon the request of any selling Holder or
underwriter, promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus, provide
copies of such document to such selling Holder or to such underwriter, if any,
make the Company's representatives available (and representatives of the
Guarantor) for discussion of such document and other customary due diligence
matters, and include such information in such document prior to the filing
thereof as such selling Holders or underwriter(s), if any, reasonably may
request;
(vii) make available at reasonable times for
inspection by the selling Holders, any underwriter participating in any
disposition pursuant to such Registration Statement, and any attorney or
accountant retained by such selling Holders or any of the underwriter(s),
subject to appropriate confidentiality agreements, all financial and other
records, pertinent corporate documents and properties of the Company and the
Subsidiary Guarantors and cause the Company's and the Subsidiary Guarantors'
officers, directors and employees to supply all information reasonably requested
by any such Holder, underwriter, attorney or accountant in connection with
perfecting a due diligence defense in respect of such Registration Statement
subsequent to the filing thereof and prior to its effectiveness;
(viii) if requested by any selling Holders or the
underwriter(s), if any, promptly incorporate in any Registration Statement or
Prospectus, pursuant to a supplement or post-effective amendment if necessary,
such information as such selling Holders and underwriter(s), if any, may
reasonably request to have included therein, including, without limitation,
information relating to the "Plan of Distribution" of the Transfer Restricted
Securities, information with respect to the principal amount of Transfer
Restricted Securities being sold to such underwriter(s), the purchase price
being paid therefor and any other terms of the offering of the Transfer
Restricted Securities to be sold in such offering; and make all required filings
of such Prospectus supplement or post-effective amendment as soon as practicable
after the Company is notified of the matters to be incorporated in such
Prospectus supplement or post-effective amendment;
(ix) cause the Transfer Restricted Securities covered
by the Registration Statement to be rated with the appropriate rating agencies,
if so requested by the Holders of a majority in aggregate principal amount of
Notes covered thereby or the underwriter(s), if any;
(x) furnish to each selling Holder and each of the
underwriter(s), if any, without charge, at least one copy of the Registration
Statement, as first filed with the Commission, and of each
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<PAGE> 11
amendment thereto, including all documents incorporated by reference therein and
all exhibits (including exhibits incorporated therein by reference);
(xi) deliver to each selling Holder and each of the
underwriter(s), if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement thereto
as such Persons reasonably may request; the Company and the Subsidiary
Guarantors hereby consent to the use of the Prospectus and any amendment or
supplement thereto by each of the selling Holders and each of the
underwriter(s), if any, in connection with the offering and the sale of the
Transfer Restricted Securities covered by the Prospectus or any amendment or
supplement thereto, provided it is used in accordance with applicable law;
(xii) enter into, and (subject to receipt of required
gaming approvals) cause the Subsidiary Guarantors to enter into, such agreements
(including an underwriting agreement), and make, and cause the Subsidiary
Guarantors to make, such representations and warranties, and take all such other
actions in connection therewith in order to expedite or facilitate the
disposition of the Transfer Restricted Securities pursuant to any Registration
Statement contemplated by this Agreement, all to such extent as may be
reasonably requested by the Purchaser or Holders of a majority in principal
amount of Transfer Restricted Securities in connection with any sale or resale
pursuant to any Shelf Registration Statement and, to the extent applicable, any
Exchange Offer Registration Statement, contemplated by this Agreement; and
whether or not an underwriting agreement is entered into and whether or not the
registration is an Underwritten Registration, the Company and the Subsidiary
Guarantors shall:
(A) furnish to each Purchaser, each selling
Holder and each underwriter, if any, in such substance and scope as they may
request and as are customarily made by issuers to underwriters in underwritten
offerings, upon the date of the Consummation of the Exchange Offer and, if
applicable, the effectiveness of the Shelf Registration Statement:
(1) a certificate, dated the date
of Consummation of the Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, signed by (y) the President or any
Vice President and (z) a principal financial or accounting officer of each of
the Company and the Subsidiary Guarantors, confirming, as of the date thereof,
the matters set forth in paragraph 6(k) of the Purchase Agreement and such other
matters as such parties may reasonably request;
(2) an opinion, dated the date of
Consummation of the Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, of counsel for the Company and the
Subsidiary Guarantors, covering the matters set forth in Sections 6(c) through
6(i) of the Purchase Agreement and such other matter as such parties may
reasonably request, and in any event including a statement to the effect that
such counsel has participated in conferences with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, the Purchaser's representatives and the Purchaser's
counsel in connection with the preparation of such Registration Statement and
the related Prospectus and have considered the matters required to be stated
therein and the statements contained therein, although such counsel has not
independently verified the accuracy, completeness or fairness of such
statements; and that such counsel advises that, on the basis of the foregoing
(relying as to materiality to a large extent upon facts provided to such counsel
by officers and other representatives of the Company and without independent
check or verification), no facts came to such counsel's attention that caused
such counsel to believe that the applicable Registration Statement, at the time
such Registration Statement or any post-effective amendment thereto became
effective, and, in the case of the Exchange Offer Registration Statement, as of
the date of Consummation, 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, or that the Prospectus contained in
such Registration Statement as of its date and, in the case of the opinion dated
the date of Consummation of the Exchange Offer, as of the date of Consummation,
contained an untrue statement
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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. Without limiting the foregoing, such counsel may state
further that such counsel assumes no responsibility for, and has not
independently verified, the accuracy, completeness or fairness of the financial
statements, notes and schedules and other financial data included in any
Registration Statement contemplated by this Agreement or the related Prospectus;
and
(3) to the extent permitted under
applicable auditing standards, a customary comfort letter, dated as of the date
of Consummation of the Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, from the Company's independent
accountants, in the customary form and covering matters of the type customarily
covered in comfort letters by underwriters in connection with primary
underwritten offerings, and affirming the matters set forth in the comfort
letters delivered pursuant to Section 6(a) of the Purchase Agreement;
(B) set forth in full or incorporate by
reference in the underwriting agreement, if any, the indemnification provisions
and procedures of Section 8 hereof with respect to all parties to be indemnified
pursuant to said Section; and
(C) deliver such other documents and
certificates as may be reasonably requested by such parties to evidence
compliance with clause (A) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the Company
pursuant to this clause (xii), if any.
If at any time the representations and
warranties of the Company and the Subsidiary Guarantors contemplated in clause
(A)(1) above cease to be true and correct, the Company or the Subsidiary
Guarantors shall so advise the Purchaser and the underwriter(s), if any, and
each selling Holder promptly and, if requested by such Persons, shall confirm
such advice in writing;
(xiii) prior to any public offering of Transfer
Restricted Securities, cooperate with, and cause the Subsidiary Guarantors to
cooperate with, the selling Holders, the underwriter(s), if any, and their
respective counsel in connection with the registration and qualification of the
Transfer Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as the selling Holders or underwriter(s) may request and do any
and all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Transfer Restricted Securities covered by the Shelf
Registration Statement; provided, however, that neither the Company nor the
Subsidiary Guarantors shall be required to register or qualify as a foreign
corporation or broker dealer where it is not now so qualified or to take any
action that would subject it to the service of process in suits or to taxation,
other than as to matters and transactions relating to the Registration
Statement, in any jurisdiction where it is not now so subject;
(xiv) subject to compliance with applicable gaming
laws, shall issue, upon the request of any Holder of Series A Notes covered by
the Shelf Registration Statement, Series B Notes, having an aggregate principal
amount equal to the aggregate principal amount of Series A Notes surrendered to
the Company by such Holder in exchange therefor or being sold by such Holder;
such Series B Notes to be registered in the name of such Holder or in the name
of the purchaser(s) of such
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Notes, as the case may be; in return, the Series A Notes held by such Holder
shall be surrendered to the Company for cancellation;
(xv) in connection with any sale that will result in
such securities no longer being Transfer Restricted Securities, cooperate with,
and cause the Subsidiary Guarantors to cooperate with, the selling Holders and
the underwriter(s), if any, to facilitate the timely preparation and delivery of
certificates representing Transfer Restricted Securities to be sold and not
bearing any restrictive legends; and enable such Transfer Restricted Securities
to be in such denominations and registered in such names as the Holders or the
underwriter(s), if any, may request at least two business days prior to any sale
of Transfer Restricted Securities made by such underwriter(s);
(xvi) subject to compliance with applicable gaming
laws, use its reasonable best efforts to cause the Transfer Restricted
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof or the underwriter(s), if any, to
consummate the disposition of such Transfer Restricted Securities, subject to
the proviso contained in clause (xiii) above;
(xvii) if any fact or event contemplated by clause
(c)(iv)(D) above shall exist or have occurred, prepare a supplement or
post-effective amendment to the Registration Statement or related Prospectus or
any document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of Transfer
Restricted Securities, the Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which made, not
misleading;
(xviii) provide a CUSIP number for all Transfer
Restricted Securities not later than the effective date of the Registration
Statement and provide the Trustee under the Indenture with printed certificates
for the Transfer Restricted Securities which are in a form eligible for deposit
with the Depositary Trust Company;
(xix) cooperate and assist in any filings required to
be made with the NASD and in the performance of any due diligence investigation
by any underwriter (including any "qualified independent underwriter") that is
required to be retained in accordance with the rules and regulations of the
NASD, and use its reasonable best efforts to cause such Registration Statement
to become effective and approved by such governmental agencies or authorities as
may be necessary to enable the Holders selling Transfer Restricted Securities to
consummate the disposition of such Transfer Restricted Securities;
(xx) otherwise use its best efforts to comply with
all applicable rules and regulations of the Commission, and make generally
available to its security holders, as soon as reasonably practicable, a
consolidated earnings statement meeting the requirements of Rule 158 (which need
not be audited) for the twelve-month period (A) commencing at the end of any
fiscal quarter in which Transfer Restricted Securities are sold to underwriters
in a firm or best efforts Underwritten Offering or (B) if not sold to
underwriters in such an offering, beginning with the first month of the
Company's first fiscal quarter commencing after the effective date of the
Registration Statement;
(xxi) cause the Indenture to be qualified under the
TIA not later than the effective date of the first Registration Statement
required by this Agreement, and, in connection therewith, cooperate, and cause
the Subsidiary Guarantors to cooperate, with the Trustee and the Holders of
Notes to effect such changes to the Indenture as may be required for such
Indenture to be so qualified in
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<PAGE> 14
accordance with the terms of the TIA; and execute, and cause the Subsidiary
Guarantors to execute, and use its best efforts to cause the Trustee to execute,
all documents that may be required to effect such changes and all other forms
and documents required to be filed with the Commission to enable such Indenture
to be so qualified in a timely manner; and
(xxii) provide promptly to each Holder upon request
each document filed by the Company with the Commission pursuant to the
requirements of Section 13(a) and Section 15(d) of the Exchange Act.
Each Holder agrees by acquisition of a Transfer
Restricted Security that, upon receipt of any notice from the Company of the
existence of any fact of the kind described in Section 6(c)(iv)(D) hereof, such
Holder will forthwith discontinue disposition of Transfer Restricted Securities
pursuant to the applicable Registration Statement until such Holder's receipt of
the copies of the supplemented or amended Prospectus contemplated by Section
6(c)(xvii) hereof, or until it is advised in writing (the "Advice") by the
Company that the use of the Prospectus may be resumed, and has received copies
of any additional or supplemental filings that are incorporated by reference in
the Prospectus. If so directed by the Company, each Holder will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such Transfer
Restricted Securities that was current at the time of receipt of such notice. In
the event the Company shall give any such notice, the time period regarding the
effectiveness of such Registration Statement set forth in Section 3 or 4 hereof,
as applicable, shall be extended by the number of days during the period from
and including the date of the giving of such notice pursuant to Section
6(c)(iv)(D) hereof to and including the date when each selling Holder covered by
such Registration Statement shall have received the copies of the supplemented
or amended Prospectus contemplated by Section 6(c)(xvii) hereof or shall have
received the Advice.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's or the Subsidiary
Guarantors' performance of or compliance with this Agreement will be borne by
the Company or the Subsidiary Guarantors, regardless of whether a Registration
Statement becomes effective, including without limitation: (i) all registration
and filing fees and expenses (including filings made by any Purchaser or Holder
with the NASD (and, if applicable, the fees and expenses of any "qualified
independent underwriter" and its counsel that may be required by the rules and
regulations of the NASD)); (ii) all fees and expenses of compliance with federal
securities and state Blue Sky or securities laws; (iii) all expenses of printing
(including printing certificates for the Series B Notes to be issued in the
Exchange Offer and printing of Prospectuses), messenger and delivery services
and telephone; (iv) all fees and disbursements of counsel for the Company, the
Subsidiary Guarantors and, subject to Section 7(b) below, the Holders of
Transfer Restricted Securities; (v) all application and filing fees in
connection with listing Notes on a national securities exchange or automated
quotation system pursuant to the requirements hereof; and (vi) all fees and
disbursements of independent certified public accountants of the Company and the
Subsidiary Guarantors (including the expenses of any special audit and comfort
letters required by or incident to such performance).
The Company will, in any event, bear its and the Subsidiary
Guarantors' internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expenses of any annual audit and the fees and expenses of any Person,
including special experts, retained by the Company.
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(b) In connection with any Registration Statement required by
this Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company will reimburse the
Purchaser and the Holders of Transfer Restricted Securities being tendered in
the Exchange Offer and/or resold pursuant to the "Plan of Distribution"
contained in the Exchange Offer Registration Statement or registered pursuant to
the Shelf Registration Statement, as applicable, for the reasonable fees and
disbursements of not more than one counsel, who shall be Latham & Watkins or
such other counsel as may be chosen by the Holders of a majority in principal
amount of the Transfer Restricted Securities for whose benefit such Registration
Statement is being prepared.
SECTION 8. INDEMNIFICATION
(a) The Company and the Subsidiary Guarantors, jointly and
severally, agree to indemnify and hold harmless (i) each Holder and (ii) each
person, if any, who controls (within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act) any Holder (any of the persons referred to in
this clause (ii) being hereinafter referred to as a "controlling person") and
(iii) the respective officers, directors, partners, employees, representatives
and agents of any Holder or any controlling person (any person referred to in
clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified
Holder"), to the fullest extent lawful, from and against any and all losses,
claims, damages, liabilities, judgments, actions and expenses (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 Holder) 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 any Registration Statement or
Prospectus (or any amendment or supplement thereto), or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided, however, that
the Company an the Subsidiary Guarantors will not be liable in any such case to
the extent that any such losses, claims, damages, liabilities or expenses 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 of the Holders furnished in writing to the Company by any of the
Holders expressly and specifically for use therein; and provided, further, with
respect to any untrue statement or alleged untrue statement in or omission or
alleged omission from the Offering Document (as defined in the Purchase
Agreement), the indemnity agreement contained in this subsection (a) shall not
inure to the benefit of the Purchaser to the extent that a sale to the person
asserting such losses, claims, damages or liabilities was an initial resale by
the Purchaser or any Holder and any such loss, claim, damage or liability of the
Purchaser or such Holder results from the fact that there was not sent or given
to such person, at or prior to the written confirmation of the sale of such
Securities to such person, a copy of the Offering Document (exclusive of any
material included therein but not attached thereto) if the Company had
previously furnished copies thereof to the Purchaser or such Holder.
In case any action or proceeding (including any governmental
or regulatory investigation or proceeding) shall be brought or asserted against
any of the Indemnified Holders with respect to which indemnity may be sought
against the Company or the Subsidiary Guarantors, such Indemnified Holder (or
the Indemnified Holder controlled by such controlling person) shall promptly
notify the Company and the Subsidiary Guarantors in writing (provided, that the
failure to give such notice shall not relieve the Company or the Subsidiary
Guarantors of its obligations other than pursuant to this Section 8(a)). Such
Indemnified Holders shall reasonably cooperate with the Company in the defense
of the action or proceeding and have the right to employ their own counsel in
any such action and the fees and expenses of such counsel shall be paid, as
incurred, by the Company and the Subsidiary Guarantors (regardless of
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<PAGE> 16
whether it is ultimately determined that an Indemnified Holder is not entitled
to indemnification hereunder). The Company and the Subsidiary Guarantors shall
not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to any appropriate local counsel) at any time for all such Indemnified
Holders, which firm shall be designated by the Holders. The Company and the
Subsidiary Guarantors shall be liable for any settlement of any such action or
proceeding effected with the Company's prior written consent, which consent
shall not be withheld unreasonably, and the Company and the Subsidiary
Guarantors agree to indemnify and hold harmless any Indemnified Holder from and
against any loss, claim, damage, liability or expense by reason of any
settlement of any action effected with the written consent of the Company. None
of Company and the Subsidiary Guarantors shall, without the prior written
consent of each Indemnified Holder (which consent shall not be unreasonably
withheld), settle or compromise or consent to the entry of 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
hereunder (whether or not any Indemnified Holder is a party thereto), unless
such settlement, compromise, consent or termination includes an unconditional
release of each Indemnified Holder from all liability arising out of such
action, claim, litigation or proceeding.
(b) Each Holder of Transfer Restricted Securities agrees,
severally and not jointly, to indemnify and hold harmless the Company and the
Subsidiary Guarantors, and their respective directors, officers, and any person
controlling (within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act) the Company, and the respective officers, directors, partners,
employees, representatives and agents of each such person, to the same extent as
the foregoing indemnity from the Company and the Subsidiary Guarantors to each
of the Indemnified Holders, but only with respect to claims and actions based on
information relating to such Holder furnished in writing by such Holder
expressly for use in any Registration Statement. In case any action or
proceeding shall be brought against the Company or any of the Subsidiary
Guarantors or any of their respective directors or officers or any such
controlling person in respect of which indemnity may be sought against a Holder
of Transfer Restricted Securities, such Holder shall have the rights and duties
given the Company and the Subsidiary Guarantors and the Company and the
Subsidiary Guarantors or their respective directors or officers or such
controlling person shall have the rights and duties given to each Holder by the
preceding paragraph. In no event shall the liability of any selling Holder
hereunder be greater in amount than the dollar amount of the proceeds received
by such Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under Section 8(a) or Section 8(b) hereof
(other than by reason of exceptions provided in those Sections) in respect of
any losses, claims, damages, liabilities or expenses referred to therein, then
each applicable 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 losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Subsidiary Guarantors on the one hand and the Holders on the
other hand from their sale of Transfer Restricted Securities or if such
allocation is not permitted by applicable law, the relative fault of the Company
and the Subsidiary Guarantors on the one hand and of the Indemnified Holder on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the Company and the Subsidiary
Guarantors on the one hand and of the Indemnified Holder on the other 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 relates to information supplied by the Company
16
<PAGE> 17
or the Subsidiary Guarantors or by the Indemnified Holder and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in the
second paragraph of Section 8(a), any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim.
The Company, the Subsidiary Guarantors and each Holder of
Transfer Restricted Securities agree that it would not be just and equitable if
contribution pursuant to this Section 8(c) were determined by pro rata
allocation (even if the Holders 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, 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 8, none of the Holders (and its
related Indemnified Holders) shall be required to contribute, in the aggregate,
any amount in excess of the amount by which the total amount received by such
Holder with respect to the Series A Notes exceeds the amount of any damages
which such Holder has otherwise been required to pay 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 Holders' obligations to contribute pursuant to
this Section 8(c) are several in proportion to the respective principal amount
of Series A Notes held by each of the Holders hereunder and not joint.
SECTION 9. RULE 144A
The Company and the Subsidiary Guarantors hereby agree with
each Holder, for so long as any Transfer Restricted Securities remain
outstanding, to make available to any Holder or beneficial owner of Transfer
Restricted Securities in connection with any sale thereof and any prospective
purchaser of such Transfer Restricted Securities from such Holder or beneficial
owner, the information required by Rule 144A(d)(4) under the Act in order to
permit resales of such Transfer Restricted Securities pursuant to Rule 144A.
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration
hereunder unless such Holder (a) agrees to sell such Holder's Transfer
Restricted Securities on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all reasonable questionnaires, powers of attorney,
indemnities, underwriting agreements, lock-up letters and other documents
required under the terms of such underwriting arrangements.
17
<PAGE> 18
SECTION 11. SELECTION OF UNDERWRITERS
The Holders of Transfer Restricted Securities covered by the
Shelf Registration Statement who desire to do so may sell such Transfer
Restricted Securities in an Underwritten Offering. In any such Underwritten
Offering, the investment banker or investment bankers and manager or managers
that will administer the offering will be selected by the Holders of a majority
in aggregate principal amount of the Transfer Restricted Securities included in
such offering; provided, that such investment bankers and managers must be
reasonably satisfactory to the Company.
SECTION 12.MISCELLANEOUS
(a) Remedies. The Company and the Subsidiary Guarantors agree
that monetary damages (including the liquidated damages contemplated hereby)
would not be adequate compensation for any loss incurred by reason of a breach
by it of the provisions of this Agreement and hereby agree to waive the defense
in any action for specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company will not, and will
cause the Subsidiary Guarantors not to, on or after the date of this Agreement
enter into any agreement with respect to its securities that is inconsistent
with the rights granted to the Holders in this Agreement or otherwise conflicts
with the provisions hereof. The rights granted to the Holders hereunder do not
in any way conflict with and are not inconsistent with the rights granted to the
holders of the Company's securities under any agreement in effect on the date
hereof.
(c) Adjustments Affecting the Notes. None of the Company or
the Subsidiary Guarantors will take any action, or permit any change to occur,
with respect to the Notes or the Subsidiary Guarantees, respectively, that would
materially and adversely affect the ability of the Holders to Consummate any
Exchange Offer.
(d) Amendments and Waivers. The provisions of this Agreement
may not be amended, modified or supplemented, and waivers or consents to or
departures from the provisions hereof may not be given unless the Company has
obtained the written consent of Holders of a majority of the outstanding
principal amount of Transfer Restricted Securities. Notwithstanding the
foregoing, a waiver or consent to departure from the provisions hereof that
relates exclusively to the rights of Holders whose securities are being tendered
pursuant to the Exchange Offer or registered hereunder and that does not affect
directly or indirectly the rights of other Holders whose securities are not
being tendered pursuant to such Exchange Offer or so registered may be given by
the Holders of a majority of the outstanding principal amount of Transfer
Restricted Securities being tendered or registered.
(e) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, first-class
mail (registered or certified, return receipt requested), telex, telecopier, or
air courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the
records of the Registrar under the Indenture, with a copy to the Registrar under
the Indenture; and
18
<PAGE> 19
(ii) if to the Company:
Alliance Gaming Corporation
6601 South Bermuda Road
Las Vegas, NV 89119-3605
Telecopier No.: (702) 270-7600
Attention: Scott Schweinfurth
With a copy to:
Milbank, Tweed, Hadley & McCloy
One Chase Manhattan Plaza
New York, New York 10005-1413
Telecopier No.: (212) 530-5000
Attention: Mark L. Weissler, Esq.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt acknowledged, if telecopied; and on
the next business day, if timely delivered to an air courier guaranteeing
overnight delivery. Copies of all such notices, demands or other communications
shall be concurrently delivered by the Person giving the same to the Trustee at
the address specified in the Indenture.
(f) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities; provided,
however, that this Agreement shall not inure to the benefit of or be binding
upon a successor or assign of a Holder unless and to the extent such successor
or assign acquired Transfer Restricted Securities from such Holder.
(g) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) Governing Law. SUBJECT TO APPLICABLE GAMING LAWS, THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF.
(j) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(k) Entire Agreement. This Agreement together with the other
Operative Documents (as defined in the Purchase Agreement) is intended by the
parties as a final expression of their agreement and
19
<PAGE> 20
intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein with respect to the registration
rights granted by the Company with respect to the Transfer Restricted
Securities. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
20
<PAGE> 21
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
ALLIANCE GAMING CORPORATION
By:
--------------------------------
Name: Scott Schweinfurth
Its: Sr. Vice President-Finance,
Chief Financial Officer and
Treasurer
APT GAMES, INC.
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
UNITED COIN MACHINE CO.
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
PLANTATION INVESTMENTS, INC.
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
ALLIANCE HOLDING COMPANY
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
BALLY GAMING
INTERNATIONAL, INC.
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
21
<PAGE> 22
BALLY GAMING, INC.
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
FOREIGN GAMING VENTURES, INC.
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
LOUISIANA VENTURES, INC.
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
UNITED GAMING RAINBOW
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
NATIVE AMERICAN
INVESTMENT, INC.
By:
--------------------------------
Name: Scott Schweinfurth
Its: Treasurer
The foregoing Registration Rights Agreement
is hereby confirmed and accepted
as of the date first above written
CREDIT SUISSE FIRST
BOSTON CORPORATION
By:
---------------------
Name: Eldad Coppens
Its: Director
22
<PAGE> 1
EXHIBIT 5.1
October 7, 1997
Alliance Gaming Corporation
6601 South Bermuda Road
Las Vegas, NV 89119
Re: Offer to Exchange $150,000,000 10% Senior
Subordinated Notes Due 2007, Series B for
$150,000,000 10% Senior Subordinated Notes Due
2007, Series A
Ladies and Gentlemen:
We are acting as special counsel for Alliance Gaming Corporation, a Nevada
corporation (the "Company") in connection with the filing by the Company of a
Registration Statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission for the purpose of registering the issuance
of up to $150,000,000 aggregate principal amount of the Company's 10% Senior
Subordinated Notes Due 2007, Series B (the "Exchange Notes") and the guarantees
thereof (the "Guarantees") under the Securities Act of 1933, as amended (the
"Act"). The Exchange Notes are to be issued in exchange for an equal aggregate
principal amount of the Company's 10% Senior Subordinated Notes Due 2007, Series
A (the "Existing Notes") and the guarantees thereof pursuant to the Registration
Rights Agreement among the Company, the Guarantors named therein and Credit
Suisse First Boston Corporation, filed as an exhibit to the Registration
Statement. The Exchange Notes and the Guarantees are to be issued pursuant to
the terms of the Indenture among the Company, the Guarantors named therein and
United States Trust Company of New York, as trustee (the "Trustee"), filed as an
exhibit to the Registration Statement. The Indenture is to be qualified under
the Trust Indenture Act of 1939, as amended (the "TIA"). Capitalized terms used
herein and not otherwise defined shall have the meanings set forth in the
Indenture.
In rendering the opinions expressed below, we have examined originals of
such corporate records of the Company and its subsidiaries and such other
documents as we have deemed necessary as a basis for the opinions expressed
below. In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity with authentic original documents of all documents submitted to us as
copies. When relevant facts were not independently established, we have relied
upon statements of governmental officials and upon representations by and
statements of appropriate representatives of the Company and its subsidiaries.
In rendering the opinions expressed below, we have assumed with respect to
all of the documents referred to in this opinion letter, including the
Indenture, that (i) such documents have been duly authorized by, have been duly
executed and delivered by, and constitute legal, valid, binding and enforceable
obligations of, all of the parties to such documents; (ii) all signatories to
such documents have been duly authorized; and (iii) all of the parties to such
documents are duly organized and validly existing and have the power and
authority (corporate or other) to execute, deliver and perform such documents.
Based upon and subject to the foregoing and subject also to the comments
and qualifications set forth below, and having considered such questions of law
as we have deemed necessary as a basis for the opinions expressed below, we are
of the opinion that:
1. When (i) the Registration Statement has been declared effective,
(ii) the Indenture has been duly qualified under the TIA, (iii) the
Exchange Notes have been duly executed by the Company and (iv) the Exchange
Notes have been duly authenticated by the Trustee in accordance with the
terms of the Indenture and issued and delivered against exchange of the
Existing Notes in accordance with the terms set forth in the prospectus
included as part of the Registration Statement, the Exchange Notes will be
valid and binding obligations of the Company, subject to bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent
transfer and similar laws affecting creditors' rights and remedies
generally and general principles of equity.
<PAGE> 2
2. When (i) the Registration Statement has been declared effective,
(ii) the Indenture has been duly qualified under the TIA, (iii) the
Exchange Notes have been duly executed by the Company, (iv) the Guarantees
have been duly executed and (v) the Exchange Notes have been duly
authenticated by the Trustee in accordance with the terms of the Indenture
and issued and delivered against exchange of the Existing Notes in
accordance with the terms set forth in the prospectus included as part of
the Registration Statement, the Guarantees will be valid and binding
obligations, subject to bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, fraudulent transfer and similar laws affecting
creditors' rights and remedies generally and general principles of equity.
This opinion is rendered to the Company in connection with the filing of
the Registration Statement and for no other purpose. We express no opinion as to
the laws of any jurisdiction other than the federal laws of the United States
and laws of the State of New York.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the prospectus which is included in the Registration Statement.
In our opinion, the discussions under the caption "Certain Federal Income
Tax Considerations" in the prospectus included as part of the Registration
Statement are correct in all material respects.
Very truly yours,
/s/ Milbank, Tweed, Hadley & McCloy
MLW/RSR
<PAGE> 1
EXHIBIT 12.1
ALLIANCE GAMING CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
------------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Net income (loss)...................... $(3,650) $(13,128) $(10,751) $(59,897) $ 5,785
Income taxes........................... -- 241 265 755 7,993
Imputed interest on rents(1)........... 741 1,996 484 398 364
Interest and debt discount
amortization........................ 5,046 6,830 8,133 8,897 23,626
------- -------- -------- ------- ------
Earnings (loss) as defined for ratio... 2,137 (4,061) (1,869) (49,847) 37,768
======= ======== ======== ======= ======
Fixed charges:
Imputed interest on rents(1)........... 741 1,996 484 398 364
Interest and debt discount
amortization........................ 5,046 6,830 8,133 8,897 23,626
------- -------- -------- ------- ------
Fixed charges as defined for ratio....... 5,787 8,826 8,617 9,295 23,990
======= ======== ======== ======= ======
Ratio of earnings to fixed charges....... -- -- -- -- 1.6
Amounts by which earnings were inadequate
to cover fixed charges................. (3,650) (12,887) (10,486) (59,142) --
======= ======== ======== ======= ======
</TABLE>
- ---------------
(1) Imputed interest on rents is calculated by taking 33% of total rents in each
period presented.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Alliance Gaming Corporation:
We consent to the use of our report included and incorporated herein by
reference and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG PEAT MARWICK LLP
Las Vegas, Nevada
October 7, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Alliance Gaming Corporation:
We consent to the incorporation by reference in this registration statement
of Alliance Gaming Corporation on Form S-4 of our report dated February 13,
1996, on our audits of the consolidated financial statements of Bally Gaming
International, Inc. We also consent to the reference to our firm under the
caption "Experts".
COOPERS & LYBRAND L.L.P.
Las Vegas, Nevada
October 7, 1997
<PAGE> 1
FORM T-1
==============================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
------------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2) _______
------------------
UNITED STATES TRUST COMPANY OF NEW YORK (Exact
name of trustee as specified in its charter)
New York 13-3818954
(Jurisdiction of incorporation (I.R.S. employer
if not a U.S. national bank) identification No.)
114 West 47th Street 10036-1532
New York, NY (Zip Code)
(Address of principal
executive offices)
------------------
ALLIANCE GAMING CORPORATION
(Exact name of obligor as specified in its charter)
Nevada 88-0104066
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
6601 South Bermuda Road
Las Vegas, Nevada 89119
(Address of principal executive offices) (Zip Code)
------------------
10% Senior Subordinated Notes due 2007
(Title of the indenture securities)
==============================================
<PAGE> 2
- 2 -
GENERAL
1. GENERAL INFORMATION
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Washington, D.C.
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH THE OBLIGOR
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15:
Alliance Gaming Corporation currently is not in default under any of its
outstanding securities for which United States Trust Company of New York is
Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12,
13, 14 and 15 of Form T-1 are not required under General Instruction B.
16. LIST OF EXHIBITS
T-1.1 -- Organization Certificate, as amended, issued by the
State of New York Banking Department to transact
business as a Trust Company, is incorporated by
reference to Exhibit T-1.1 to Form T-1 filed on
September 15, 1995 with the Commission pursuant to
the Trust Indenture Act of 1939, as amended by the
Trust Indenture Reform Act of 1990 (Registration No.
33-97056).
T-1.2 -- Included in Exhibit T-1.1.
T-1.3 -- Included in Exhibit T-1.1.
<PAGE> 3
- 3 -
16. LIST OF EXHIBITS
(cont'd)
T-1.4 -- The By-Laws of United States Trust Company of New
York, as amended, is incorporated by reference to
Exhibit T-1.4 to Form T-1 filed on September 15, 1995
with the Commission pursuant to the Trust Indenture
Act of 1939, as amended by the Trust Indenture Reform
Act of 1990 (Registration No. 33-97056).
T-1.6 -- The consent of the trustee required by Section 321(b)
of the Trust Indenture Act of 1939, as amended by the
Trust Indenture Reform Act of 1990.
T-1.7 -- A copy of the latest report of condition of the
trustee pursuant to law or the requirements of its
supervising or examining authority.
NOTE
As of September 29,1997, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U.S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States Trust
Company of New York and its parent company, U. S. Trust Corporation.
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
------------------
Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
United States Trust Company of New York, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York, on the 29th day
of September, 1997.
UNITED STATES TRUST COMPANY
OF NEW YORK, Trustee
By: John Guiliano
Vice President
<PAGE> 4
EXHIBIT T-1.6
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
September 1, 1995
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
By: /s/ Gerard F. Ganey
------------------------------
Senior Vice President
<PAGE> 5
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
June 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and Due from Banks $ 83,529
Short-Term Investments 259,746
Securities, Available for Sale 924,165
Loans 1,437,342
Less: Allowance for Credit Losses 13,779
----------
Net Loans 1,423,563
Premises and Equipment 61,515
Other Assets 122,696
----------
TOTAL ASSETS $2,875,214
==========
LIABILITIES
Deposits:
Non-Interest Bearing $ 763,075
Interest Bearing 1,409,017
----------
Total Deposits 2,172,092
Short-Term Credit Facilities 404,212
Accounts Payable and Accrued Liabilities 132,213
----------
TOTAL LIABILITIES $2,708,517
==========
STOCKHOLDER'S EQUITY
Common Stock 14,995
Capital Surplus 49,541
Retained Earnings 100,930
Unrealized Gains (Losses) on Securities
Available for Sale, Net of Taxes 1,231
----------
TOTAL STOCKHOLDER'S EQUITY 166,697
----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $2,875,214
==========
</TABLE>
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank
do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.
Richard E. Brinkman, SVP & Controller
August 7, 1997
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
TENDER OF 10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
IN EXCHANGE FOR
10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
ALLIANCE GAMING CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). EXISTING NOTES
TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE.
Deliver to the Exchange Agent:
United States Trust Company of New York
<TABLE>
<S> <C>
By Mail: By Facsimile:
(212) 780-0592
United States Trust Company of New York (For Eligible Institutions Only)
P.O. Box 843
Cooper Station By Hand to 4:30 p.m.:
New York, NY 10276
Attention: Corporate Trust Services United States Trust Company of New York
111 Broadway
By Overnight Courier or New York, N.Y. 10006
By Hand after 4:30 p.m.: Attention: Lower Level Corporate Trust
United States Trust Company of New York
770 Broadway, 13th Floor
New York, N.Y. 10003
Attention: Corporation Trust
</TABLE>
For Information Call:
(800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned hereby acknowledges receipt and review of the Prospectus
dated , 1997 (the "Prospectus") of Alliance Gaming Corporation (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together describe the Company's offer (the "Exchange Offer") to exchange its 10%
Senior Subordinated Notes due 2007, Series B (the "Exchange Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which the Prospectus is a part,
for a like principal amount of its issued and outstanding 10% Senior
Subordinated Notes due 2007, Series A (the "Existing Notes"). Capitalized terms
used but not defined herein have the respective meanings given to them in the
Prospectus.
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest time and date in which the Exchange Offer is extended. The
Company shall notify the holders of the Existing Notes of any extension by oral
or written notice prior to 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
<PAGE> 2
This Letter of Transmittal is to be used by a Holder of Existing Notes
either if original Existing Notes are to be forwarded herewith or if delivery of
Existing Notes, if available, is to be made by book-entry transfer to the
account maintained by the Exchange Agent at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in the
Prospectus under the caption "The Exchange Offer -- Book-Entry Transfer".
Holders of Existing Notes whose Existing Notes are not immediately available, or
who are unable to deliver their Existing Notes and all other documents required
by this Letter of Transmittal to the Exchange Agent on or prior to the
Expiration Date, or who are unable to complete the procedure for book-entry
transfer on a timely basis, must tender their Existing Notes according to the
guaranteed delivery procedures set forth in the Prospectus under the caption
"The Exchange Offer -- Guaranteed Delivery Procedures". See Instruction 1.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Existing Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered Holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their Existing
Notes must complete this Letter of Transmittal in its entirety.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Existing Notes to which this Letter of Transmittal relates.
If the space below is inadequate, list the registered numbers and principal
amounts on a separate signed schedule and affix the list to this Letter of
Transmittal.
- --------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
1 2 3
------------------------------------------------------------------------------------------------------------------
AGGREGATE
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) PRINCIPAL AMOUNT PRINCIPAL
EXACTLY AS NAME(S) APPEAR(S) ON EXISTING NOTES REGISTERED REPRESENTED BY AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* NOTE(S) TENDERED**
------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
Total Shares
------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry Holders.
** Unless otherwise indicated, any tendering Holder of Existing Notes will be
deemed to have tendered the entire aggregate principal amount represented
by such Existing Notes. All tenders must be integral multiples of $1,000.
================================================================================
<PAGE> 3
[ ] CHECK HERE IF TENDERED EXISTING NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE
INSTITUTIONS ONLY):
Name of Tendering Institution:
----------------------------------------------------------------------------
Account Number:
- --------------------------------------------------------------------------------
Transaction Code Number:
- --------------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING
(FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name(s) of Registered Holder(s) of Existing Notes:
-----------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-----------------------------------------------------
Window Ticket Number (if available):
--------------------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
--------------------------------------------------
Account Number (if delivered by book-entry transfer):
--------------------------------------------------
Transaction Code Number:
- --------------------------------------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Existing Notes, it acknowledges that
the Existing Notes were acquired as a result of market-making activities or
other trading activities and that it will deliver a prospectus in connection
with any resale of such Exchange Notes; however, by so acknowledging and by
delivering a prospectus, the undersigned will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company for exchange the principal amount of Existing
Notes indicated above. Subject to and effective upon the acceptance for exchange
of the principal amount of Existing Notes tendered in accordance with this
Letter of Transmittal, the undersigned hereby exchanges, assigns and transfers
to the Company all right, title and interest in and to the Existing Notes
tendered for exchange hereby. The undersigned hereby irrevocably constitutes and
appoints the Exchange Agent the agent and attorney-in-fact of the undersigned
(with full knowledge that the Exchange Agent also acts as the agent of the
Company in connection with the Exchange Offer) with respect to the tendered
Existing Notes with full power of substitution to (i) deliver such Existing
Notes, or transfer ownership of such Existing Notes on the account books
maintained by the Book-Entry Transfer Facility, to the Company and deliver all
accompanying evidences of transfer and authenticity, and
<PAGE> 4
(ii) present such Existing Notes for transfer on the books of the Company and
receive all benefits and otherwise exercise all rights of beneficial ownership
of such Existing Notes, all in accordance with the terms of the Exchange Offer.
The power of attorney granted in this paragraph shall be deemed to be
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign and transfer the Existing
Notes tendered hereby and to acquire the Exchange Notes issuable upon the
exchange of such tendered Existing Notes, and that the Company will acquire good
and unencumbered title thereto, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim, when the same are
accepted for exchange by the Company.
The undersigned acknowledges that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the
"Commission") that the Exchange Notes issued in exchange for the Existing Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any such Holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such Holders' business and such Holders are not engaging in
and do not intend to engage in a distribution of the Exchange Notes and have no
arrangement or understanding with any person to participate in a distribution of
such Exchange Notes. The undersigned hereby further represent(s) to the Company
that (i) any Exchange Notes acquired in exchange for Existing Notes tendered
hereby are being acquired in the ordinary course of business of the person
receiving such Exchange Notes, whether or not the undersigned, (ii) neither the
undersigned nor any such other person is engaging in or intends to engage in a
distribution of the Exchange Notes, (iii) neither the undersigned nor any such
other person has an arrangement or understanding with any person to participate
in the distribution of such Exchange Notes, and (iv) neither the Holder nor any
such other person is an "affiliate", an defined in Rule 405 under the Securities
Act, of the Company or, if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
If the undersigned or the person receiving the Exchange Notes is a
broker-dealer that is receiving Exchange Notes for its own account in exchange
for Existing Notes that were acquired as a result of market-making activities or
other trading activities, the undersigned acknowledges that it or such other
person will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that the undersigned or such other
person is an "underwriter" within the meaning of the Securities Act. The
undersigned acknowledges that if the undersigned is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes (i) the
undersigned cannot rely on the position of the staff of the Commission in
certain no-action letters and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction of the Exchange
Notes, in which case such registration statement must contain the selling
security holder information required by Item 507 of Regulation S- K of the
Commission, and (ii) failure to comply with such requirements in such instance
could result in the undersigned incurring liability under the Securities Act for
which the undersigned is not indemnified by the Company.
If the undersigned or the person receiving the Exchange Notes is an
"affiliate" (as defined in Rule 405 under the Securities Act), the undersigned
represents to the Company that the undersigned understands and acknowledges that
the Exchange Notes may not be offered for resale, resold or otherwise
transferred by the undersigned or such other person without registration under
the Securities Act or an exemption therefrom.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of the Existing
Notes tendered hereby, including the transfer of such Existing Notes on the
account books maintained by the Book-Entry Transfer Facility.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange properly tendered Existing Notes when, as and if the
Company gives oral or written notice thereof to the Exchange Agent. Any tendered
Existing Notes that are not accepted for exchange pursuant to the Exchange Offer
for any reason will be returned, without expense, to the undersigned at the
address shown below or at a
<PAGE> 5
different address as may be indicated herein under "Special Delivery
Instructions" as promptly as practicable after the expiration or termination of
the Exchange Offer.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned acknowledges that the Company's acceptance of properly
tendered Existing Notes pursuant to the procedures described under the caption
"The Exchange Offer -- Procedures for Tendering" in the Prospectus and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
Unless otherwise indicated under "Special Issuance Instructions", please
issue the Exchange Notes issued in exchange for the Existing Notes accepted for
exchange and return any Existing Notes not tendered or not exchanged in the
name(s) of the undersigned. Similarly, unless otherwise indicated under "Special
Delivery Instructions", please mail or deliver the Exchange Notes issued in
exchange for the Existing Notes accepted for exchange and any Existing Notes not
tendered or not exchanged (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signatures). In the
event that both "Special Issuance Instructions" and "Special Delivery
Instructions" are completed, please issue the Exchange Notes issued in exchange
for the Existing Notes accepted for exchange in the name(s) of, and return any
Existing Notes not tendered or not exchanged to, the person(s) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" and "Special Delivery Instructions" to transfer
any Existing Notes from the name of the registered holder(s) thereof if the
Company does not accept for exchange any of the Existing Notes so tendered for
exchange.
<PAGE> 6
------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY (i) if Existing Notes in a principal amount not
tendered, or Exchange Notes issued in exchange for Existing Notes accepted
for exchange, are to be issued in the name of someone other than the
undersigned, or (ii) if Existing Notes tendered by book-entry transfer
which are not exchanged are to be returned by credit to an account
maintained at the Book-Entry Transfer Facility. Issue Exchange Notes
and/or Existing Notes to:
Name(s):
------------------------------------------------
------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Address:
--------------------------------------------------
------------------------------------------------------------
(INCLUDE ZIP CODE)
------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
(COMPLETE SUBSTITUTE FORM W-9)
[ ] Credit unexchanged Existing Notes delivered by book-entry transfer to
the Book-Entry Transfer Facility set forth below:
------------------------------------------------------------
(BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER, IF APPLICABLE)
============================================================
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY if Existing Notes in a principal amount not
tendered, or Exchange Notes issued in exchange for Existing Notes accepted
for exchange, are to be mailed or delivered to someone other than the
undersigned, or to the undersigned at an address other than that shown
below the undersigned's signature.
Mail or deliver Exchange Notes and/or Existing Notes to:
Name(s):
------------------------------------------------
------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Address:
--------------------------------------------------
------------------------------------------------------------
(INCLUDE ZIP CODE)
------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
------------------------------------------------------------
<PAGE> 7
PLEASE SIGN HERE WHETHER OR NOT
EXISTING NOTES ARE BEING PHYSICALLY TENDERED HEREBY
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
Dated:
- --------------------------- , 1997
x
- --------------------------------------------------------------------------------
x
- --------------------------------------------------------------------------------
SIGNATURE(S) OF HOLDER DATE
Area Code and Telephone Number:
------------------------------------
The above lines must be signed by the registered Holder(s) of Existing
Notes as name(s) appear(s) on the Existing Notes or on a security position
listing, or by person(s) authorized to become registered Holder(s) by a properly
completed bond power from the registered Holder(s), a copy of which must be
transmitted with this Letter of Transmittal. If Existing Notes to which this
Letter of Transmittal relate are held of record by two or more joint Holders,
then all such Holders must sign this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
then such person must (i) set forth his or her full title below and (ii) unless
waived by the Company, submit evidence satisfactory to the Company of such
person's authority so to act. See Instruction 5 regarding the completion of this
Letter of Transmittal, printed below.
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
(INCLUDING ZIP CODE)
Tax Payer Identification:
- --------------------------------------------------------------------------------
MEDALLION SIGNATURE GUARANTEES
(IF REQUIRED BY INSTRUCTION 5)
Certain signatures must be Guaranteed by an Eligible Institution.
Signature(s) Guaranteed by
an Eligible Institution:
---------------------------------------------------------------
(AUTHORIZED SIGNATURE)
- --------------------------------------------------------------------------------
(NAME)
- --------------------------------------------------------------------------------
(TITLE)
- --------------------------------------------------------------------------------
(NAME OF FIRM)
- --------------------------------------------------------------------------------
(ADDRESS, INCLUDE ZIP CODE)
- --------------------------------------------------------------------------------
(AREA CODE AND TELEPHONE NUMBER)
Dated:
- ---------------------------, 1997
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND EXISTING NOTES OR BOOK-ENTRY
CONFIRMATIONS.
All physically delivered Existing Notes or any confirmation of a book-entry
transfer to the Exchange Agent's account at the Book-Entry Transfer Facility of
Existing Notes tendered by book-entry transfer (a "Book-Entry Confirmation"), as
well as a properly completed and duly executed copy of this Letter of
Transmittal or facsimile hereof, and any other documents required by this Letter
of Transmittal, must be received by the Exchange Agent at its address set forth
herein prior to 5:00 p.m., New York City time, on the Expiration Date. The
method of delivery of the tendered Existing Notes, this Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holder and, except as otherwise provided below, the delivery will be
deemed made only when actually received or confirmed by the Exchange Agent.
Instead of delivery by mail, it is recommended that the Holder use an overnight
or hand delivery service. In all cases, sufficient time should be allowed to
assure delivery to the Exchange Agent before the Expiration Date. No Letter of
Transmittal or Existing Notes should be sent to the Company.
2. GUARANTEED DELIVERY PROCEDURES.
Holders who wish to tender their Existing Notes and (a) whose Existing
Notes are not immediately available, or (b) who cannot deliver their Existing
Notes, this Letter of Transmittal or any other documents required hereby to the
Exchange Agent prior to the Expiration Date must tender their Existing Notes
according to the guaranteed delivery procedures set forth in the Prospectus.
Pursuant to such procedures: (i) such tender must be made by or through a firm
which is a member of a registered national securities exchange or of the
National Association of Securities Dealers, Inc. or a commercial bank or a trust
company having an office or correspondent in the United States (an "Eligible
Institution"); (ii) prior to the Expiration Date, the Exchange Agent must have
received from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Existing Notes, the
registration number(s) of such Existing Notes and the principal amount of
Existing Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three (3) New York Stock Exchange, Inc. ("NYSE")
trading days after the Expiration Date, this Letter of Transmittal (or facsimile
hereof) together with the Existing Notes (or a Book-Entry Confirmation) in
proper form for transfer, will be received by the Exchange Agent within three
(3) NYSE trading days after the Expiration Date; and (iii) the certificates for
all physically tendered shares of Existing Notes, in proper form for transfer,
or Book-Entry Confirmation, as the case may be, and all other documents required
by this Letter are received by the Exchange Agent within three (3) NYSE trading
days after the date of execution of the Notice of Guaranteed Delivery.
Any Holder of Existing Notes who wishes to tender Existing Notes pursuant
to the guaranteed delivery procedures described above must ensure that the
Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m.,
New York City time, on the Expiration Date. Upon request of the Exchange Agent,
a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their
Existing Notes according to the guaranteed delivery procedures set forth above.
See "The Exchange Offer -- Guaranteed Delivery Procedures" in the
Prospectus.
3. TENDER BY HOLDER.
Only a Holder of Existing Notes may tender such Existing Notes in the
Exchange Offer. Any beneficial Holder of Existing Notes who is not the
registered Holder and who wishes to tender should arrange with the registered
Holder to execute and deliver this Letter of Transmittal on his behalf or must,
prior to completing and executing this Letter of Transmittal and delivering his
Existing Notes, either make appropriate arrangements to register ownership of
the Existing Notes in such Holder's name or obtain a properly completed bond
power from the registered Holder.
<PAGE> 9
4. PARTIAL TENDERS.
Tenders of Existing Notes will be accepted only in integral multiples of
$1,000. If less than the entire principal amount of any Existing Notes in
tendered, the tendering Holder should fill in the principal amount tendered in
the column entitled "Principal Amount Tendered" contained in the box entitled
"Description of Existing Notes Tendered" above. The entire principal amount of
Existing Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated. If the entire principal amount of all
Existing Notes in not tendered, then Existing Notes for the principal amount of
Existing Notes not tendered and Exchange Notes issued in exchange for any
Existing Notes accepted will be sent to the Holder at his or her registered
address, unless a different address is provided in the box on this Letter of
Transmittal entitled "Special Delivery Instructions", promptly after the
Existing Notes are accepted for exchange.
5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
MEDALLION GUARANTEE OF SIGNATURES.
If this Letter of Transmittal (or facsimile hereof) is signed by the record
Holder(s) of the Existing Notes tendered hereby, the signature must correspond
with the names as written on the face of the Existing Notes without alteration,
enlargement or any change whatsoever. If this Letter of Transmittal is signed by
a participant in the Book-Entry Transfer Facility, the signature must correspond
with the name as it appears on the security position listing as the Holder of
the Existing Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder or Holders of Existing Notes listed and tendered hereby and
the Exchange Notes issued in exchange therefor is to be issued (or any
untendered principal amount of Existing Notes is to be reissued) to the
registered Holder, the said Holder need not and should not endorse any tendered
Existing Notes, nor provide a separate bond power. In any other case, such
Holder must either properly endorse the Existing Notes tendered or transmit a
properly completed separate bond power with this Letter of Transmittal, with the
signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered Holder or Holders of any Existing Notes listed, such
Existing Notes must be endorsed or accompanied by properly completed bond
powers, in each case signed as the name of the registered Holder or Holders
appears on the Existing Notes with the signature thereon guaranteed by an
Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) or any Existing Notes
or bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
ENDORSEMENTS ON EXISTING NOTES OR SIGNATURES ON BOND POWERS REQUIRED BY
THIS INSTRUCTION 5 MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
No signature guarantee is required if (i) this Letter of Transmittal is
signed by the registered holder(s) of the Existing Notes tendered herewith (or
by a participant in the Book-Entry Transfer Facility whose name appears on a
security position listing as the owner of the tendered Existing Notes) and the
issuance of Exchange Notes (and any Existing Notes not tendered or not accepted)
are to be issued directly to such registered Holder(s) (or, if signed by a
participant in the Book-Entry Transfer Facility, any Exchange Notes or Existing
Notes not tendered or not accepted are to be deposited to such participant's
account at such Book-Entry Transfer Facility) and neither the box entitled
"Special Delivery Instructions" nor the box entitled "Special Issuance
Instructions" has been completed, or (ii) such Existing Notes are tendered for
the account of an Eligible Institution. In all other cases, all signatures on
this Letter of Transmittal must be guaranteed by an Eligible Institution.
<PAGE> 10
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering Holders should indicate, in the applicable box or boxes, the name
and address (or account at the Book-Entry Transfer Facility) to which Exchange
Notes or substitute Existing Notes for principal amounts not tendered or not
accepted for exchange are to be issued or sent, if different from the name and
address of the person signing this Letter of Transmittal. In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated.
7. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Existing Notes pursuant to the Exchange Offer. If, however, Exchange Notes or
Existing Notes for principal amounts not tendered or accepted for exchange are
to be delivered to, or are to be registered or issued in the name of, any person
other than the registered Holder of the Existing Notes tendered hereby, or if
tendered Existing Notes are registered in the name of any person other than the
person signing this Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Existing Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other persons) will be payable by the tendering Holder.
If satisfactory evidence of payment of such taxes or exemption therefrom in not
submitted with this Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering Holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE EXISTING NOTES LISTED IN THIS LETTER OF
TRANSMITTAL.
8. TAX IDENTIFICATION NUMBER.
Federal income tax law requires that a Holder of any Existing Notes which
are accepted for exchange must provide the Company (as payor) with its correct
taxpayer identification number ("TIN"), which, in the case of a Holder who is an
individual, is his or her social security number. If the Company is not provided
with the correct TIN, the Holder may be subject to a $50 penalty imposed by
Internal Revenue Service. (If withholding results in an over-payment of taxes, a
refund may be obtained.) Certain Holders (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
To prevent backup withholding, each tendering Holder must provide such
Holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such Holder is awaiting a
TIN), and that (i) the Holder has not been notified by the Internal Revenue
Service that such Holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the Holder that such Holder is no longer subject to backup withholding.
If the Existing Notes are registered in more than one name or are not in the
name of the actual owner, see the enclosed "Guidelines for Certification of
Taxpayer Identification Number of Substitute Form W-9" for information on which
TIN to report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS.
All questions as to the validity, form, eligibility (including time of
receipt), and acceptance of tendered Existing Notes will be determined by the
Company, in its sole discretion, which determination will be final and binding.
The Company reserves the right to reject any and all Existing Notes not validly
tendered or any Existing Notes, the Company's acceptance of which would, in the
opinion of the Company or its counsel, be unlawful. The Company also reserves
the right to waive any conditions of the Exchange Offer or defects or
irregularities in tenders of Existing Notes as to any ineligibility of any
Holder who seeks to tender Existing Notes in the Exchange Offer. The
interpretation of the terms and conditions of the Exchange Offer (includes
<PAGE> 11
this Letter of Transmittal and the instructions hereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Existing Notes must be cured within such time as
the Company shall determine. The Company will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Existing
Notes, but shall not incur any liability for failure to give such notification.
10. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive, in whole or part, any of
the conditions to the Exchange Offer set forth in the Prospectus.
11. NO CONDITIONAL TENDER.
No alternative, conditional, irregular or contingent tender of Existing
Notes on transmittal of this Letter of Transmittal will be accepted.
12. MUTILATED, LOST, STOLEN OR DESTROYED EXISTING NOTES.
Any Holder whose Existing Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Requests for assistance or for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address or
telephone number set forth on the cover page of this Letter of Transmittal.
Holders may also contact their broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Exchange Offer.
14. ACCEPTANCE OF TENDERED EXISTING NOTES AND ISSUANCE OF EXCHANGE NOTES;
RETURN OF EXISTING NOTES.
Subject to the terms and conditions of the Exchange Offer, the Company will
accept for exchange all validly tendered Existing Notes as soon as practicable
after the Exchange Date and will issue Exchange Notes therefor as soon as
practicable thereafter. For purposes of the Exchange Offer, the Company shall be
deemed to have accepted tendered Existing Notes when, as and if the Company has
given written and oral notice thereof to the Exchange Agent. If any tendered
Existing Notes are not exchanged pursuant to the Exchange Offer for any reason,
such unexchanged Existing Notes will be returned, without expense, to the
undersigned at the address shown above (or credited to the undersigned's account
at the Book-Entry Transfer Facility designated above) or at a different address
as may be indicated under the box entitled "Special Delivery Instructions".
15. WITHDRAWAL.
Tenders may be withdrawn only pursuant to the limited withdrawal rights set
forth in the Prospectus under the caption "The Exchange Offer -- Withdrawal of
Tenders".
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
(TOGETHER WITH THE EXISTING NOTES WHICH MUST BE DELIVERED BY BOOK-ENTRY TRANSFER
OR IN ORIGINAL FORM) OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
<PAGE> 12
PAYER'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<C> <S> <C>
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART I -- Please provide your TIN in the TIN:
FORM W-9 box at the right and certify by signing and -------------------------------------
dating below Social Security Number
or Employer Identification Number
(If awaiting TIN write "Applied For")
------------------------------------------------------------------------------------
DEPARTMENT OF THE TREASURY PART II -- For Payees Exempt from Backup Withholding, see the enclosed Guidelines
INTERNAL REVENUE SERVICE for Certification of Taxpayer Identification Number on Substitute Form W-9 and
complete as instructed therein.
------------------------------------------------------------------------------------
Certification -- Under penalties of perjury, I certify that:
(1) The Number shown on this form is my correct Taxpayer Identification Number (or
I am waiting for a number to be issued to me); and
(2) I am not subject to backup withholding either because I have not been notified
PAYER'S REQUEST FOR by the Internal Revenue Service (IRS) that I am subject to backup withholding
TAXPAYER IDENTIFICATION as a result of a failure to report all interest or dividends, or the IRS has
NUMBER ("TIN") notified me that I am no longer subject to backup withholding. CERTIFICATE
INSTRUCTIONS -- You must cross out item (2) above if you have been notified by
the IRS that you are subject to backup withholding because of underreporting
interest or dividends on your tax return. However, if after being notified by
the IRS that you were subject to backup withholding, you received another
notification from the IRS that you were no longer subject to backup
withholding, do not cross out item (2). (Also see instructions in the enclosed
Guidelines.)
Name:
------------------------------------------------------------------------------
(Please Print)
Signature: Date:
--------------------------------- ------------------------------
- -------------------------------------------------------------------------------------------------------------------
NOTE: Failure to complete and return this Substitute Form W-9 may result in backup withholding of 31% of any
payments made to you pursuant to the Offer to Purchase. Please review the enclosed guidelines for
certification of taxpayer identification number on Substitute Form W-9 for additional details.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING A TIN.
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within
sixty (60) days, 31% of all payments of the Offer Price made to me thereafter
will be withheld until I provide a number.
- ----------------------------------- --------------------------------------
Signature Date
- --------------------------------------------------------------------------------
<PAGE> 13
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER--Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
=========================================================
<S> <C> <C>
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds, any
one of the
individuals(1)
3. Husband and wife (joint The actual owner of
account) the account or, if
joint funds, either
person
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult and minor (joint account) The adult or, if
the minor is the
only contributor,
the minor(1)
6. Account in the name of guardian The ward, minor or
or committee for a designated incompetent
ward, minor or incompetent person(3)
person
7. a. The usual revocable savings The grantor
trust account (grantor is trustee(1)
also trustee)
b. So-called trust account that The actual owner(1)
is not a legal or valid
trust under state law
8. Sole proprietorship account The actual owner(4)
<CAPTION>
- ---------------------------------------------------------
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
- ---------------------------------------------------------
<S> <C> <C>
9. A valid trust, estate, or The legal entity
pension trust (Do not furnish the
identification
number of the
personal
representative or
trustee unless the
legal entity itself
is not designated
in the account
title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization
account
12. Partnership account held in the The partnership
name of the business
13. Association, club or other tax- The organization
exempt organization
14. A broker or registered nominee The broker or
nominee
15. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a State
or local government, school,
district, or prison) that
receives agricultural program
payments
- ---------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension trust
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 14
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a) of the Internal Revenue
Code of 1986, as amended (the "CODE"), or an individual retirement plan.
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
- An international organization or any agency or instrumentality thereof.
- A registered dealer in securities or commodities registered in the United
States or a possession of the United States.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a) of the Code.
- An exempt charitable remainder trust, or a nonexempt trust described in
section 4947(a)(1) of the Code.
- An entity registered at all times under the Investment Company Act of 1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to nonresident aliens subject to withholding under section 1441 of
the Code.
- Payments to partnerships not engaged in a trade or business in the United
States and which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid in
money.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided
your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest dividends under
section 852 of the Code).
- Payments described in section 6049(b)(5) of the Code to nonresident aliens.
- Payments on tax-free covenant bonds under section 1451 of the Code.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
EXEMPT PAYEES DESCRIBED ABOVE MUST STILL COMPLETE SUBSTITUTE FORM W-9 ENCLOSED
HEREWITH TO AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE SUBSTITUTE FORM
W-9 WITH THE PAYER, REMEMBERING TO CERTIFY YOUR TAXPAYER IDENTIFICATION NUMBER
ON PART III OF THE FORM. WRITE "EXEMPT" ON THE FACE OF THE FORM AND SIGN AND
DATE THE FORM AND RETURN IT TO THE PAYER.
Payments that are not subject to information reporting are also not subject to
backup withholding. For details, see sections 6041, 6041A(a), 6042, 6044, 6045,
6049, 6050A, and 6050N of the Code and their regulations.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividends,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. Payers must be
given the numbers whether or not recipients are required to file a tax return.
Payers must generally withhold 31% of taxable interest, dividends, and certain
other payments to a payee who does not furnish a taxpayer identification number
to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF 10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
IN EXCHANGE FOR
10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
ALLIANCE GAMING CORPORATION
This form, or one substantially equivalent hereto, must be used by a Holder
to accept the Exchange Offer of Alliance Gaming Corporation, a Nevada
corporation (the "Company"), to tender 10% Senior Subordinated Notes due 2007,
Series A (the "Existing Notes") to the Exchange Agent pursuant to the guaranteed
delivery procedures described in "The Exchange Offer--Guaranteed Delivery
Procedures" in the Company's Prospectus, dated , 1997 (the
"Prospectus") and in Instruction 2 to the related Letter of Transmittal. Any
Holder who wishes to tender Existing Notes pursuant to such guaranteed delivery
procedures must ensure that the Exchange Agent receives this Notice of
Guaranteed Delivery prior to the Expiration Date (as defined below) of the
Exchange Offer. Capitalized terms used but not defined herein have the meanings
ascribed to them in the Prospectus or the Letter of Transmittal.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
EXISTING NOTES TENDERED IN THE EXCHANGE OFFER MAY BE
WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
The Exchange Agent for the Exchange Offer is:
United States Trust Company of New York
<TABLE>
<S> <C>
By Mail: By Facsimile:
United States Trust Company of New York (212) 780-0592
P.O. Box 843 (For Eligible Institutions Only)
Cooper Station
New York, NY 10276
Attention: Corporate Trust Services
By Overnight Courier or
By Hand after 4:30 p.m.: By Hand to 4:30 p.m.:
United States Trust Company of New York United States Trust Company of New York
770 Broadway, 13th Floor 111 Broadway
New York, N.Y. 10003 New York, N.Y. 10006
Attention: Corporation Trust Attention: Lower Level Corporate Trust
</TABLE>
For Information Call:
(800) 548-6565
------------------------
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER
OF TRANSMITTAL FOR GUARANTEE OF SIGNATURES.
<PAGE> 2
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company, upon the terms and subject
to the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Existing Notes set forth below pursuant to the guaranteed delivery procedures
set forth in the Prospectus and in Instruction 2 of the Letter of Transmittal.
THE UNDERSIGNED HEREBY TENDERS THE EXISTING NOTES LISTED BELOW:
<TABLE>
<S> <C> <C>
CERTIFICATE NUMBER(S) (IF KNOWN) OF EXISTING NOTES OR AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
ACCOUNT NUMBER AT THE BOOK-ENTRY FACILITY AMOUNT REPRESENTED AMOUNT TENDERED
- ----------------------------------------------------------- ------------------------------ ------------------------------
</TABLE>
The Book-Entry Transfer Facility Account Number
(if the Existing Notes will be tendered by book-entry transfer):
- --------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Holder(s) or
Authorized Signatory:
- --------------------------------------------------------------------------------
Name(s) of Registered Holder(s):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Area Code and Telephone No.
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their name(s) appear on certificates for Existing Notes or on a security
position listing as the owner of Existing Notes, or by person(s) authorized to
become Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capacity:
- --------------------------------------------------------------------------------
Address(es):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934,
guarantees deposit with the Exchange Agent of the Letter of Transmittal (or
facsimile thereof), together with the Existing Notes tendered hereby in proper
form for transfer (or confirmation of the book-entry transfer of such Existing
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility
described in the Prospectus under the caption "The Exchange Offer -- Guaranteed
Delivery Procedures" and in the Letter of Transmittal) and any other required
documents, all by 5:00 p.m., New York City time, within three (3) New York Stock
Exchange trading days following the Expiration Date.
<TABLE>
<S> <C>
Name of Firm: ---------------------------------------------
- ------------------------------------------------- (AUTHORIZED SIGNATURE)
Address: Name:
- ------------------------------------------------------ ---------------------------------------------
(INCLUDE ZIP CODE) Title:
Area Code and Tel. Number: ---------------------------------------------
- --------------------------------- (PLEASE TYPE OR PRINT)
- ------------------------------------------------------ Date: ------------------------------, 1997
DO NOT SEND EXISTING NOTES WITH THIS FORM. ACTUAL SURRENDER OF EXISTING NOTES MUST BE MADE PURSUANT
TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
</TABLE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery of this Notice of Guaranteed Delivery. A properly completed
and duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by the
Exchange Agent at its address set forth herein prior to the Expiration Date. The
method of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and sole risk of the Holder,
and the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. As an alternative to delivery by mail, the
Holders may wish to consider using an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedures, see Instruction 2 of the
Letter of Transmittal.
2. Signatures on this Notice of Guaranteed Delivery. If this Notice of
Guaranteed Delivery is signed by the registered Holder(s) of the Existing Notes
referred to herein, the signature must correspond with the name(s) written on
the face of the Existing Notes without alteration, enlargement, or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of
the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of the Existing Notes, the signature must correspond with
the name shown on the security position listing as the owner of the Existing
Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered Holder(s) of any Existing Notes listed or a participant of the
Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be
accompanied by appropriate bond powers, signed as the name of the registered
Holder(s) appears on the Existing Notes or signed as the name of the participant
shown on the Book-Entry Transfer Facility's security position listing.
<PAGE> 4
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company of such person's authority to so act.
3. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Exchange Offer.
<PAGE> 1
TENDER OF 10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
IN EXCHANGE FOR
10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
ALLIANCE GAMING CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
EXISTING NOTES TENDERED IN THE EXCHANGE OFFER MAY BE
WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
To Registered Holders and Depository
Trust Company Participants:
We are enclosing herewith the material listed below relating to the offer
by Alliance Gaming Corporation (the "Company"), a Nevada corporation, to
exchange its 10% Senior Subordinated Notes Due 2007, Series B (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), for a like principal amount of its issued and
outstanding 10% Senior Subordinated Notes Due 2007, Series A (the "Existing
Notes") upon the terms and subject to the conditions set forth in the Company's
Prospectus, dated , 1997, and the related Letter of Transmittal
(which together constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated , 1997;
2. Letter of Transmittal (together with accompanying Substitute Form
W-9 Guidelines);
3. Notice of Guaranteed Delivery; and
4. Letter which may be sent to your clients for whose account you hold
Existing Notes in your name or in the name of your nominee, with space
provided for obtaining such client's instruction with regard to the
Exchange Offer.
We urge you to contact your clients promptly. Please note that the Exchange
Offer will expire on the Expiration Date unless extended.
The Exchange Offer is not conditioned upon any minimum number of Existing
Notes being tendered.
Pursuant to the Letter of Transmittal, each Holder of Existing Notes will
represent to the Company that (i) the Exchange Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
undersigned, (ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes within the meaning of the Securities Act, (iii) if the
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
Exchange Notes for its own account in exchange for Existing Notes, neither the
undersigned nor any such other person is engaged in or intends to participate in
the distribution of such Exchange Notes and (iv) neither the undersigned nor any
such other person is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act or, if the undersigned is an "affiliate," that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
Exchange Notes for its own account in exchange for Existing Notes, it represents
that such Existing Notes were acquired as a result of market-making activities
or other trading activities, and it acknowledges that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities
<PAGE> 2
Act in connection with any resale of such Exchange Notes, the undersigned is not
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
The enclosed Letter to Clients contains an authorization by the beneficial
owners of the Existing Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or dealer or
to any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Existing Notes pursuant to the Exchange Offer. The
Company will pay or cause to be paid any transfer taxes payable on the transfer
of Existing Notes to it, except as otherwise provided in Instruction 7 of the
enclosed Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
<PAGE> 3
Tender of 10% Senior Subordinated Notes Due 2007, Series A
in Exchange for
10% Senior Subordinated Notes Due 2007, Series B
ALLIANCE GAMING CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON , 1997, UNLESS EXTENDED
(THE "EXPIRATION DATE").
EXISTING NOTES TENDERED IN THE EXCHANGE OFFER
MAY BE WITHDRAWN AT ANY TIME PRIOR TO
THE EXPIRATION DATE.
To Our Clients:
We are enclosing herewith a Prospectus, dated _________, 1997, of
Alliance Gaming Corporation (the "Company"), a Nevada corporation, and a related
Letter of Transmittal (which together constitute the "Exchange Offer") relating
to the offer by the Company, to exchange its 10% Senior Subordinated Notes Due
2007, Series B (the "Exchange Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act") for a like principal
amount of its issued and outstanding 10% Senior Subordinated Notes Due 2007,
Series A (the "Existing Notes"), upon the terms and subject to the conditions
set forth in the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum number of
Existing Notes being tendered.
We are the holder of record of Existing Notes held by us for your own
account. A tender of such Existing Notes can be made only by us as the record
holder and pursuant to your instructions. The Letter of Transmittal is furnished
to you for your information only and cannot be used by you to tender Existing
Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of
the Existing Notes held by us for your account pursuant to the terms and
conditions of the Exchange Offer. We also request that you confirm that we may
on your behalf make the representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Existing Notes
will represent to the Company that (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being acquired in the ordinary course of business of the
undersigned, (ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
within the meaning of the Securities Act of such Exchange Notes, (iii) if the
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
Exchange Notes for its own account in exchange for Existing Notes, neither the
undersigned nor any such other person is engaged in or intends to participate in
the distribution of such Exchange Notes and (iv) neither the undersigned nor any
such other person is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act or, if the undersigned in an "affiliate," that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
Exchange Notes for its own account in exchange for Existing Notes, it represents
that such Existing Notes were acquired as a result of market-making activities
or other trading activities, and it acknowledges that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes, the undersigned is not deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Very truly yours,
<PAGE> 4
INSTRUCTION TO REGISTERED HOLDER
AND/OR BOOK ENTRY TRANSFER PARTICIPANT FROM BENEFICIAL OWNER
FOR
TENDER OF 10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
IN EXCHANGE FOR
10% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
ALLIANCE GAMING CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
EXISTING NOTES TENDERED IN THE EXCHANGE OFFER MAY BE
WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1997 (the "Prospectus") of Alliance Gaming Corporation, a Nevada
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer") to exchange its 10% Senior Subordinated Notes Due 2007, Series
B (the "Exchange Notes") for all of its outstanding 10% Senior Subordinated
Notes Due 2007, Series A (the "Existing Notes"). Capitalized terms used but not
defined herein have the meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Existing Notes held by you for the account of
the undersigned.
The aggregate face amount of the Existing Notes held by you for the account
of the undersigned is (FILL IN AMOUNT):
$ of the 10% Senior Subordinated Notes Due 2007, Series A.
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
[ ] To TENDER the following Existing Notes held by you for the
account of the undersigned (INSERT PRINCIPAL AMOUNT OF EXISTING NOTES TO BE
TENDERED (IF ANY): $ .
[ ] NOT to TENDER any Existing Notes held by you for the account of
the undersigned.
If the undersigned instructs you to tender the Existing Notes held by you
for the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations that (i) the
Exchange Notes acquired pursuant to the Exchange Offer are being acquired in the
ordinary course of business of the undersigned, (ii) neither the undersigned nor
any such other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), (iii) if the
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
Exchange Notes for its own account in exchange for Existing Notes, neither the
undersigned nor any such other person is engaged in or intends to participate in
the distribution of such Exchange Notes and (iv) neither the undersigned nor any
such other person is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act or, if the undersigned is an "affiliate," that the
undersigned will comply with the registration and prospectus
<PAGE> 5
delivery requirements of the Securities Act to the extent applicable. If the
undersigned is a broker-dealer (whether or not it is also an "affiliate") that
will receive Exchange Notes for its own account in exchange for Existing Notes,
it represents that such Existing Notes were acquired as a result of
market-making activities or other trading activities, and it acknowledges that
it will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. By acknowledging that it will
deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes, the
undersigned is not deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
SIGN HERE
Name of beneficial owner(s):
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Signature(s):
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Name(s) (Please Print):
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Address:
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Telephone Number:
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Taxpayer Identification or Social Security Number:
- --------------------------------------------------------------------------------
Date:
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